The developments included in this article highlight recent accounting standards projects, updates, and new guidance. This discussion touches on those developments most relevant to our client base and is not intended to be all inclusive. Both Private Company Council projects and international convergence projects and their potential impacts are detailed below. Also included is a description of the newly issued Financial Reporting Framework for Small- and Medium-Sized Entities, which reduces the cost and complexity associated with traditional frameworks through simplifying reporting requirements and providing relevant information to financial statement users. Finally, a list of the status of other Financial Accounting Standards Board projects that may be relevant to nonpublic entities follows.
Private Company Council Projects
The Private Company Council (PCC) is charged with working with the Financial Accounting Standards Board (FASB) to agree on criteria for evaluating accounting and reporting alternatives for private companies within the US Generally Accepted Accounting Principles framework (US GAAP) and proposing alternatives based on these criteria. The goal of the PCC is to address the practical needs of private company financial statement users, including lenders and stakeholders. The PCC met on Tuesday, November 12, 2013, and addressed the following Accounting Standards Update projects:
Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
This proposed alternative would exempt many private companies from applying the complex variable interest entity (VIE) guidance to lessor companies under common control. Users of private company financial statements provided feedback that consolidation of lessor and lessee is costly to implement and not particularly meaningful when the primary purpose of establishing a separate lessor is for tax and estate planning purposes and each stand alone entity’s cash flows and tangible net worth is more relevant than that of the consolidated group. The proposed alternative, which excludes public companies, not-for-profit organizations, and certain employee benefit plans, would require additional financial statement disclosures for the private company lessee. The proposed disclosures include information about significant liabilities, the key terms of the leasing arrangements, debt agreements of the lessor under common control, and any other explicit interest related to the lessor under common control and would be applied retrospectively. The PCC voted to finalize this alternative pending FASB endorsement.
Accounting for Goodwill Subsequent to a Business Combination
This proposed alternative would permit a private company to amortize goodwill from a business combination over a period not to exceed ten years and apply a simplified impairment model to goodwill. Users of private company financial statements provided feedback that they often disregard goodwill and any related impairment losses in their analyses of a private company’s operating performance and financial condition. The cost and complexity of the existing guidance is also a concern to users. The proposed alternative, in addition to providing for the amortization of goodwill for a period not to exceed 10 years, would require impairment testing only after a triggering event rather than the existing annual testing requirement. Impairment testing upon a triggering event would be applied at the company-wide level rather than at the existing reporting unit level. The PCC voted to finalize this alternative and the FASB endorsed the PCC decision in its November 25, 2013 meeting.
Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
This proposed alternative would provide two simpler approaches to accounting for certain types of interest rate swaps rather than the current US GAAP requirement that a company capitalize derivative instruments and measure them at fair value, or, alternatively, elect cash flow hedge accounting if certain requirements are met. Users of private company financial statements provided feedback that the complexity and expertise associated with understanding and applying hedge accounting prevents companies from electing hedge accounting, resulting in income statement volatility. The proposed alternative’s approaches include the Combined Instruments Approach and the Simplified Hedge Accounting Approach to account for swaps that are entered into for the purpose of economically converting variable rate borrowing to fixed-rate borrowing if certain conditions are met. The Combined Instruments Approach would allow a company to account for a swap and a variable-rate borrowing as one combined financial instrument and the swap would only be recorded to the extent of a period-end accrual relating to the next swap settlement. The settlement value would be disclosed in the notes to the financial statements. The Simplified Hedge Accounting Approach would provide a practical expedient to qualify for hedge accounting and the swap and related borrowing would continue to be accounted for as two separate financial instruments; however, no ineffectiveness would be assumed for qualifying swaps and the designated swap may be recorded at settlement value rather than at fair value. The PCC voted to finalize the Simplified Hedge Accounting Approach and the FASB endorsed the PCC decision in its November 25, 2013 meeting. The PCC continued discussion on the Combined Instruments Approach and directed FASB staff to conduct additional research for further discussion at the next PCC meeting in January 2014.
Accounting for Identifiable Intangible Assets in a Business Combination
This proposed alternative would modify the requirement for private companies to separately recognize intangible assets acquired in a business combination. Users of private company financial statements provided feedback that separate recognition of certain identifiable intangible assets from goodwill does not necessarily provide meaningful information, the relevance of this recognition is diminished in subsequent periods because amortized carrying amounts no longer represent fair values, and the cost and complexity associated with estimating the fair value of certain hard to value assets outweighs the benefit of separate recognition. The proposed alternative provides for recognition of only identifiable intangible assets arising from non-cancelable contractual terms or those arising from other legal rights, resulting in fewer overall separately identified intangible assets. The PCC continued discussion on this alternative and directed FASB staff to conduct additional research for further discussion at the next PCC meeting in January 2014.
