Selected Accounting Standards Update

Evolving Accounting Standards for CPAs

Wiley author, Joanne Flood, reviews three 2015 Accounting Standards Updates (ASUs). Those reviewed are ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,; ASU 2015-02, Amendments to the Consolidation Analysis; and ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Topic 835).

The following Accounting Standards Updates (ASU) make changes to the FASB Accounting Standards Codification^®. Consultants and specialists should be cognizant of these changes (and others) as they review financial statements.  The following may be of particular interest to valuation specialists as they read and analyze financial statements. Those interested in more detail may download the complete ASUs for free on fasb.org.

Recent News on the New Revenue Standard

The FASB voted to direct its staff to draft an Exposure Draft (ED) delaying implementation of the ASU, Revenue from Contracts with Customers, for one year. The ED will include a provision for early adoption as of the original implementation dates for public entities. If the ED results in a final Accounting Standards Update , public entities reporting under U.S, GAAP will implement the standard in calendar 2018, and nonpublic entities will implement in 2019, assuming the entities do not opt for early adoption.

ASU 2015-01

In January 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU is part of the FASB’s Simplification Initiative. The ASU eliminates from GAAP the concept of extraordinary items. The Board eliminated extraordinary items because of feedback that the criteria (unusual in nature and infrequent in occurrence) for classifying an item as extraordinary were unclear and the usefulness of the classification was questionable. The use of the classification was also extremely rare. In fact, after the terror attacks on September 11, 2001, the FASB advised that those events were not extraordinary events, issuing a statement that:

“While the events of September 11 were certainly extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case

By moving unusual and infrequent events to the presentation and disclosure guidance for items that are unusual or infrequent, the FASB is of the opinion that the information most useful to investors and other financial statement users will be retained.

Implementation

The update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted if the guidance is applied from the beginning of the fiscal year of adoption.

The ASU gives the following options for adoption:

• Prospectively, disclosing the nature and amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the adoption date.
• Retrospectively to all prior periods presented including the disclosures currently required.

ASU 2015-02

On February 18, 2015, the FASB issued Amendments to the Consolidation Analysis. In its press release upon issuance of the ASU, the FASB stated that the ASU is “intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).”

Who will be affected? Entities in all industries that:

• Use limited partnerships
• Outsource decision making
• Have applied the related party tiebreaker when assessing whether or not to consolidate

Once entities implement the new guidance, valuation specialists and others analyzing financial statements should take a close look to see if the consolidated entities have changed.

Guidance

The ASU:

• Provides a new scope exception to registered money market funds and similar unregistered money market funds
• Makes targeted amendments to the current consolidation guidance
• Ends the deferral granted to investment companies from applying the Variable Interest Entity (VIE) guidance

The guidance currently provides five criteria to determine if an entity is a VIE that must be consolidated. The ASU does not change that. However, it does change how one of the criteria is applied. Currently, when decision-making over the entity’s most significant activities has been outsourced, the reporting entity begins by determining if there is a single equity holder that is able to remove the outsourced decision maker that has a variable interest. The standard changes how a reporting entity assesses if the equity holders at risk lack decision-making rights – whether the investor has power. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. This change is expected to reduce the number of entities that are VIEs.

The new standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing VIE status. It will no longer be assumed that a general partner has a variable interest in a limited partnership.  A limited partnership must provide partners with either substantive kick-out rights or substantive participating rights over the general partner. For limited partnerships and similar legal entities that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights

Effective Date

The ASU is effective:

• For public companies, for periods beginning after December 15, 2015
• For private companies and not-for-profit organizations, for annual periods beginning after December 15, 2016; and for interim periods, beginning after December 15, 2017

Early adoption is permitted, including adoption in an interim period. Although the standard is not in effect until 2016, entities should begin planning for implementation, measuring its effect on the financial statements, and communicating the changes and their effect to investors.

ASU 2015-03 – Debt Issuance Costs

In April, the FASB issued Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs (Topic 835).

Guidance

The ASU requires that debt issuance costs be presented on the statement of financial position as a direct reduction of proceeds from debt. The presentation of debt issuance costs as a direct reduction of the liability is consistent with current U.S. guidance on debt discounts. The new guidance is also consistent with FASB Conceptual Statement No. 6, which states:

Debt issue costs not an asset for the same reason that debt discount is not—it provides no future economic benefit. Debt issues cost in effect reduces the proceeds of borrowing and increases the effective interest rate and thus may be accounted for the same as debt discount.

Note that the ASU only affects presentation and not recognition or measurement. Debt issuance costs will continue to be amortized using the interest method and reported as interest expense. These changes will simplify accounting while increasing the clarity of presentation.

Effective Date and Transition

ASU 2015-03 has the following effective dates:

• For public entities – Fiscal years and interim periods within those fiscal years beginning after December 15, 2015
• For all other entities – Fiscal years beginning after December 15, 2015 and interim periods beginning after December 15, 2016

Early adoption is permitted. Entities should apply the guidance retrospectively to all prior periods presented.

Copyright Wiley, 2015. Originally published on wiley.com as update to Wiley GAAP 2014.   Wiley GAAP 2015, comprehensive, practical guide to U.S. accounting standards is now available for sale on wiley.com.

Joanne M. Flood, CPA is author of Wiley’s GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles, Wiley Practitioner’s Guide to GAAS 2015: Covering all SASs, SSAEs, SSARSs, and Interpretations, and Wiley GAAP: Financial Statement Disclosures Manual. 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 jflood3@optonline.net or at (516) 536-4374.

Image courtesy of Pong/FreeDigitalPhotos.net