The third quarter of 2014 broughtcontinued changes in U.S. generally accepted accounting principles (GAAP) resulting from several ongoing projects at the Finanical Accounting Standards Board (FASB). The FASB has issued fifteen accounting standards updates (ASU) in 2014, an amount greater than the total ASU’s issued in all of 2013. This MHM Messenger provides a brief recap of certain third quarter activities.
prepare accounting guides for 16 industries ranging from aerospace and defense to timeshares. The SEC has announced that its staff is working on implementation issues related to a filer’s election to retrospectively adopt the standard’s provisions and how that retrospective adoption impacts the MD&A five-year table. Expect additional information about implementation and application of this guidance throughout 2015 and 2016.
For additional information about the revenue recognition standard follow our MHM Messenger Revenue Recognition Serial.
Lease Accounting – The faSB and IaSB continue to deliberate the proposal on lease accounting. While these Boards are reconsidering certain previous decisions, the capitalization of a leased asset and lease liability for virtually all leases is expected to remain should a final standard ultimately be issued. This will result in significant changes to financial statements and leverage ratios of many entities, with potential negative effects on existing financial covenants. However, the accounting for lessor entities is not expected to change significantly from the current requirements. The Boards continue to work on a final standard. If one is issued, we anticipate it would be issued during 2015.
Financial Instruments – While the IaSB has essentially completed their financial instruments project, the faSB continued deliberations in the areas of classification and measurement and impairment. Recent deliberations on the impairment loss model have resulted in tentative decisions to
The third quarter of 2014 broughtcontinued changes in U.S. generally accepted accounting principles (GAAP) resulting from several ongoing projects at the finanical accounting Standards Board (faSB). The FASB has issued fifteen accounting standards updates (ASU) in 2014, an amount greater than the total ASU’s issued in all of 2013. This MHM Messenger provides a brief recap of certain third quarter activities.
Convergence Projects
Revenue Recognition – The faSB and IaSB (Boards) issued their long-anticipated revisions to the accounting for revenue recognition in the second quarter of 2014. during the third quarter, the faSB and IASB’s Transition Resource Group (TRG) held their first meeting. The goal of the TRG is to solicit, analyze, discuss and communicate implementation issues related to the new revenue recognition standard. Discussions that result at the TRG meetings are expected to highlight potential implementation issues for further potential considerations by the Boards. The first meeting discussed gross versus net, revenue recognition from royalties and licenses, and impairment of capitalized contract costs.
In addition to activities at the TRG, the AICPA and SEC are also working on implementation guidance. The AICPA has formed various committees to
September 2014
Third Quarter Accounting and Financial Reporting Update
no longer allow debt securities to follow the credit impairment loss model. Rather such instruments will continue to follow the other-than-temporary-impairment model that current exists. Additionally, financial assets with similar risk characteristics are required to be collectively evaluated for impairment. The impairment analysis should not be performed using the probability weighted assessment which was previously to be required under the exposure draft. The current expected credit losses model for held-to-maturity debt securities was affirmed. Convergence is no longer expected in many areas and final standards are expected from the FASB in the next year.
Going Concern
as discussed in a recent MHM Messenger, the faSB issued aSU 2104-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern during the third quarter.
This ASU establishes for the first time in US GAAP, management’s responsibility to evaluate the assumption that an entity is a going concern when financial statements are issued. The requirement for management to apply the liquidation basis of accounting when liquidation becomes imminent, expected to be a rare occurrence, is not changed by this aSU.
Under the ASU management evaluates whether there is substantial doubt about an entities ability to continue as a going concern and if so, if management’s plans to alleviate the conditions and events causing the substantial doubt are probable of being implemented, and if those plans are probable of being effective. Disclosure related to this evaluation is required when substantial doubt about a going concern exists, whether or not management’s plans are expected to alleviate the conditions and events that have caused the substantial doubt to arise.
Unlike the guidance in the auditing standards, where an evaluation of substantial doubt about an entities ability to continue as a going concern is required for one year from the balance sheet date, this standard requires management’s evaluation to be performed for a period represented by one year from the date financial statements are issued or available to be issued.
The evaluation will be required for all entities for annual periods ending after December 15, 2016 (December 31, 2016 for a calendar year entity) and interim periods thereafter. Early adoption is permitted.
Troubled Debt Restructuring – Certain Mortgage Loans
A consensus by the Emerging Issues Task Force was ratified and issued by the FASB as ASU 2014-04 Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective for this ASU is to reduce inconsistencies in practice that have occurred in the accounting by creditor entities for the foreclosure on mortgage loans with government guarantees. In practice, there have been two primary methods of accounting for the foreclosure:
a. The foreclosed mortgage is reclassified as an other receivable.
