Selected Accounting Standards Update
Evolving Accounting Standards for CPAs
Wiley author Joanne Flood reviews three significant Accounting Standards Updates (ASU).Â First, she reviews ASU 2014â€“08, issued in April 2014. This ASU focuses on Reporting [for] Discontinued Operations.Â This ASU changes the criteria for determining which disposals can be presented as discontinued operations. Â In the remaining portion of the article, she summarizes changes brought about by ASU 2014â€“10, Elimination of Certain Financial Reporting Requirements, including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, and ASU 2014â€“15, Disclosures of Uncertainties about an Entityâ€™s Ability to Continue as a Going Concern.
The following Accounting Standards Updates (ASU) make changes to the FASB Accounting Standards CodificationÂ®. Consultants and specialists should be cognizant of these changes (and others) as they review financial statements.Â The following may be of particular interest to valuation specialists. Those interested in more detail may download the complete ASUs for free on fasb.org.
ASU 2014-08, Reporting Discontinued Operations
In April 2014, the FASB issued ASU 2014, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU changes the criteria for determining which disposals can be presented as discontinued operations. The ASU also modifies related disclosure requirements.
Please note that this ASU applies to all entities and will significantly change current practice for assessing discontinued operations. It will also affect an entityâ€™s income and EPS from continuing operations.
The ASU defines a discontinued operation as a disposal of component or group of components that is disposed of or classified as held for sale and â€śrepresents a strategic shift that has (or will have) a major effect on an entityâ€™s operations and financial results.â€ť The update goes on to state that a strategic shift could include:
- A major geographical area of operations
- A major line of business
- A major equity method investment, or
- Other major parts of an entity
The disposal of component or group of components must be reported in discontinued operations when any of the follow occurs:
1. Â The component of an entity or group of components of an entity meets all these criteria:
- Management commits to a plan to sell the entity.
- The entity to be sold is available for immediate sale.
- The entity has taken action to complete the plan, including a program to find a buyer or other actions.
- The sale or transfer of the entity to be sold is expected to be recognized as a completed sale within one year, unless events beyond the entityâ€™s control occur.
- The entity to be sold is being actively marketed at a price that is reasonable in relation to its current fair value.
- Action required to complete the plan to sell make it unlikely that the plan will be withdrawn or changed in any significant way.
2. Â The component or group of component is disposed of by sale.
3. Â The component or group of components is disposed of by other than sale.
Although â€śmajorâ€ť in major strategic shift is not defined, the update does state a major strategic shift could have occurred when there has been a disposal of
- A major geographical area
- A major line of business, or
- Other major parts of an entity
The update also provides several detailed examples. However, there will be a degree of judgment involved in making the determination.
The ASU removes the provisions that disallowed presentation as a discontinued operation if:
- There are operations and cash flows of the component that have not been eliminated from the reporting entityâ€™s ongoing operations, or
- There is a significant continuing involvement with a component after its disposal.
Removal of these provisions should reduce complexity.
The Update details several new disclosures including:
- Presenting in the statement of cash flows or in a note:
- Total operating and investing cash flows or discontinued operations, or
- Depreciation, amortization, capital expenditures, and significant operating and investing noncash items related to discontinued operations
- Information about any significant continuing involvement after the disposal date. These may involve supply and distribution agreements, guarantees, repurchase option, and an equity method investment. The disclosure should include the nature of the activities that gave rise to the continuing involvement and how long the involvement is expected to continue
- Cash inflows or outflow after the disposal transaction
- Revenues or expenses after the disposal that before the disposal were eliminated in consolidation
- If an entity retains an equity method investment after the disposal, the entity must present information that enables users to compare the financial performance of the entity from period to period if the entity held the same investment in all periods presented
For public entities and not-for-profits that have issue, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, the provisions are prospectively to all disposals that occur within annual periods beginning on or after December 24, 2014, and interim periods within those years and all businesses or nonprofit activities that on acquisition are classified as held for sale.
