FASB

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

PCC's proposed alternatives endorsed by Board

At its June 10 meeting, the FASB endorsed three proposals of the Private Company Council (PCC) for public comment, as follows:

  • PCC Issue 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination, offers private companies relief from the requirement to separately recognize certain intangible assets that are acquired in business combinations. Under this proposal, a private company would have the option not to recognize an intangible asset separate from goodwill, unless that asset arises from a noncancelable contract or other legal right. See the May 7, 2013 PCC Decision Overview for further information.
  • PCC Issue 13-01B, Accounting for Goodwill Subsequent to a Business Combination, would allow private companies to amortize goodwill and to use a simplified goodwill impairment model. Specifically, a private company would amortize goodwill using the useful life of the primary asset acquired in the business combination for a period of up to 10 years. Goodwill impairment would be tested at the companywide level rather than at the reporting unit level. In addition, goodwill would be tested for impairment only when a triggering event occurs that would more likely than not reduce the fair value of the company below its carrying amount. A quantitative test of goodwill would be a single step test, with goodwill impairment equal to the excess of the company's carrying amount over its fair value. See May 7, 2013 PCC Decision Overview for further information.
  • PCC Issue 13-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps, would permit private companies to adopt a simpler approach to account for certain types of interest rate swaps if they intend to economically convert the interest rate on their debt. This proposal would allow a private company to (1) use approaches identified as "combined instruments" and "simplified shortcut" to account for certain interest rate swaps utilized on an economic basis to convert variable-rate borrowings to fixed rate, and (2) present interest expense as though the borrowings were fixed rate. Private financial institutions would not be allowed to elect this guidance. See the May 7, 2013 PCC Decision Overview for further information.

At the Board's direction, the staff will perform additional research on the first two proposals to assess their applicability to public companies and not-for-profit entities. For the third proposal, the staff will make a similar assessment through outreach to stakeholders, including advisory groups, but excluding public companies due to the Board's current project on hedging.

The proposals are expected to be released for public comment in the near future.

Disclosures for nonpublic employee benefit plans deferred

At its June 12 meeting, the Board discussed feedback from recent comment letters and voted to indefinitely defer requiring certain disclosures on investments held by nonpublic employee benefit plans in the plan sponsor's (or the sponsor's affiliate's) own nonpublic equity securities.

The deferral of disclosures would be immediately effective for financial statements that have not been issued upon issuance of an Accounting Standards Update (ASU).

EITF MEETING HELD JUNE 11

Because consensuses and consensuses-for-exposure are subject to ratification by the FASB and some of the details of conclusions reached at an EITF meeting are determined during the process of developing the minutes of the meeting, the following descriptions are preliminary.

At its meeting on June 11, the FASB's Emerging Issues Task Force (EITF) reached two final consensuses and three consensuses-for-exposure, as summarized below.

The FASB will consider ratification of the consensuses and consensuses-for-exposure at its June 26 meeting. Board-ratified consensuses will be issued as ASUs and will be incorporated into the FASB Accounting Standards Codification® (ASC). Board-ratified consensuses-for-exposure will be posted as proposed ASUs to the FASB website for comments.

Final consensuses

Issue 13-A, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

The EITF reached a final consensus on Issue 13-A to include the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes to be applied to new or redesignated hedges. Currently, ASC 815, Derivatives and Hedging, identifies only U.S. Treasury rates and LIBOR as benchmark interest rates for such purposes. To provide risk managers with the flexibility to utilize this additional benchmark rate, the Task Force agreed to remove the guidance in ASC 815-20-25-6 that requires the use of different benchmark interest rates for similar hedges to be both "rare" and "justified."

Under the proposed guidance, an entity would be permitted to apply hedge accounting referencing the Fed Funds Effective Swap Rate to new or redesignated hedges, regardless of whether it has existing hedges designated using LIBOR or U.S. Treasury rates at the date of adoption.

The Task Force also affirmed its previous decisions that the guidance would require no additional disclosures and would be applied prospectively to new or redesignated hedging relationships.