B. The foreclosed mortgage is derecognized and a real estate asset is recognized in the same manner of the foreclosure of a mortgage without a government-issued guarantee.
This ASU requires that the foreclosure of a mortgage loan will result in derecognition of the mortgage loan and recognition of a separate other receivable measured as the amount of loan principal and interest expected to be recovered, if the following three conditions are met:
1. The loan has a government guarantee that is not separable from the loan before foreclosure.
2. At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.
3. At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.
The ASU is effective for annual periods, and interim periods within, for public business entities for periods beginning after December 15, 2014. For all other entities, it is effective for annual periods ending after December 15, 2015 and interim periods beginning after December 15, 2015. Early adoption is permitted, and the ASU may be adopted either prospectively or under a modified retrospective method.
Consolidation – Collateralized Financing Entity
A reporting entity that has a variable interest in an entity that is designed as a collateralized financing entity (CFE), evaluates if it must consolidate the CFE under the variable interest entity model. CFEs, examples of which include collateralized debt obligation (CDO) or collateralized loan obligation (cLo) entities, are variable interest entities because they have nominal equity as a result of issuing beneficial interests that are classified as liabilities. When consolidation occurs, the reporting entity often elects or is required to account for the assets and liabilities of the cfe at fair value. The resulting fair value measurement of the assets and liabilities may be different resulting in diversity in practice for the differential between the fair value of the assets and liabilities.
aSU 2014-03 Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a
Consolidated Collateralized Financing Entity provides an election to the reporting entity to measure the more observable of the asset or liability at fair value. When the election is made, the ASU proscribes methodologies for the accounting for the unobserved assets or liabilities.
The ASU also requires that if the election is not made, the difference between the fair value of the assets and liabilities should be attributed to earnings in the income statements of the reporting entity.
The standard is effective for annual periods, and interim periods within, for public business entities for periods beginning after December 15, 2015. For all other entities, it is effective for annual periods ending after December 15, 2016 and interim periods beginning after December 15, 2016. Early adoption is permitted, and the ASU may be adopted either with a retrospective method or a modified retrospective method.
Simplification Initiative
The objective of the FASB’s Simplification Initiative is to reduce the complexity in accounting standards for narrow issues which will reduce the cost to prepare financial statements, but also improve or maintain the usefulness of information to financial statement users. The FASB has issued three exposure drafts in connection with the initiative:
1. Simplification for the accounting for inventory by modifying lower of cost or market to be lower of cost or net realizable value (See Aug. 12 MHM Messenger)
2. Simplification of the income statement presentation by the removal of extraordinary items, and
3. Simplification of the customers accounting for fees paid in cloud based computing arrangements (See aug. 26 MHM Messenger)
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report.
our MHM Messenger issued on aug. 19 discussed the expansion of the FASB’s simplification initiative.Other projects that the FASB is working on include simplifying the accounting for debt issuance costs, the balance sheet classification of debt, and changes to the measurement date for defined benefit plans for entities with non-calendar period ends. In addition, the FASB has asked the EITF to consider the accounting for income taxes for intra-entity transfers and the classification of deferred taxes.
Other FASB Activities
The faSB has concluded deliberations on its projects for addressing principal-versus-agent analysis in the consolidation literature and a final standard is expected soon. This project will affect all entities that perform evaluations under the variable interest entity (VIE) model. Some of the items addressed by this project are expected to include:
• Removal of the deferral from the VIE model for investment companies. A scope exception will exist for money market funds.
• Modifying the guidance for limited partnerships such that they will be variable interest entities unless a single limited partner, or simple majority vote of all partners, can exercise substantive kick-out, liquidation or participation rights, thus increasing the number of limited partnerships that will be determined to be VIEs.
• Removing the guidance for limited partnerships and similar entities that are not VIEs, resulting in those entities being evaluated for consolidation using the existing guidance for corporations.
• Removing some of the conditions that cause a decision maker fee or service arrangement to be a variable interest.
• Modifying the related party rules to narrow the circumstances for when they apply, without eliminating the concept of intermediate level consolidation of a VIE by a commonly controlled sister entity.
Public Company Accounting Oversight Board
The PcaoB issued its third round of inspection reports for auditors of broker-dealers, which continued to identify significant deficiencies in the application of auditing standards amongst a large variety of public accounting firms.
The PCAOB staff also issued an invitation to comment on the auditing of accounting estimates and fair value measurements. Comments are due November 3, 2014.
Additional Information
Many of these issues will be discussed during our Third Quarter accounting and financial reporting Issues Update webinar on Sept. 11. There will be a repeat broadcast on oct. 16.
Also, save the date for our Fourth Quarter session on Dec. 11 and 16. For email notices of this and other courses, please sign up to receive the CBIZ & MHM Weekly Digest.
