As we end 2017 and look to 2018, it’s time to consider what the Financial Accounting Standards Board (FASB) has been up to in 2017. As of November 30, the FASB had issued 14 new Accounting Standards Updates (ASU) in 2017. This article will highlight four of the new U.S. Generally Accepted Accounting Principles (GAAP) standards issued in 2017 and a few earlier standards with approaching effective dates.
New GAAP on the Horizon
2017-01 Business Combinations (Topic 805)
Clarifying the Definition of a Business
ASU 2017-01 was issued in January 2017. Because the definition of a business affects many areas of accounting, this ASU will likely have a significant effect. Specifically, the new standard will affect all entities that must determine whether they have acquired or sold a business. The revision in the definition is anticipated to result in far fewer business combinations and more asset acquisitions.
Under the new standard, the first step in determining whether a transaction meets the definition of a business is to consider whether substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets. If so, it does not meet the new definition of a business and would be recorded as an asset acquisition in the case of a purchase. For simplicity purposes, this is good news because the reporting and disclosure requirements for asset acquisition accounting are far fewer than for business combinations.
The standard includes guidance on evaluating whether assets are similar, which is a consideration of the nature of each asset and the risks associated with managing and creating outputs from the assets.
If substantially all the fair value of the gross assets acquired (or disposed of) is not concentrated in a single identifiable asset or group of similar identifiable assets, we must move on to Step 2.
Under the new guidance, Step 2:
- Requires that to be considered a business, a set (an integrated set of assets and activities is collectively referred to as a “set”) must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output.
- Removes the evaluation of whether a market participant could replace missing elements.
The guidance provides a framework to use in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider, depending on whether a set has outputs.
While outputs are not required to meet the definition of a business, such as in the acquisition of an early-stage company, outputs are a key element of a business; therefore, the new guidance includes more stringent criteria for sets without outputs:
- If a set does not have outputs, it can be considered a business only if it includes, among other things, employees who form an organized workforce.
- If a set does have outputs, it can be considered a business if it includes, among other things, employees who form an organized workforce or an acquired process, as defined in the standard.
The standard includes examples of various acquisitions in real estate, manufacturing, pharmaceutical and research, television stations, distribution rights, intellectual property, and loan portfolios.
ASU 2017-01, Business Combinations, is effective for public companies for annual reporting periods beginning after December 15, 2017 (calendar year 2018), including interim periods within that reporting period.
All other entities will apply the new guidance to annual reporting periods beginning after December 15, 2018 (calendar year 2019), and interim reporting periods beginning after December 15, 2019.
The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition. Early application is generally allowed for transactions that have not been reported in financial statements which have been issued or made available for issuance and is an option that definitely should be considered for any new acquisitions entered into by your organization.
2017-04 Intangibles – Goodwill and Other (Topic 350)
Simplifying the Test for Goodwill Impairment
Following the update issued in 2014 that allows private companies alternative accounting for goodwill, the FASB added a project to consider similar simplifications for the accounting of goodwill to be applicable to all entities. The FASB subsequently separated the project into two phases, with Phase 1 resulting in the issuance of 2017‑04. This update applies to all entities—public businesses, not-for-profits, and private entities that have not adopted the private company alternative.
Current accounting for the subsequent measurement of goodwill requires an entity to perform procedures to determine the fair value of its individual assets and liabilities (including those unrecognized) at the impairment testing date by following the same procedures that would be required in a business combination to arrive at a total entity value, from which the implied fair value of goodwill is derived. The carrying amount of goodwill is then compared with the implied fair value for goodwill.
The new standard eliminates this test and allows an entity to perform impairment testing by comparing the fair value of the reporting unit as a whole with its carrying amount. An impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value; such charge shall not, however, be greater than the amount of goodwill recorded.
This ASU should be applied on a prospective basis, with early adoption permitted for testing dates performed after January 1, 2017. The standard is effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, for other public business entities in fiscal years beginning after December 15, 2020, and for all other entities in fiscal years beginning after December 15, 2021.
2017-05 Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610‑20)
Clarifying the Scope of Asset Derecognition Guidance and Accounting for the Partial Sales of Nonfinancial Assets
While much has been publicized about the new standard for revenue recognition, it is important to highlight this update, which also relies on certain of the principles in ASC 606, Revenue from Contracts with Customers. Subtopic 610‑20 was originally issued in Update 2014‑09, which established ASC 606. Update 2017‑05 is a clarification of the original issuance.
While ASC 606 deals with revenue generated by the ongoing activities of an entity, ASC 610‑20 covers sales and disposals of nonfinancial assets in contracts with noncustomers. This includes primarily the sale of fixed assets (when this is not an entity’s ongoing activity); it is specifically relevant for real estate sales because the real-estate-specific guidance in current GAAP will be superseded. Often, sales of nonfinancial assets include financial assets. ASC 610‑20 provides guidance detailing in what circumstances a financial asset is considered an “in substance” nonfinancial asset and can therefore be grouped with nonfinancial assets (such as selling a building with existing leases). An in-substance nonfinancial asset is a financial asset that is promised to a counterparty in a contract in which substantially all the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. When evaluating whether the definition of “substantially all” has been met, entities will exclude cash or cash equivalents and liabilities (both assumed and relieved).