Active Joint FASB and International Accounting Standards Board (IASB) Projects
The FASB and IASB’s international convergence of accounting standards over the past ten years has resulted in standards adopted and promulgated by both the FASB and IASB as US GAAP and International Financial Reporting Standards (IFRS), respectively. These standards are expected to both improve in quality and become increasingly similar, if not identical, over time. The four remaining projects are as follows:
This common revenue standard has been initiated to remove inconsistencies and weaknesses in existing revenue requirements, provide a more robust framework for addressing revenue recognition issues, improve comparability of revenue recognition practices, improve disclosure requirements, and reduce the number of requirements to comply with when preparing financial statements. The most recent meeting on October 30, 2013 marked the completion of the planned joint Board discussions on revenue. The staff will continue drafting the final standard and the final document is scheduled to be issued in the first half of 2014. Earlier in 2013, the Boards announced plans to form a joint transition revenue recognition resource group including preparers, auditors, regulators, users and other stakeholders. The group will meet after issuance of the final revenue recognition standard and will present various interpretative issues that develop in practice. The standard is expected to take effect in 2017.
This common insurance contract guidance has been initiated to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance and reinsurance contracts. The current guidance applies exclusively to insurance entities, rather than to those entities that may issue insurance-like contracts. The proposed guidance would apply to all insurance contracts, as defined in the exposure draft, rather than only to insurance entities. The proposed update would supersede guidance in Topic 944, Financial Services – Insurance. The comment period on the proposed Accounting Standards Update has ended and roundtable discussions will conclude at the end of 2013.
The accounting for financial instruments projects of the FASB and IASB include three main components:
- Classification and measurement,
- Credit Impairment, and
- Hedge accounting (FASB redeliberations have not started)
This common financial instruments standard has been initiated to simplify accounting requirements related to these topics. The Board will continue deliberations considering feedback received from various proposed Accounting Standards Updates related to classification and measurement, impairment, and hedge accounting. The final standards on classification, measurement and impairment are currently scheduled to be issued in the first half of 2014. No such schedule is in place for the hedge accounting topic.
This common lease standard has been initiated primarily due to repeated recommendations made by financial statement users including the US Securities and Exchange Commission and a number of academic studies suggesting the recognition by a lessee of assets and liabilities arising from a lease with a maximum possible term of more than 12 months. This recognition would depend primarily on whether the lessee is expected to consume more than an insignificant portion of economic benefits embedded in the underlying asset. A revised Exposure Draft is in place and the Board plans to consider all feedback and begin deliberations of all significant issues by the end of 2013.
Financial Reporting Framework for Small- and Medium-Sized Entities
In June, 2013, the American Institute of CPAs (AICPA) issued the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) as a non-US GAAP financial reporting framework. This framework has been developed for owner-managed for-profit entities when US GAAP financial statements are not required, and does not preclude an entity from using the framework. The framework draws upon a blend of traditional methods of accounting with some accrual income tax methods that are especially suited to meet the needs of small- and medium-sized entities, including the use of historical cost as its measurement basis (steering away from complicated fair value measurements). Also, it does not require complicated accounting for derivatives, hedging activities, or stock compensation. With substantial relevance and cost-benefit factors, lenders and other key external stakeholders are beginning to accept the use of this framework.
Active FASB Projects
The current status of active FASB projects include Final Documents on ‘Definition of a Nonpublic Entity’ and ‘Reporting Discontinued Operations’ scheduled for the end of 2013, Final Documents on ‘Technical Corrections and Improvements’ and ‘Transfers and Servicing: Repurchase Agreements and Similar Transactions’ scheduled for the first half of 2014, an Exposure Document on ‘Development Stage Entities’ issued November 11, 2013, an Exposure Document on ‘Board’s Decision Process’ within ‘Disclosure Framework’ scheduled for the fourth quarter of 2013, and Exposure Documents on ‘Not-for-Profit Financial Reporting: Financial Statements’ and ‘Investment Companies: Disclosures about Investments in Another Investment Company’ scheduled for the first half of 2014.