The guidance will be effective upon issuance of a final ASU.

Issue 13-C, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists

The EITF reached a final consensus on Issue 13-C requiring entities to present an unrecognized tax benefit as a reduction to a deferred tax asset for an NOL or similar tax loss or tax credit carryforward, unless the uncertain tax position is not available to reduce the NOL or carryforward under the provisions of the tax law within the same jurisdiction, or would not be utilized for that purpose. Otherwise, the unrecognized tax benefit would be presented gross, as a liability. The guidance would apply to all unrecognized tax benefits existing at the effective date of the guidance.

The EITF changed its position on transition guidance, deciding that entities would adopt the final consensus on a prospective rather than retrospective basis, but with an option to apply the guidance retrospectively. Based on the feedback in comment letters, the Task Force determined that the cost of requiring retrospective application would outweigh its benefit.

The guidance would be effective for public entities for annual periods, and for interim periods within those annual periods, beginning after December 15, 2013. Nonpublic entities would adopt the guidance for annual periods, and for interim periods within those annual periods, beginning after December 15, 2014. Early adoption would be permitted.

Consensuses-for-exposure

Issue 12-G, Accounting for the Difference between the Fair Value of the Assets and the Fair Value of the Liabilities of a Consolidated Collateralized Financing Entity

At a prior meeting, the EITF had reached a final consensus on Issue 12-G, but during the FASB's review process, some Board members expressed concerns about certain guidance to be included in the final ASU and asked that the EITF reconsider the Issue. On June 11, the Task Force decided to propose removing the requirement that an entity should measure the net risk exposure of its investment in a collateralized financing entity (CFE) under ASC 825, Financial Instruments. Instead, a reporting entity that elects the fair value option to measure the financial assets and financial liabilities of a CFE would be required to measure the fair value of the financial liabilities based on the fair value of the financial assets and carrying amount of any nonfinancial assets of the CFE.

The Task Force also decided that a reporting entity would be required to provide only the fair value disclosures in ASC 820, Fair Value Measurement, for the financial assets, as well as a new qualitative disclosure that explains how the financial liabilities were measured.

Finally, the Task Force decided that reporting entities would apply the guidance on a modified retrospective approach, with a cumulative effect adjustment in the period of adoption. Reporting entities that did not previously elect the fair value option would be allowed to make a one-time election of this option upon adopting the final consensus. Entities that previously elected the fair value option would be permitted to apply the guidance on a full retrospective basis.

The Issue will be re-exposed for public comment.

Issue 12-H, Accounting for Service Concession Arrangements

The Task Force reached a consensus-for-exposure on Issue 12-H stipulating that service concession arrangements within its scope should not be accounted for as a lease. EITF members had previously agreed that the scope of this Issue would be limited to concession arrangements (contracts where a public sector entity grants a private entity the right to operate and/or maintain its infrastructure assets) if the grantor meets two conditions:

  • Has some level of control over the services the operating entity must provide and under what terms
  • Controls the residual interest in the infrastructure at the end of the term of the arrangement

Entities would be required to adopt the proposed guidance on a limited retrospective basis, with a cumulative effect adjustment for all contracts existing at the beginning of the period of adoption. The Task Force further agreed that transition disclosures would be required in accordance with ASC 250, Accounting Changes and Error Corrections.

Issue 13-E, Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring

The Task Force reached a consensus-for-exposure on Issue 13-E indicating that a creditor undertaking a troubled debt restructuring (TDR) that is in substance a repossession or foreclosure would be considered to have taken physical possession of real estate property, and would therefore be required to reclassify the loan to other real estate owned, if either (a) the creditor obtains legal title to the real estate collateral or (b) the borrower voluntarily conveys all interest in the real estate property to the creditor to satisfy that loan, even though legal title did not yet pass.

The Task Force also decided that additional information should be provided about loans currently in the process of foreclosure, similar to the existing requirement in quarterly bank regulatory "call reports." In addition, the Task Force decided that entities should provide a rollforward of other real estate owned.

