Accounting & Auditing Update
Julie Killian
With each passing year, accounting standards change and increase in complexity. While accounting standards have continued to evolve throughout 2015, the main theme of the year contradicts what accounting professionals have come to know. It appears the Financial Accounting Standards Board (“FASB”) focused on one key area during 2015 – simplification. Whether it is handling revenue recognition, simplifying inventory measurement, or disclosures of fair value investments, Clayton & McKervey has compiled five recent important updates.
ASU 2014-09 – Revenue Recognition
Although not adopted in 2015, ASU 2014-09 is an important update pertaining to recognizing revenue which has been further refined in 2015. In 2014, the International Accounting Standards Board (“IASB”) and FASB issued the joint 2014-09, which applies to all contracts for the transfer of goods or services. Although the guidance will be complex to implement, the end result will be the simplification of revenue recognition because it will be codified primarily in one standard rather than in multiple standards.
The proposed update would recognize revenue when, or in conjunction with, satisfying performance obligations in terms of the contract with the customer – as opposed to previous standards (for example, a Percentage of Completion Model may no longer recognize revenue based on costs incurred, but when satisfying performance obligations as defined by the terms of the contract).
What does this mean for you?
Terms of your contracts with customers may need to change to ensure the performance obligations are clearly outlined within the contract and are consistent with logical points for recognizing revenue.
Effective Dates: 2019
Early Adoption Available: 2017
Applies: Retrospectively
ASU 2015-03: Presentation of Debt Issuance Costs
Previous to this update, third-party costs and fees associated with the issuance of debt were recorded as a deferred charge (asset) on the balance sheet. The update requires that debt issuance costs be presented as a direct deduction from the debt liability through utilization of a contra liability account. This aligns the treatment of debt issuance costs between US GAAP, IFRS, and FASB Concept Statement No. 6.
What does this mean for you?
The need for different balance sheet presentations of debt issuance costs and a debt discount created unnecessary complexity; the debt issuance cost can now be grouped with the outstanding debt consistent with the treatment of debt discounts or premiums.
Effective Dates: Periods beginning after December 15, 2015
Early Adoption Available: Yes
Applies: Retrospectively
ASU 2015-07: Fair Value of Investments
Prior to this accounting standard update, companies could elect to measure the fair value of an investment using the net asset value (“NAV”) per share practical expedient and had to categorize these investments in the fair value hierarchy. The criteria being used to categorize these investments in the hierarchy differed from other fair value measurements in the hierarchy. Under the amendment, investments that measure NAV per share using the practical expedient should not be categorized in the fair value hierarchy.
What does this mean for you?
For investments for which fair value is measured at NAV per share using the practical expedient, the analysis that needed to be performed to decide whether the investment should be classified within level 2 or 3 no longer needs to be performed; the investment will be categorized outside the fair value hierarchy. Should the adoption of ASU 2015-12 coincide with the adoption of ASU 2015-07, the need for disaggregated note disclosures is no longer necessary as well, resulting in fewer and less complex footnote disclosures.
Effective Dates: Periods beginning after December 15, 2016
Early Adoption Available: Yes
Applies: Retrospectively
ASU 2015-11: Simplifying Inventory Measurement
Current inventory standards require that inventory be measured at the lower of cost or market where market could be replacement cost, net realizable value, or net realizable value less a normal profit margin. The guidance now requires inventory to be measured at the lower of cost or net realizable value, with net realizable value being the estimated normal selling price less reasonable predictable costs of completion, disposal, and transportation. The guidance does not apply to inventories valued using the retail inventory method (“RIM”) or last-in first-out (“LIFO”).
What does this mean for you?
Adoption of this accounting standard means simplification of the measurement of inventory carrying value. In addition, this amendment more closely aligns the measurement of inventory under US GAAP and IFRS.
Effective Dates: Periods beginning after December 15, 2016.
Early Adoption Available: Yes.
Applies: Prospectively.
ASU 2015-17: Classification of Deferred Taxes
Current GAAP requires a company to separate deferred income tax liabilities and assets into current and noncurrent amounts on their balance sheet. The classification of these assets and liabilities does not always reflect when the deferred tax amounts will be actually recovered or settled. The amendments in this ASU require all deferred tax assets and liabilities to be classified as noncurrent.
What does this mean for you?
This will simplify the effort to prepare the financial statement presentation of deferred tax assets and liabilities. This also aligns the treatment of deferred tax assets and liabilities under US GAAP and IFRS.
Effective Dates: Periods ending on or after December 15, 2015
Early Adoption Available: Yes
Applies: Prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented.