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2019: FASB’s year of reflection for Accounting Standards Updates

Jan 24, 2020

The past year seems be one filled with reflection for the Financial Accounting Standards Board (FASB).

During 2019, the FASB issued 12 Accounting Standards Updates (ASUs) — the majority of which either correct, clarify or defer ASUs issued in previous years.

That’s great news for those of us still coming to terms with the two biggest issues of 2019: revenue recognition and not-for-profit financial statement updates. 

So, let’s take a break from grappling with those topics to check out a few of the more universal updates that were passed in 2019:

2019-01 Leases (Topic 842)

Codification Improvements

Subsequent to its issuance in 2016 of the new lease standard, FASB has been fielding questions and seeking feedback on potential implementation issues. This ASU address three separate issues.

  1. In applying the lease standard, lessors need to determine the fair value of the underlying leased asset. Prior guidance allowed lessors who were not manufacturers or dealers (generally financial institutions and captive finance companies), to use the cost of the underlying asset. This exception was not carried forward to the new Lease Topic 842. ASU 2019-01 amends Topic 842 to permit the cost exception for lessors who are not manufacturers or dealers. Lessors should note that if there is a significant time lapse between acquiring the asset and the lease commencement, the lessor will be required to use fair value.
  2. Topic 842 requires lessors to present all cash receipts from leases within the operating section of the statement of cash flows. Prior lease standard did not provide guidance on presentation of cash flows. Lessors within the scope of Topic 942, Financial Services – Depository and Lending, based on an example in Topic 942, have been presenting the principal payments received as investing activities; similar to their reporting of payments received on loans. ASU 2019-01 amends Topic 842 to permit lessors that are depository and lending institutions to continue to report principal payments as investing activities in the statement of cash flows.
  3. In adopting the lease standard, certain transition disclosures under Topic 250 are required. ASU 2019-01 clarifies that the guidance in Topic 250-10-3 (requiring the effect of changes to be included in interim statements issued after the fiscal year of adoption) is not required when implementing Topic 842.

2019-03 Not-for-Profit Entities (Topic 958)

Updating the Definition of Collections

Works of art, historical treasures and similar assets, referred to as collections, are permitted special treatment from typical property and equipment under GAAP. While collections are most often associated with not-for-profit entities, this ASU expands the new definition to encompass both not-for-profit as well as business entities.

The ASU modifies the definition of the term collections in GAAP.

In current GAAP, to qualify for the special accounting rules for collections, three conditions must be met. One condition is that an entity adopt a policy that requires the proceeds from any disposition of a collection item, to be used to acquire additional collection items. Numerous entities felt the condition was too restrictive, believing that the preservation and care of collections was as important as continuing to acquire collection items.

To address these concerns, this ASU now permits the policy to be expanded so that proceeds can be used to acquire additional collection items, to support the direct care of existing collections, or both. If an entity’s policy allows for proceeds to be used to support the direct care of existing collections, the entity must disclose its definition of direct care.

The amendments in this update are effective for annual financial statements issued for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments is permitted. The amendments should be applied on a prospective basis.

2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

2019-05 Financial Instruments – Credit Losses - Targeted Transition Relief

2019-11 Codification Improvements to Topic 326, Financial Instruments – Credit Losses

These three ASU individually amend one or all of the following ASUs related to financial instruments:

  1. Accounting Standards Update No. 2016-01, Financial Instruments— Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
  2. Accounting Standards Update No. 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
  3. Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

Subsequent to their issuance, FASB has assisted with implementation inquiries and identified certain areas that need clarification, correction, or improvement. A number of the changes arose from discussions at meetings of the Credit Losses Transition Resource Group and others submitted by stakeholders.

Key topics that are affected by these updates include:

  • Accrued interest receivables
  • Recoveries of financial assets and trade receivables
  • Equity method loss allocations
  • Projections of interest rate environments for variable-rate financial instruments
  • Consideration of estimated costs to sell when foreclosure is probable
  • Hedges of interest rate risk
  • Fair value hedge basis adjustments
  • Option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis
  • Expected recoveries for purchased financial assets with credit deterioration
  • Financial assets secured by collateral maintenance provisions
  • Transition guidance

The effective date for the changes in these ASUs generally corresponds to the effective dates of the related ASUs, with modified dates for those entities that may have already adopted the new guidance.

2019-06 Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958)

Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities

In 2014, FASB issued Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and Accounting Standards Update No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (consensuses of the Private Company Council [PCC]), which simplify the subsequent accounting for goodwill and the accounting for certain identifiable intangible assets in a business combination.

FASB acknowledged that the issues addressed in the updates are not limited solely to private entities and added to its agenda projects to address these issues in not-for-profit entities and public entities. This ASU extends the alternatives to not-for-profit entities.

Goodwill: Not-for-profit entities may now choose to amortize goodwill instead of performing annual impairment tests. If an entity elects this alternative, it must be applied to all existing goodwill and subsequent additions to goodwill – cannot be chosen for some instances and not others. The amortization term is 10 years, or less if the entity demonstrates a shorter life is more appropriate.

