Accounting updates Kaustav Ghose
New guidance of Financial Accounting Standards Board (FASB) on the definition of a business The FASB has changed its definition of a business in an effort to assist entities with evaluating whether a set of transferred assets and activities is a business. The changes will likely result in more acquisitions being accounted for as asset acquisitions rather than business combinations. The new guidance will require an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If the threshold is not met, the entity should evaluate whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue guidance. The new guidance is effective for public business entities (PBEs) 15 December 2017, and interim periods within those years. For all other entities, it is effective 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019. Early adoption is permitted. Clarifications to guidance on the derecognition of nonfinancial assets The FASB has issued final guidance that clarifies the scope and application of Accounting Standards Codification (ASC) 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. ASC 610-20 requires entities to apply certain recognition and measurement principles in the new revenue standard when they derecognize nonfinancial assets and in substance nonfinancial assets, and the counterparty is not a customer. The new guidance applies to nonfinancial assets, including real estate (e.g., buildings, land and solar farms), ships and intellectual property, and clarifies that the derecognition of businesses is in the scope of ASC 810, Consolidation. It also defines an in substance nonfinancial asset. The amendments are effective at the same time as the new revenue standard. For public entities, that means annual periods beginning after 15 December 2017 and interim periods therein. Early adoption is permitted but only as of fiscal years beginning after 15 December 2016, including interim periods therein. An entity may elect different transition methods to adopt ASC 610-20 and ASC 606. FASB simplifies accounting for goodwill The FASB has issued new guidance that simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit s carrying amount over its fair value (i.e., measure the charge based on today s Step 1). The new standard does not change the guidance on completing Step 1 of
The standard has tiered effective dates, starting in 2020, for calendar-year PBEs that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after 1 January 2017. the goodwill impairment test. An entity will still be able to perform today s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. In addition, private companies will still have the option to elect the Private Company Council alternative on goodwill. The standard has tiered effective dates, starting in 2020, for calendar-year PBEs that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after 1 January 2017. Employers presentation of defined benefit retirement costs will change The FASB has issued new guidance that will require employers that sponsor defined benefit plans for pensions and/or other post-retirement benefits to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s), which include the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for PBEs 15 December 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period (i.e., only in the first interim period). The guidance provides a practical expedient for disaggregating the service cost component and other components for comparative periods. Illustration Components of cost Previous GAAP Current GAAP Service cost Employee cost Employee cost Interest cost Employee cost Other income/(expense) Actual return on plan assets Employee cost Other income/(expense) Amortization of any prior service cost Employee cost Employee cost Gain or loss (including the effects of OCI OCI changes in assumptions) Amortization of any net transition asset or obligation Employee cost Other income/(expense)
In case of capitalization, only service cost can be capitalized. Disclosures for certain employee benefit plans will change The FASB, based on an Emerging Issues Task Force consensus, has issued final guidance that will change the presentation and disclosure requirements for an employee benefit plan that holds an interest in a master trust. The guidance also eliminates a disclosure requirement for health and welfare benefit plans related to 401(h) retiree health accounts. The guidance will be applied retrospectively and is effective 15 December 2018. Early adoption is permitted. Proposal on accounting for sharebased payments to nonemployees The FASB has proposed to align the accounting for share-based payments to nonemployees with that for employees, with specific exceptions. The proposal would expand the scope of ASC 718 to include share-based payments made to non-employees in exchange for goods and/or services used or consumed in an entity s own operations. The cost of non-employee awards would continue to be recognized in the same period and in the same manner as if the entity had paid cash for the goods and/or services. The proposal would also expand two practical expedients in ASC 718 to non-employee awards for non-public entities. Comments are due by 5 June 2017. Proposal on inventory disclosures The FASB has proposed a requirement for all entities to make additional disclosures regarding changes in inventory that are outside the normal purchase, manufacture or sale of inventory and the composition of inventory. All entities also would have to make certain inventory disclosures currently required by the Securities and Exchange Commission (SEC). Entities that make segment disclosures would have to make disclosures about inventory by reportable segment if they provide that information to the chief operating decision maker. Entities that apply the retail inventory method would have to make additional qualitative and quantitative disclosures about the critical assumptions they use in their inventory calculations. The proposal is part of the FASB s disclosure framework project, under which the Board also proposed changes to the disclosure requirements for income taxes, fair value measurements and defined benefit plans. The Board also plans to review disclosure requirements for interim reporting. Proposal on determining the balance sheet classification of debt The FASB has proposed to replace today s rules-based guidance for determining whether to classify debt as current or noncurrent on the balance sheet with a principles-based approach. Debt would be classified as noncurrent only when it is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date or when the entity has a contractual right to defer settlement for at least one year (or operating cycle, if longer) after the balance sheet date.