Subtopic 610‑20 includes a decision tree to assist in determining which standards apply, depending on such factors as who the counterparty is, what assets are being sold, or whether the transaction includes transfer of ownership interests.
Within the scope of this subtopic, an entity shall apply guidance in Topic 810 on consolidation and in Topic 606 on revenue from contracts with customers.
Topic 606 principles are used in determining whether there is a contract, determining the transaction price and allocating the consideration to each distinct nonfinancial asset/in-substance nonfinancial asset, determining when control transfers, and accounting for variable consideration.
The amendments in this update are effective at the same time as the new revenue recognition standard: for annual reporting periods beginning after December 15, 2017 (calendar year 2018), for public entities and for annual reporting periods beginning after December 15, 2018 (calendar year 2019), for all other entities.
2017-07 Compensation – Retirement Benefits (Topic 715)
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
The amendments in this update do not change the accounting for pension costs, but rather address presentation issues. Under GAAP, defined benefit pension cost and postretirement benefit cost consist of several components (such as service costs, interest cost, actual return on plan assets, gain or loss, and amortization of prior service costs or credit). Current GAAP does not definitively prescribe where the net benefit cost should be presented or what level of detail must be disclosed for the components.
This ASU requires that the service cost component of the net benefit cost be separated and reported in the same line item or items as other compensation costs for the respective employees. The other components should be presented outside the subtotal of income from operations. The items should be described appropriately.
The amendments in this update are effective for annual reporting periods beginning after December 15, 2017 (calendar year 2018), for public entities and for annual reporting periods beginning after December 15, 2018 (calendar year 2019), for all other entities. Early adoption is permitted.
Prior-Year ASUs With Rapidly Approaching Effective Dates
Now we’ll turn to highlights from ASUs issued in prior years—those with nearing effective dates or provisions you may want to adopt early. The items below are summarized. Click Here for More Information.
2014-09 Revenue from Contracts with Customers (Topic 606)
This update, issued in 2014, received revisions in both 2015 and 2016. For entities other than public business entities, the update, based on deferral provisions, is effective for fiscal years beginning after December 15, 2018 (calendar year 2019). Early application is permitted as of an annual reporting period beginning after December 15, 2016. Click Here for More Information.
2014-15 Presentation of Financial Statements – Going Concern (Subtopic 205‑40)
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
This update applies to all entities and is effective for fiscal years beginning after December 15, 2016 (calendar year 2017). Early application is permitted.
2015-11 Inventory (Topic 330)
Simplifying the Measurement of Inventory
For entities other than public business entities, the update is effective for fiscal years beginning after December 15, 2016 (calendar year 2017). Early application is permitted as of the beginning of an interim or annual reporting period.
No. 2016-01 Financial Instruments – Overall (Subtopic 825‑10)
Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU is effective for all public business entities for fiscal years beginning after December 15, 2017 (calendar year 2018), and for all other entities for fiscal years beginning after December 15, 2018 (calendar year 2019). Entities that are not public business entities may immediately adopt the provision eliminating the fair value disclosure of financial instruments not measured at fair value for any financial statements that have not been made available for issuance.
2016-02 Leases (Subtopic 842)
This ASU is effective for all entities other than public business entities for fiscal years beginning after December 15, 2019 (calendar year 2020). The amendments for public business entities are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.
2016-13 Financial Instruments – Credit Losses (Topic 326)
Measurement of Credit Losses on Financial Instruments
This ASU is effective for all entities other than public business entities for fiscal years beginning after December 15, 2020 (calendar year 2021), with early adoption permitted for fiscal years beginning after December 15, 2018 (calendar year 2019). For public business entities, it is effective for fiscal years beginning after December 15, 2019.
2016-14 Not-for-Profit Entities (Topic 958)
Presentation of Financial Statements for Not-for-Profit Entities
This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017 (calendar year 2018). Early application is permitted.
2016-18 Statement of Cash Flows (Topic 230)
This ASU is effective for all entities other than public business entities for fiscal years beginning after December 15, 2018 (calendar year 2019). Early application is permitted. The effective date for public business entities is fiscal years beginning after December 15, 2017.
Because the above-reviewed ASUs are only a highlighted representation of the updates, for further detailed information, presentation, and disclosure requirements on any of the accounting standards, visit FASB.org. This website includes issued standards, standards in draft form, effective dates, comment letters, and much more! This is a valuable resource for staying up to date on U.S. GAAP.
In addition to the Accounting Standards Updates highlighted above, there have been numerous others over the past few years that are equally important and should be properly evaluated for applicability within your organization.
Please contact your Wipfli relationship executive if you have any questions or if we can help provide guidance on the applicability of any new standards for your organization.