The SKR+CO office will be closed at 3:00 PM on July 19th and all day on July 21st. We will be open normal business hours Wednesday and Friday.
Red Alert – Test Alert A – July 12 expiration
The SKR+CO office will be closed at 3:00 PM on July 19th and all day on July 21st. We will be open normal business hours Wednesday and Friday.
Red Alert – Test Alert A – July 12 expiration
As you plan for the year ahead, you may wonder how changes to the accounting standards might affect the information you report on your company’s financial statements, including how it’s presented and what details are disclosed. The Financial Accounting Standards Board (FASB) establishes the standards for public and private companies to follow when they issue financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Here’s an overview of what the FASB is currently working on.
Although the FASB sometimes experiences delays in its publication schedule, it expects to issue final standards on the following topics by the end of the first quarter of 2016:
Leases. This revised recognition and measurement standard is big news for retailers, manufacturers, contractors and other companies that lease significant amounts of property and equipment. But the changes won’t be as far reaching as the FASB originally intended — and the standard won’t be aligned with international accounting rules for leases.
The revised standard aims to increase transparency and comparability among organizations by recognizing assets and liabilities on the balance sheet for leases with terms of more than 12 months and disclosing key information about leasing arrangements. The project addresses lease accounting from the perspective of both the lessee and the lessor.
The revised guidance wouldn’t apply for public companies until fiscal years beginning after December 15, 2018. Private businesses would have an extra year. Once the final standard is issued, however, the FASB would encourage early application.
Revenue recognition amendments. Revenue is considered one of the most important measures of a company’s financial health. In 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This standard replaces about 180 pieces of individual guidance under GAAP with a single principles-based model for recognizing revenue from customer contracts worldwide.
After fielding complaints that companies won’t have enough time to apply the standard, the FASB decided in April 2015 to delay the effective date by one year to give companies more time to implement the changes. Public companies, certain employee benefit plans and some not-for-profit organizations can wait to apply the new standard until annual financial statements for fiscal years that start after December 15, 2017. Private companies can wait until annual financial statements for fiscal years that start after December 15, 2018.
In the meantime, the FASB has been issuing amendments to the revenue recognition standard to clarify confusing parts of the standard — but not to change the core of the standard. One amendment aimed at identifying performance obligations and licenses would differentiate between 1) a license to intellectual property that has significant standalone functionality, and thus, satisfies the entity’s promise to the customer to use the intellectual property at a point in time, and 2) a license to symbolic intellectual property that includes support or maintenance of the intellectual property during the license period and, thus, that is satisfied over time.
The amendment also would address when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. In terms of performance obligations, the amendment is expected to add guidance on goods and services that aren’t material in the context of the contract and accounting for shipping and handling activities.
Other revenue recognition amendments are in the works, too. The FASB is currently drafting a final standard to clarify the revenue recognition guidance for principal vs. agent arrangements. And it’s reviewing public comments on another proposal for narrow-scope improvements and practical expedients for implementing the revenue recognition standard. The effective dates for these revenue recognition amendments would be the same as the revised implementation date for ASU 2014-09.
Employee share-based payment accounting. This narrow-scope project aims to reduce complexity and improve the accounting for share-based payments that public and private companies award to employees. It would provide simplifications in accounting for income taxes, including tax benefits and deficiencies arising from the difference between the deduction for tax purposes and the compensation cost in the financial statements. The standard also would allow for an election to simplify accounting for forfeitures.
Transition to the equity method of accounting. Under current accounting, an equity method investor is required to determine the acquisition-date fair value of the identifiable assets and liabilities assumed in the same manner as for a business combination. The entity’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets and liabilities generally must be accounted for in net income in subsequent periods.
This narrow-scope simplification project would eliminate the requirement to separately account for this basis difference. In other words, the equity method investment would be recognized at cost. The final standard is also expected to eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment unexpectedly qualifies for the method as a result of an increase in the level of ownership interest.
Finally, the FASB recently approved Private Company Council (PCC) Issue No. 2015-01, Effective Date and Transition Guidance. When it’s finalized, this standard would allow private companies an unconditional, one-time option to adopt four PCC accounting alternatives that were developed in 2014 related to goodwill, hedging, common control leasing arrangements and intangible assets.
The FASB has announced that it will issue proposed standards updates — also known as exposure drafts — on the following topics:
Classification of debt. This proposal would simplify the process for determining whether a liability should be classified as current or long term on the balance sheet. It replaces the existing fact-pattern-specific guidance in GAAP with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an entity’s current compliance with debt covenants.