In following the alternative, a not-for-profit entity is required to (1) make an accounting policy election to test goodwill at either the entity level or reporting unit level, and (2) test goodwill for impairment when a triggering event occurs that indicates the fair value of the entity may be less that its carrying amount.

Business Combinations and Intangibles: Not-for-profit entities may now choose an alternative when entering into a business combination or acquisition which relieves the entity from separately identifying certain intangibles. Intangibles that do not require separate identification, and therefore result in being reported within the amount of goodwill of the transaction, include: (1) customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of a business, and (2) noncompetition agreements. If an entity elects this alternative, it must be applied to all future business combination and acquisition transactions, and most importantly the entity must also elect the accounting policy alternative to amortize goodwill (as described above).

As with their initial issuance for private companies, these accounting policy alternatives that have now been extended to not-for-profit entities, aim to reduce the cost and complexity of accounting for and disclosing Goodwill and Business Combinations or Acquisitions. Entities will be subject to any subsequent revisions to these alternatives.

The amendments in the ASUs are effective upon issuance. Transition methods are as stated in the original ASUs. Goodwill – apply prospectively for all existing goodwill and for all new goodwill generated in acquisitions. Business combinations and intangibles – apply prospectively upon the occurrence of the first affected transaction.

2019-09 Financial Services – Insurance (Topic 944)

2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)

Here lies the gem of 2019!

These two ASUs defer the effective dates for some upcoming GAAP standard changes. The ASUs also demonstrate the FASB’s new philosophy in staggering the effective dates of standards for public entities, smaller reporting companies (SRC), and private entities. This philosophy anticipates the effective dates for nonpublic entities (including SRCs) to be at least two years after the effective dates for public entities (excluding SRCs), for major Updates.

This follows consideration of the factors nonpublic entities encounter when transitioning to a major Update and the amount of time needed for implementation.

The following is a listing of new effective dates for the respective ASUs

Update 2018-12 Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

New effective dates – public business entities, excluding SRCs – fiscal years beginning after December 15, 2021; for all other entities – fiscal years beginning after December 15, 2023.

Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

New effective dates – public business entities, excluding SRCs – fiscal years beginning after December 15, 2019; for all other entities – fiscal years beginning after December 15, 2022. Note that the effective date for public entities remains the same as in the original ASU 2016-13. Deferral was only granted for nonpublic entities, including SRCs.

Update 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

New effective dates – As this ASU is already effective for all public business entities, the effective date remained unchanged for those entities - fiscal years beginning after December 15, 2018; for nonpublic business entities the effective date has been extended to fiscal years beginning after December 15, 2020.

Update 2016-02 Leases (Topic 842)

New effective dates – As this ASU is already effective for all public business entities, the effective date remained unchanged for those entities - fiscal years beginning after December 15, 2018; for nonpublic business entities the effective date has been extended to fiscal years beginning after December 15, 2020.

2019-12 Income Taxes (Topic 740)

Simplifying the Accounting for Income Taxes

FASB slipped this one in right at the end of 2019.

The amendments in this update simplify the accounting for income taxes by removing the following exceptions to general principles that were required to be applied in certain situations.

  • Eliminates the exception to the incremental approach for intraperiod tax allocation in situations where there is a loss from continuing operations and income or gain from other items. Such as a loss from operations but income from discontinued operations or other comprehensive income.
  • Eliminates the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; and the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary.
  • Eliminates the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

This ASU also requires certain treatment for specific items in an effort to simplify the accounting for income taxes.

  • Requires an entity to account for a franchise tax (or similar tax) that is partially based on income as an income-based tax for the portion based on income
  • Requires an entity to evaluate when a step up in the tax basis of goodwill should be considered part of the original business combination when the book goodwill was recognized or when a step up in the tax basis should be considered a separate transaction
  • An entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statement
  • Requires that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

And the amendments make minor improvements to the Codification for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. 

The ASU is effective for public business entities for fiscal years beginning after December 15, 2020; and for all other entities for fiscal years beginning after December 15, 2021. Early adoption is permitted; however, an entity must adopt all of the provisions of the ASU in the same period.

Special mention for amendments taking effect in calendar year 2019 financial statements

We also want to draw attention to Updates issued in prior years that had an effective date of Jan. 1, 2019 for nonpublic calendar year entities (first application in December 31, 2019 financial statements). If you are unsure how the changes may affect your entity or for more information, please contact anyone on your Wipfli team. We are here and ready to help.

  • ASU 2014-09 Revenue from Contracts with Customers (Topic 606)
  • ASU 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
  • ASU 2016-04 Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force)
  • ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
  • ASU 2016-16 - Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
  • ASU 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
  • ASU 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business
  • ASU 2017-07 - Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
  • ASU 2018-02 - Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
  • ASU 2018-08 - Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

Author(s)

Border_Sheila
Sheila Border, CPA
Senior Manager
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