Defining Issues. FASB Issues Two More Simplification Exposure Drafts. October 2014, No Key Facts. Key Impacts

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1 Defining Issues October 2014, No FASB Issues Two More Simplification Exposure Drafts The FASB is working on several projects to reduce unnecessary complexity in U.S. GAAP, including its projects to simplify the presentation of debt issuance costs and provide a practical expedient for the measurement date of employers defined benefit obligations and plan assets. 1 Contents Presentation of Debt Issuance Costs... 2 Measurement Date of Employers Defined Benefit Obligations and Plan Assets... 3 Key Facts Debt issuance costs would be presented in the balance sheet as a direct deduction from debt liabilities consistent with the presentation of debt discounts. A practical expedient would be provided to employers with fiscal year-ends that do not fall on a month-end to permit them to measure defined benefit obligations and plan assets using the month-end closest to the entity s fiscal year-end. The comment period for both proposed Accounting Standards Updates (ASUs) ends December 15, Key Impacts The cost of issuing debt would no longer be recorded as a separate asset, except when incurred prior to receipt of the funding from the associated debt liability. The requirement to measure defined benefit obligations and plan assets as of the fiscal year-end would be eliminated when that year-end does not coincide with third-party valuation information of plan assets provided as of a monthend. Presentation of debt issuance costs would more closely align U.S. GAAP with comparable IFRS standards, while IFRS standards do not provide a similar practical expedient for measuring defined benefit obligations and plan assets. 1 FASB Proposed Accounting Standards Update, Simplifying the Presentation of Debt Issuance Cost, and FASB Proposed Accounting Standards Update, Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets, October 14, 2014, both available at

2 Presentation of Debt Issuance Costs Under current U.S. GAAP, debt issuance costs are reported in the balance sheet as assets and amortized as interest expense. 2 The proposed ASU would require that they be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability consistent with the presentation of debt discounts or premiums. The costs would continue to be amortized to interest expense using the effective interest method. Example: Presentation of Debt Issuance Costs before and after the Proposed ASU On December 31, 2015, an entity issues a noninterest bearing debt security due December 31, 2017, with a face amount of $1,000,000 to an investor for $907,030. On the same date, the entity incurs and pays issuance costs of $25,000 to parties other than the investor. Presentation of debt issuance costs on December 31, 2015, before and after adoption of the proposed ASU would be: Before Adoption After Adoption Debt issuance costs (asset) $ 25,000 $ n/a Noninterest bearing note due December 31, 2017 $ 1,000,000 $ 1,000,000 Less unamortized discount based on imputed interest rate of 5% 92,970 92,970 Less unamortized debt issuance costs n/a 25,000 Note payable, net $ 907,030 $ 882,030 KPMG Observations Presentation of debt issuance costs as a direct deduction from the related debt liability would be consistent with discussion in paragraph 237 of FASB Concepts Statement No. 6, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, 2 FASB ASC paragraphs through 45-1A, , and , available at 2

3 which increases the effective interest rate. 3 This discussion also states that debt issuance costs are not assets for the same reason that debt discounts are not because the costs provide no future economic benefit. This proposed presentation also would improve consistency with IFRS, which requires transaction costs, including third-party cost and creditor fees, to be deducted from the carrying amount of the financial liability and not recorded as separate assets. The FASB acknowledged that in circumstances in which the debt issuance costs do not have an associated debt liability amount recorded in the financial statements (e.g., the costs are incurred before funding is received), they would be reported in the balance sheet as an asset until the debt liability is recorded. The proposed ASU is limited to simplifying the presentation of debt issuance costs; the recognition and measurement guidance for debt issuance costs would not be affected by the proposed ASU. For example, guidance for debt issuance costs in accounting for conversion options (ASC paragraph ) or accounting for third-party costs of exchange or modification of debt instruments (ASC paragraph ) would not change. Entities should continue to track debt issuance costs separately from debt discounts as required by other accounting guidance. There would also be no effect on the income statement upon adoption of the proposed ASU as both debt issuance costs and debt discounts are amortized using the effective interest method, which is unchanged by the proposed ASU. Proposed Transition and Effective Date The proposed ASU would require retrospective application to all prior periods presented in the financial statements. The Board did not specify an effective date in the proposed ASU. The Board will determine the effective date after it considers stakeholders feedback about how much time would be necessary to adopt the proposed ASU. Measurement Date of Employers Defined Benefit Obligations and Plan Assets Under current U.S. GAAP, an entity s information about the fair value and classes of plan assets and defined benefit obligations is required to be measured and reported as of the fiscal year-end. 4 The proposed ASU would provide a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit obligations and the fair value of plan assets as of the month-end that is closest 3 FASB Concepts Statement No. 6, Elements of Financial Statements a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2), available at 4 FASB ASC paragraph (d) and (c), available at 3

4 to the entity s fiscal year-end. The measurement date methodology would be used consistently each year. The proposed ASU would require employers to disclose the accounting policy election and the date defined benefit obligations and plan assets were measured. The proposed ASU would also require the funded status recognized in the balance sheet to reflect contributions made between the date used to measure defined benefit obligations and plan assets and the entity s fiscal year-end, but would not require adjustment for other transactions such as benefit payments or plan amendments. If a contribution to plan assets is made between the measurement date and an entity s fiscal year-end, the following adjustments would be needed. The entity would adjust the funded status recognized in its balance sheet to reflect the contribution as an addition to plan assets (for contributions made after the measurement date but before fiscal year-end) or as a deduction from plan assets (for contributions made after fiscal year-end but before the measurement date). Classes of plan assets and the fair value hierarchy would not be adjusted for the effects of the contribution. Instead, an employer would present the amount of the contribution separately from the classes of plan assets and the fair value hierarchy to permit reconciliation to the ending balance of the fair value of plan assets and funded status of the plan. KPMG Observations Entities with fiscal year-ends that do not fall on a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other postretirement benefit plan. Additional cost may be incurred because information about the fair value and classes of plan assets obtained from third-party service providers typically is reported with fair values determined as of the month-end, which requires those entities to adjust that information so that it reflects the fair value and classes of plan assets as of their fiscal year-end. The proposed ASU would reduce the costs of measuring defined benefit plan assets for entities with fiscal year-ends that do not fall on a month-end. The proposed ASU would require adjustments to reflect contributions made between the date used to measure defined benefit plan assets and obligations and the entity s fiscal year-end so that the funded status recognized in an employer s statement of financial position reconciles to the funded status of the plan as of the employer s fiscal year-end. Given the discretionary timing of an entity s funding payments to a plan, a company can avoid this issue by funding either before or after these two dates. The Board also concluded that it may be costly for an employer to determine which classes of plan assets and levels in the fair value hierarchy were affected by these contributions. Therefore, the Board decided that these contributions should not be categorized within the classes of plan assets or the fair value hierarchy. 4

5 Adjustments would not be required for other transactions such as benefit payments (this would reduce plan assets and obligations by the same amount and not affect funded status) and plan amendments (this would add complexity). There is not a similar practical expedient under IFRS. Proposed Transition and Effective Date The proposed ASU would require prospective application. The Board did not provide an effective date in the proposed ASU. The Board will determine the effective date after it considers stakeholders feedback about the time required to adopt the proposed ASU. Contact us: This is a publication of KPMG s Department of Professional Practice Contributing authors: Sibel Yuksel and Brandon T. Schaefer Earlier editions are available at: Legal The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the proposed standards or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors. Defining Issues is a registered trademark of KPMG LLP. 5