Presentation of the costs of net periodic pension and postretirement benefits. This narrow-scope project would simplify the ways employers report “net benefit costs” on their financial statements.
During the FASB’s December 11 meeting, it also agreed to release a proposal to clarify eight narrow pieces of guidance for cash flow statements in the first quarter of 2016. This is a complex area of accounting — and the leading cause of financial restatements. The proposal would attempt to settle some of the frequent questions that crop up about the statement of cash flows.
The FASB has been working on several projects to simplify the disclosure requirements under GAAP by eliminating disclosures that don’t provide sufficient benefits to justify the costs of collecting the information to provide them. It plans to issue exposure drafts on required disclosures for defined benefit plans. It’s also reviewing public comments on the disclosure framework overall, including how the board and companies decide what’s appropriate to disclose in financial statement footnotes.
Public comments on the FASB’s exposure drafts on fair value and government assistance disclosures are due in February 2016. In addition, the FASB has begun to address disclosure requirements for income taxes, inventory and interim reporting.
We’ve only scratched the surface of these FASB projects. GAAP is constantly evolving to address the concerns of businesses and other users of financial statements. The FASB plans to conduct additional research and is beginning initial deliberations on many other areas of financial reporting. Contact us for more information and the latest updates on any of the items on the FASB’s current technical agenda.
To help you stay abreast of tax developments that might affect you, we’ve recently updated our online tax planning guide to cover the following timely topics:
Please let us know if you have any questions about the updates or how they might affect your tax planning strategies.
The Financial Accounting Standards Board (FASB) has issued new guidance that permits private companies following Generally Accepted Accounting Principles (GAAP) to, in some circumstances, elect not to consolidate the financial reporting from variable interest entities (VIEs) that lease property to them. It may apply in situations where an owner of a private company is also an owner of a second business entity that leases property to the company.
The guidance, Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is a consensus of the Private Company Council (PCC). It’s intended to improve private company financial reporting regarding consolidation of lessors.
The Financial Accounting Foundation, FASB’s parent organization, established the PCC in May 2012. Its purpose is to improve the process of setting accounting standards for private companies that prepare their financial statements in accordance with GAAP.
Among other things, the body was tasked with working with FASB to determine whether alternatives to existing GAAP standards can ease the burden on private companies of preparing GAAP-compliant financial statements while better addressing the needs of users of those financial statements. Earlier this year, FASB issued the first two private-company GAAP alternatives, ASU 2014-02 and ASU 2014-03, addressing goodwill and interest rate swaps, respectively. ASU 2014-07 is the third private company alternative that FASB has issued.
Under GAAP, a company must consolidate the financial reporting from an entity in which it has a controlling financial interest. Two models are typically used to determine whether a company has a controlling interest in an entity: the voting interest model or the VIE model.
Under the VIE model, a company is deemed to have a controlling financial interest in an entity when it has 1) the power to direct the activities that most significantly affect the entity’s economic performance, and 2) the obligation to absorb losses, or the right to receive benefits, of the entity that could potentially be significant to the entity. To determine whether the VIE model applies, a company must determine whether it has an explicit or implicit variable interest in the entity and whether that entity is a VIE.
An explicit variable interest stems from contractual, ownership or other financial interests in the entity that directly absorb or receive the variability of the entity. An implicit variable interest involves the absorbing or receiving of variability from the entity indirectly. The identification of such interests is a matter of judgment based on the relevant facts and circumstances.
A VIE generally is a corporation, partnership or any other legal structure that is used for business purposes and either doesn’t have equity investors with voting rights or has equity investors that don’t provide sufficient financial resources for the entity to support its activities.
The new guidance specifically applies to leasing arrangements. Private companies commonly lease facilities from separate lessor entities owned by one of the company’s owners. The lessor entity usually is established for tax, estate planning or legal liability purposes — not to structure off-balance sheet debt arrangements. Typically, the lessor entity’s only asset is the leased facility, and the lease is the only contractual relationship between the lessee company and the lessor entity.
Existing GAAP guidance requires the lessee company to determine whether it holds a variable interest in the lessor entity (for example, a guarantee of the lessor’s debt). If it does, and the lessor is a VIE, the lessee company must assess whether it holds a controlling financial interest in the lessor under the VIE model. If the entities are under common control, the lessee generally must consolidate the financial reporting from the lessor.