All other entities should apply the guidance prospectively within annual periods beginning on or after December 12, 2014, and in interim periods beginning on or after December 15, 2015.
Early adoption is permitted for new disposals that have not been reported on financial statements previously issued or available for issuance.
ASU 2014â€“10, Elimination of Certain Financial Reporting Requirements, including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915) Elimination of Certain Financial Reporting Requirements, including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.
In July 2013, this issue was identified by the Private Company Council (PCC). FASB staff research found the issue relevant not just for companies within the scope of the PCC, but for all development state entitiesâ€”public and private.
The objective of the amendments in ASU 2014-10 is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. Users of financial statements of development stage entities told the board that the development stage entity distinction, the inception-to-date information, and certain other disclosures currently required under U.S. generally accepted accounting principles (GAAP) in the financial statements of development stage entities provide information that has limited relevance and is generally not decision useful. As a result, this ASU eliminates the concept of development stage entities from US GAAP. In so doing, it removes ASC 915 from the FASB’s Accounting Standards Codification.
The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage.
Except for the changes to ASC 810, the ASU 2014â€“10 amendments are effective for public entities for reporting periods, including interim periods, beginning after December 15, 2014. The ASC 810 changes are effective one year later. For non public entities, the ASU is effective for periods beginning after December 15, 2015. The ASC 810 changes are effective one year later. Early adoption is permitted.
ASU 2014â€“15, Disclosure of Uncertainties about an Entityâ€™s Ability to Continue as a Going Concern
On August 27, 2014, the FASB issued ASU 2014-15, Presentation of Financial Statementsâ€”Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entityâ€™s Ability to Continue as a Going Concern.
This ASU essentially, with some changes, mirrors going-concern requirements for auditors currently found in PCAOB and AICPA standards. Now, management must perform at least annually an evaluation of the entityâ€™s ability to continue as a going concern. Management must evaluate, in the aggregate, conditions and events that are known or reasonably knowable at the evaluation date. Management must assess whether it is probable that the entity will be able to meet its obligations that are due within one year after the date that the financial statements are issued or available to be issued. The probability threshold is the same used for accounting for contingenciesâ€”more likely than not. When making the assessment, management may consider mitigating plans to determine whether substantial doubt is alleviated. These plans can be considered only if both of the following conditions are met:
- It is probable that the plan will be effectively implemented with the year.
- It is probable that the plan when implemented will mitigate the conditions or events that raise substantial doubt about going concern.
In order for these plans to be considered, generally, management or those with authority must approve the plans before the issuance date of the financial statements.
If, after considering all the facts and managementâ€™s plans, management concludes that substantial doubt remains, the financial statements must include a statement that there is substantial doubt about the entityâ€™s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. The financial statements must also include disclosures that allow users to understand:
- Principal conditions or events that raised substantial doubt,
- Managementâ€™s evaluation of the significance of those conditions or events in relation to the entityâ€™s ability to meet its obligations, and
- Managementâ€™s plans to mitigate the conditions or events
These disclosures must be made even if management concludes that the substantial doubt has been alleviated.
ASU 2014â€“14 is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted.
Joanne Flood, CPA, is author of Wileyâ€™s GAAP 2014: Interpretation and Application of Generally Accepted Accounting Principles; Wiley GAAP 2013: Interpretation and Application of Generally Accepted Accounting Principles; Wiley Practitioner’s Guide to GAAS 2013: Covering all SASs, SSAEs, SSARSs, and Interpretations. Ms. Flood specializes in technical guidance and training courses. Her subject matter expertise is in U.S accounting and auditing standards and International Financial and Reporting Standards. Ms. Flood can be reached at firstname.lastname@example.org.
Copyright Wiley, 2014. Originally published on Wiley.com, as updates to Wiley GAAP 2014. Wiley GAAP 2015, comprehensive, practical guide to U.S. accounting standards,is now available for sale on Wiley.com.
Image courtesy of Stuart Miles/FreeDigitalPhotos.net