The Financial Accounting Standards Board (FASB) has been very active in early 2017, especially over the past few weeks, having issued three Accounting Standard Codification (ASC) Updates (Updates). Here’s a quick summary of the new Updates.
ASU No. 2017-04
Companies with goodwill from business acquisitions get some long-requested relief from the cost of performing goodwill impairment testing under this new Update.
ASU No. 2017-14 addressed a long-standing compliant of entities concerning the cost and complexity of performing the Step 2 quantitative goodwill impairment test. Through this Update, which is both part of the FASB’s simplification initiative as well as Part 1 of a wider FASB project on goodwill accounting, an entity can stop its impairment testing after performing the Step 1 quantitative test for goodwill impairment. Under the Step 1 test, the entity compares the carrying value of its reporting unit to its fair value at the goodwill impairment measurement date. The excess of carrying value over fair value would represent the amount of the required goodwill writedown up to the amount of the goodwill recorded by the entity. Under this Update, an entity can continue to either perform the Step 0 qualitative test first or go directly to the Step 1 qualitative test.
This approach mirrors the option for impairment for private entities added through ASU No. 2014-02, though in that Update, the assessment is done at the entity level. The benefit of the new Update is that the cost and complexity of the Step 2 test, where an entity reallocates the fair value of the reporting unit to determine the need for a goodwill writedown, is eliminated.
Implementation for this standard is prospective, with a tiered effective date approach. SEC registrants will adopt the guidance for impairment measurements for fiscal years beginning after December 15, 2019, while non SEC public business entities have an additional year. Lastly, non-public entities will adopt the Update for their impairment measurements for years beginning after December 15, 2021. However, early adoption is permitted for all for measurements performed after January 1, 2017.
ASU No. 2017-03
Next, it’s been no secret that that the SEC has been underwhelmed by the disclosure, or lack thereof, by registrants regarding the impact of adopting Topic 606, Revenue from Contracts with Customers. Its comments at recent EITF meetings have now set the guidelines for what it expects with regard to the disclosure of the impact of adopting significant new standards.
Update 2017-03 added certain SEC staff comments at recent EITF meetings to the ASC and highlighted the SEC’s increasing scrutiny of registrant’s disclosures about the effects of issued but not-yet effective accounting standards. Under Staff Accounting Bulletin (SAB) Topic 11.M, still widely known by its pre-codification SAB 74 name, SEC registrants are required to make disclosures about the impact of issued but not yet effective Updates. As seen by its recent comments concerning the lack of detail in recent SAB 74 disclosures concerning Topic 606, the SEC detailed its expectations about SAB 74 disclosures for three recently issued Updates which could have significant impacts on registrants’ financial results. Specifically within the implementation guidance for Topic 606, as well as for ASUs 2016-02, Leases and ASU 2016-13 on Impairment, references were added to include the SEC’s expectations that, when a registrant cannot estimate the impact from adopting the new standard, it should nonetheless disclose that as well as the following:
- A description of the effect of the accounting policies it expects to apply, if determined;
- A comparison of these polices to its current accounting policies; and
- The status of its implementation process, including significant implementation matters yet to be addressed
With this Update, SEC registrants are now on notice that the normal boilerplate SAB 74 disclosures just won’t cut it anymore. However, while this SEC guidance is not applicable to private companies, they can also pick up a few helpful hints about how best to communicate the impact of adopting these new standards to their stakeholders as well.
Lastly, in Update No. 2017-02, Not-for-Profit Entities – Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity that is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity, the FASB reinstated consolidation guidance for not-for-profit entities (NFPs) which was eliminated with the issuance of Update No. 2015-02, Consolidation (Topic 810).
Under the amendments in Update 2015-02, the presumption of a general partner to consolidate a for-profit limited partnership was eliminated, with general partners required to follow the guidance for variable interest entities (VIE) when determining whether to consolidate such investments. However, the VIE guidance to which the general partners were referred is not in scope for NFPs, leaving NFP general partners of a for profit limited partnership with confusion as to how they should consider whether to consolidate their investments.
This Update reinstates the previous consolidation guidance for NFP’s investments as a general partner in a for-profit limited partnership, resulting in their consolidation unless the presumption of control is overcome. Further, for NFPs that are limited partners in such investments, the Update provided guidance on when a NFP with substantive kick-out rights should consolidate their investment.
While of limited applicability, this Update provides needed guidance for NFPs and also highlights the unintended consequences that may occur when the FASB updates such complicated guidance as that dealing with consolidation issued.
This Update is effective for fiscal years beginning after December 15, 2016.
Rich Daisley is Director, Accounting and Financial Reporting Content for Surgent Professional Education. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.
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