Entities would be required to apply the proposed guidance to new and existing loans on a prospective basis as of the date of adoption, with a cumulative effect adjustment in the period of adoption.

The staff indicated that a second issue related to TDRs on the accounting for the effect of a Federal Housing Administration guarantee, which had originally been combined with Issue 13-E, would be considered as a separate issue at a future meeting. Refer to the May 1, 2013 meeting agenda report for more information.

Other matter discussed

Issue 13-D, Determination of Whether a Performance Target That Is Allowed to Be Met after the Requisite Service Has Been Provided by the Employee Is a Vesting Condition or a Condition That Affects the Grant-Date Fair Value of the Awards

Background

Diversity in practice currently exists among preparers in accounting for share-based payment awards that contain a performance target if a holder is not employed by the company at the time the performance target is met.

For example, an entity issues restricted stock units that contain a three-year service period but only become transferable if an IPO occurs before the end of the award's ten-year contractual life. After providing three years of service, an employee could terminate employment, retain the restricted stock unit, and eventually transfer the award upon an IPO, as long as the IPO occurs within ten years of the grant.

Some entities treat the performance target as a vesting condition and do not recognize compensation expense until it is probable the condition will be met (in the example, the expense would be recognized when an IPO occurs). Other entities treat the performance target as an "other" condition that impacts the grant-date fair value of the award.

Current developments

Mixed views were expressed by Task Force members, although there appeared to be stronger preliminary support for considering the condition as a vesting condition. The Task Force directed the FASB staff to perform additional research on this subject and agreed to discuss the results at a future meeting.

AICPA

Financial reporting framework for small and medium-sized entities released

The AICPA recently released its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEsTM ), an optional non-GAAP financial reporting framework for small and medium-sized entities that are not required by owners, lenders, or other stakeholders to present their financial statements in accordance with U.S. GAAP. This framework provides simplified criteria for the measurement, recognition, and presentation of financial information and is intended for small and medium-sized entities that are privately held and may be owner-managed having no intention of either going public or including the financial statements in a public filing, among other characteristics.

The FRF for SMEsTM is distinct from guidance for private companies being developed by the Financial Accounting Foundation's PCC in that the PCC is developing modifications to existing U.S. GAAP that will be considered GAAP for financial reporting purposes, whereas the FRF for SMEsTM is not GAAP.

This framework comprises traditional accounting and accrual income tax accounting principles, and is therefore considered an other comprehensive basis of accounting (OCBOA). Other frameworks considered to be OCBOA include cash basis, modified cash basis, tax basis, and contractual basis, among others. Accordingly, entities considering adopting the FRF for SMEsTM should discuss the matter with their financial statement users prior to adoption.

Below are examples of differences between the FRF for SMEsTM and U.S. GAAP:

  • Derivatives are recognized using the net cash paid/received at the time of settlement.
  • Goodwill is amortized generally over the same period used for tax purposes, or over 15 years if goodwill is not amortized for tax purposes.
  • Compensation expense is not recognized for stock or other equity compensation issued in lieu of cash.
  • Revenue for service and long-term contracts is recognized using the percentage-of-completion or completed contract method.
  • Accounting policy elections include the following options, among others:

    • Income taxes: income taxes payable or deferred income taxes method. Under the income taxes payable method, only current income tax assets and liabilities are recognized.
    • Subsidiaries: consolidation or equity method accounting
    • Joint ventures: equity method or proportionate consolidation
    • Start-up costs: expensed as incurred or capitalized and amortized over 15 years
    • Defined benefit plans: current contribution payable or accrued benefit obligation method

Proposed standard issued for personal financial planning services

The AICPA is seeking comments on its Proposed Statement on Standards in Personal Financial Planning Services, which would apply to personal financial planning services not otherwise covered by other standards.

The comment period on the proposal ends September 9.

COSO PUBLISHES ARTICLE ON TRANSITIONING TO 2013 FRAMEWORK

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has issued an article providing an example of one approach to transition to COSO's 2013 Internal Control – Integrated Framework from the original 1992 framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.