While this approach would require entities to classify debt based on legal rights existing at the balance sheet date, an exception would be provided for waivers of debt covenant violations received after the balance sheet date but before the financial statements are issued. Entities would no longer be able to consider their intent and ability to refinance short-term obligations after the balance sheet date on a longterm basis to support noncurrent classification. Entities would apply the guidance prospectively to all debt arrangements that exist as of the date of initial adoption. Early adoption would be permitted. Balance Sheet Classification of Deferred Taxes - Income Taxes (Topic 740) Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Stakeholders informed the Board that the requirement results in little or no benefit to users of financial statements because the classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. In addition, there are costs incurred by an entity to separate deferred income tax liabilities and assets into a current and noncurrent amount. To simplify the presentation of deferred income taxes, the amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments. The amendments will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). IAS 1, Presentation of Financial Statements, requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. Regulatory developments SEC proposes requiring Inline XBRL and adopts rule on exhibit hyperlinks The SEC has proposed a requirement for operating companies and mutual funds to use Inline XBRL and embed tags in their financial statements and their risk/return summaries, respectively. The proposal would relocate XBRL tags from an exhibit to a filer s HTML submission and would require companies and funds to tag the same information they tag today. The requirement would be phased in over three years for operating companies based on filing status and over two years for mutual funds based on net assets. Separately, the SEC has adopted a final rule that will require registrants to include a hyperlink to each exhibit listed in the exhibit index of nearly all filings subject to Item 601 of Regulation S-K, as well as in Form F-10 and Form 20-F. The rule is effective 1 September 2017 for accelerated filers and large accelerated filers and 1 September 2018 for
smaller reporting companies and non-accelerated filers. New going concern auditing standard The American Institute of Certified Public Accountants has issued Statement on Auditing Standards (SAS) No. 132 to align its going concern guidance with the FASB guidance requiring management to assess an entity s ability to continue as a going concern. The SAS, which supersedes SAS No. 126, also requires the auditor to obtain sufficient appropriate audit evidence about the intent and ability of a third party or ownermanager to provide financial support when management s plans to alleviate substantial doubt depend on that support. The SAS is effective for audits of financial statements for periods ending on or after 15 December 2017, and reviews of interim financial information for interim periods beginning after fiscal years ending on or after 15 December 2017. SEC chairman nominee and deregulation moves Jay Clayton, a partner at law firm Sullivan & Cromwell LLP, has been nominated by President Donald Trump to lead the SEC as chairman. His appointment requires Senate approval. Meanwhile, Acting SEC Chairman Michael Piwowar has directed the SEC staff to reconsider the guidance it issued in 2014 on compliance with the conflict minerals rule, as well as the implementation of a rule requiring registrants to disclose the ratio of median employee compensation to that of the chief executive, and asked for public comment. Congress has also eliminated SEC rules that would have required disclosures of payments made by resource extraction issuers to domestic and foreign governments for the commercial development of oil, natural gas or minerals. These rules were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Trump is seeking to roll back. Other considerations 2017 shareholder proposal landscape Proxy access is once again the number 1 topic for shareholder proposals, according to a review of nearly 650 proposals by our EY Center for Board Matters. Proxy access refers to the right to include shareholder-nominated board candidates on a company s ballot. The investor campaign for proxy access has led a majority of Standard & Poor s 500 companies to adopt proxy access bylaws over the past three years. Nearly 20% of shareholder proposals this year focus on environmental sustainability, with climate risk emerging as one of the top topics. Other hot topics include political and lobbying spending, gender pay equality and board and workforce diversity. Proxies focus on non-gaap disclosures As companies begin working on their proxy statements, they should be careful about how they use non-gaap financial measures. All of the rules on non-gaap measures apply to disclosures in proxy statements, except for disclosures of target levels in the Compensation Discussion & Analysis (CD&A). If these metrics or others that meet the definition of non-gaap measures are disclosed outside of the CD&A, they must comply with all non- GAAP rules. More insights on accounting, governance and reporting changes in the Reporting Insights magazine, July 2017