The PCC found that, despite the cost and complexity of applying the GAAP VIE guidance in such a case, most users of private company financial statements consider the consolidation of the lessors under common control irrelevant. These users tend to focus on the cash flows and tangible worth of the stand-alone lessee entity, not the cash flows and tangible worth of the consolidated group presented under GAAP.
Moreover, consolidation of the lessor distorts the lessee’s financial statements. As a result, users who receive consolidated financial statements often request a consolidating schedule that they can use to reverse the effects of consolidation.
Under ASU 2014-07, a private company lessee can elect an alternative not to apply the GAAP VIE guidance to a lessor if:
In addition, if the private company explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, the principal amount of the obligation at inception can’t exceed the value of the asset leased by the private company from the lessor.
If a private company elects to apply the accounting alternative, it should apply the alternative to all current and future leasing arrangements satisfying the above conditions.
Electing the alternative would also free a private company from providing GAAP-compliant VIE disclosures about the lessor entity. The private company won’t be totally off the hook, though. It must disclose the following information:
These disclosures are required in combination with the other GAAP-required disclosures about the private company’s relationship with the lessor entity, such as those for guarantees, leases and related party transactions.
A private company that elects the accounting alternative must apply it retrospectively to all periods presented on financial statements. The alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any period for which the company hasn’t yet issued financial statements.
If you have questions regarding how this guidance affects the preparation of your financial statements, please give us a call. We’d be happy to answer your questions.
The Financial Accounting Standards Board (FASB) has issued two updates to Generally Accepted Accounting Principles (GAAP) that are intended to reduce the cost and complexity of preparing financial statements for private companies. As outlined in Accounting Standards Update (ASU) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, the alternative standards streamline the method for goodwill impairment and make it easier for certain interest rate swaps to qualify for hedge accounting.
The updates grew out of proposals from the Private Company Council (PCC) and were endorsed by FASB last year. The Financial Accounting Foundation, FASB’s parent organization, formed the PCC in May 2012 to improve the process of setting accounting standards for private companies that need or are required to have financial statements prepared in accordance with GAAP.
In December 2013, FASB and the PCC released new guidance, Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the Guide), to be used to determine whether private companies should be allowed to use alternative standards in the areas of recognition and measurement, disclosures, display/presentation, effective date and transition method. For each of these areas, the Guide describes criteria FASB and the PCC will use to evaluate whether to permit alternative guidance. ASU 2014-02 and ASU 2014-03 contain the first of the alternative guidance.
The term “goodwill” refers to the residual asset recognized in a business combination, such as a merger, after recognizing all other identifiable assets acquired and liabilities assumed. Under GAAP, goodwill is carried on the books at its initial value less any impairment. It isn’t subject to amortization.
Goodwill is considered impaired when the implied fair value of goodwill in a company’s reporting unit — basically, an operating unit that has its own discrete financial information, separate from the overall company — falls to an amount that’s less than its carrying amount, or book value, including any deferred income taxes. Under GAAP, companies must test for impairment at least annually, and more frequently if certain conditions exist.
GAAP allows a company to choose initially to perform a qualitative evaluation to determine whether it’s more likely than not (that is, a likelihood of more than 50%) that a reporting unit’s fair value is less than its carrying amount. If the company determines it’s not more likely than not that fair value is less than the carrying amount, it need not perform a quantitative two-step impairment test. If it is more likely than not, the company must proceed to the two-step impairment test.
In the first step, the company calculates the fair value of the reporting unit and compares that amount with the reporting unit’s carrying amount, including goodwill. If the carrying amount exceeds the fair value, the company performs the second step — measuring the amount of the goodwill impairment loss, if any, by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. This requires performing a hypothetical application of the acquisition method to determine the implied fair value of goodwill after measuring the reporting unit’s identifiable assets and liabilities.
Preparers and auditors of private company financial statements have complained about the cost and complexity involved in carrying out the existing GAAP goodwill standards. Moreover, users of these financial statements have indicated that the requirements provide limited benefits to them because they often disregard goodwill and impairment losses when analyzing a company’s financial condition and operating performance.
The alternative standards in ASU 2014-02 are designed to address these concerns. They allow a private company to amortize goodwill after its acquisition (and initial recognition and measurement) on a straight-line basis during a period of 10 years, or less if the company demonstrates that another useful life is more appropriate. The company can revise the remaining useful life of goodwill in response to events and changes in circumstances that warrant a revision, but the cumulative amortization period can’t exceed 10 years.
A company that elects this alternative must make an accounting policy decision to test goodwill for impairment at either the company level or the reporting unit level. But goodwill needs to be tested for impairment only when a triggering event — such as a significant adverse change in business climate, legal issues or loss of key personnel — occurs that indicates the fair value of a company or a reporting unit may be below its carrying amount.
The alternative standard also drops the second step of the existing impairment test: the costly and complicated hypothetical application of the acquisition method. Instead, the amount of the impairment equals the amount by which the carrying amount of the company or reporting unit exceeds its fair value. The goodwill impairment loss can’t exceed the company’s or reporting unit’s carrying amount of goodwill.
The aggregate amount of goodwill net of accumulated amortization and impairment will appear as a separate line item in the company’s statement of financial position. The amortization and aggregate amount of goodwill impairment will be presented in income statement line items within continuing operations unless the amortization or impairment is associated with a discontinued operation. Such amortization and impairment must be included on a net-of-tax basis within the results of discontinued operations.
The disclosures required under this alternative are similar to existing GAAP. A company that elects the alternative, however, isn’t required to present changes in goodwill in a tabular reconciliation.
Private companies that opt for the goodwill alternative may experience significant cost savings because of the combination of the amortization method and the elimination of the requirement to test goodwill for impairment at least annually. Amortization should reduce the likelihood of impairments, and testing may occur less frequently. When impairment testing is required, the removal of the second step and the ability to test at the company level (as opposed to the reporting unit level) should cut the test’s cost.
Once elected, the goodwill alternative will apply prospectively. A company will amortize existing goodwill starting at the beginning of the period of adoption in which the alternative is elected, as well as new goodwill recognized after the beginning of the annual period of adoption.
Private companies can find it difficult to obtain fixed-rate loans. They often must enter into an interest rate swap (a derivative instrument) to economically convert their variable-rate loans to fixed-rate loans. Existing GAAP guidance requires a company to recognize all of its derivative instruments in its balance sheet as either assets or liabilities and measure them at fair value.
A company may elect cash flow hedge accounting to mitigate income statement volatility if certain requirements are met. But many private companies lack the resources and expertise to comply with the requirements and, therefore, remain vulnerable to volatility.
The alternative standards in ASU 2014-03 will allow nonfinancial institution private companies to apply a simplified hedge accounting approach to their receive-variable, pay-fixed interest rate swaps as long as the terms of the swap and the related debt are aligned. Using this hedge accounting results in presenting interest expense in the income statement as if the company had directly entered a fixed-rate loan, instead of a variable-rate loan and an interest rate swap. Companies applying the alternative will have until the issuance of their financial statements to complete the required hedging documentation.
The alternative standard also allows a private company to recognize the swap at its settlement value, which measures the swap without consideration of nonperformance risk, rather than at fair value. Private companies that apply this alternative may enjoy cost savings, because settlement value is generally easier to determine than fair value. The variability of the fair value or settlement amount will be recorded as accumulated other comprehensive income (part of equity).
The standard can be applied to both existing and new qualifying swaps because the election of hedge accounting can be made on a swap-by-swap basis. This is good news for private companies that chose not to elect hedge accounting in the past because of the difficulty involved in complying with the requirements.
Users of financial statements, including regulators, lenders or other creditors, may require a private company to continue to apply traditional GAAP accounting standards, even if the company is otherwise eligible for the alternatives. Further, FASB is working on a project that addresses the subsequent accounting for goodwill for public companies and not-for-profit organizations, which could result in a future change to the subsequent accounting for goodwill for all entities, including private companies.
And a company that elects an accounting alternative could subsequently become subject to public company reporting and, therefore, need to recast prior periods as if it hadn’t elected the alternative.
Both of the new alternatives will be effective for annual periods beginning after Dec. 15, 2014, and interim periods beginning after Dec. 15, 2015. Early adoption is permitted, so an eligible private company could elect to apply the alternatives on its 2013 financial statements, as long as the financial statements weren’t made available for issuance before the ASUs were released.
If you have questions regarding how the updates affect how you prepare your financial statements, please give us a call. We’d be happy to answer your questions.
Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.
At Stockman Kast Ryan + Co., we have developed a Records Retention Schedule we think you will find helpful. Although it doesn’t cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.