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In response to feedback from stakeholders, the FASB recently proposed the deferral of the effective dates for several major accounting standards. The proposed deferral would provide at least an additional year to certain companies that have not yet adopted these standards. The standards immediately impacted by the deferral include:
Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)
Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12)
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
Leases (ASU 2016-02)
For credit losses, hedging, and leases, the proposal would defer the effective dates for certain companies. For insurance, the proposal would defer the effective dates for all companies.
The proposal also creates a framework for future standard setting where two "buckets" are used, allowing at least a two year difference in the effective dates for major standards. The "buckets" the FASB has proposed are: (1) SEC filers other than smaller reporting companies (SRCs, as defined by the SEC) and (2) all other companies, including SRCs.
In August 2019, the FASB issued an exposure draft on the two-bucket approach and deferral of the effective dates for credit losses, hedging, and leases. The FASB also issued a separate exposure draft to defer the effective date of the insurance standard. The comment periods for these exposure drafts end in mid-September and the FASB expects to issue final amendments later this year.
For an overview of the current and proposed effective dates refer to Appendix - FASB guidance effective dates.
The next major standard up for adoption is the new credit losses standard. Given the variety of financial instruments that are within the scope of the new standard, both financial services and non-financial services companies will be impacted.
The new credit losses standard introduces a new accounting model for recognizing credit losses on certain financial instruments based on an estimate of “lifetime” expected credit losses. The current expected credit loss (CECL) model applies to a broad scope of financial instruments, including financial assets measured at amortized cost (including trade receivables and held-to-maturity debt securities), net investments in leases, and certain off-balance sheet credit exposures. While available-for-sale (AFS) debt securities are not within the scope of CECL, the new credit losses standard also made several notable changes to the AFS impairment model.
The new standard is currently effective on January 1, 2020 for calendar year-end public business entities (PBEs) that meet the definition of an SEC filer. As discussed in Front and center, the FASB has proposed to defer the effective date for the new credit losses standard to January 1, 2023 for calendar year-end companies that are SRCs or non-PBEs. Early adoption of the standard is permitted.
As companies prepare for adoption of the new credit losses standard, they are increasingly focused on presentation and disclosure in the financial statements. The new standard expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for credit losses. For example, companies will be required to disclose a rollforward of the allowance for credit losses on assets subject to CECL and on AFS debt securities. In addition, PBEs will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year).
For many companies, the new credit losses standard will have a significant impact on systems, processes, and controls over financial reporting. We have a number of resources that can help as companies prepare for adoption of the new credit losses standard. Our podcast, The CECL standard - 5 things you need to know, outlines the CECL model and its impact on companies as they prepare for adoption. Other available resources include our Loans and investments guide, In depth US2019-02, Frequently asked questions on the FASB’s new credit losses standard, In depth US2019-09, Additional FAQs on the FASB’s new credit losses standard, and In depth US2019-14, Further FAQs on the FASB's new credit losses standard.
SAB 74 disclosures
SEC Staff Accounting Bulletin (SAB) No. 74 requires a company to provide information on the status of its analysis and the impact that adoption of new standards is expected to have on its financial statements.
With the 2020 adoption date for the new credit losses standard approaching, companies’ SAB 74 disclosures should become more specific. Below is a summary of SAB 74 disclosures on the potential impact of adopting the new credit losses standard in annual and quarterly filings of companies in the S&P 500 between May 15, 2019 and August 23, 2019.
Many companies have implemented cloud-based solutions that involve migrating their data, applications, and platforms to the “cloud.” New accounting guidance (ASU 2018-15) will require companies to capitalize certain costs incurred when purchasing a cloud computing arrangement (CCA) that is a service. Under the new guidance, companies will apply the same criteria for capitalizing implementation costs in a CCA service as they would for internal-use software. The capitalized implementation costs will generally be expensed over the term of the service arrangement and the related assets will be assessed for impairment using the same model applied to long-lived assets.
The guidance requires companies to present CCA implementation costs in the same line items as the fees associated with the CCA service. Therefore, the presentation of CCA-related payments will differ from the presentation of internal-use software costs:
|Internal-use software||CCA service|
|Balance sheet||Fixed or intangible asset||Prepaid or other asset|
|Income statement||Depreciation or amortization||Operating expense|
|Statement of cash flows||Investing activity||Operating activity|
The new guidance also requires qualitative and quantitative disclosures about the nature of the CCA as well as the amounts that are capitalized, amortized, and impaired.
To apply the new guidance, companies will need processes and controls to track and evaluate capitalization of implementation costs related to a CCA, determine the period of amortization, and assess impairment. Among other potential operational challenges, companies may need to evaluate activities performed by third-party service providers to identify or estimate the portion of costs that relate to implementation activities. Companies should also consider the potential impact to areas outside of accounting such as IT, financial planning, and income taxes.
The new guidance is effective on January 1, 2020 for calendar year-end PBEs, with early adoption permitted. The new guidance can be applied either prospectively or retrospectively. If adopting prospectively, companies will only apply the new guidance to costs incurred after the date of adoption. For in-process implementation projects, this could result in different accounting for costs incurred before and after adoption.
For more information, refer to our In the loop, Moving to the cloud? Better check the new cost guidance, In depth US2018-14, Cloud computing arrangements: Customer accounting for implementation costs, and listen to our podcast.
Under the new leases standard, a lessor’s pattern of revenue recognition for an operating lease is impacted by its assessment of the collectibility of lease payments. If collectibility is probable at commencement, lease income is generally recognized on an accrual basis (generally on a straight-line basis) over the term of the lease. If collection is not probable, lease income is limited to the lesser of (1) income that would have been recognized if collectibility was probable and (2) lease payments collected (i.e., on a cash basis).
Collectibility should be reassessed throughout the lease term. If collectibility is no longer probable (i.e., the lease subsequently becomes "troubled") and cumulative cash receipts are less than lease income recognized to date, the excess lease income would be reversed. If collectibility subsequently becomes probable, any difference between the lease income that would have been recognized if collectibility was always probable and the income actually recognized to date is recognized as current period lease income, assuming the original agreement has not been modified or replaced.
The FASB staff has concluded that lessors can elect an accounting policy to record a general reserve on a portfolio basis for operating lease receivables that are individually probable of collection following the contingencies standard (ASC 450). If a lessor elects to record a general reserve, it may either be recorded as a reduction of lease income or as bad debt expense.
For more information, refer to our In depth US2019-12, Lessors: the impact of operating lease receivable collectibility.
Arrangements that appear to be service contracts on the surface may actually include embedded leases when the vendors use equipment or devices to provide the service. For example, outsourced technology solutions for communications and infrastructure are becoming more common where vendors use technology-enabled devices in conjunction with cloud-enabled offerings to provide services. The technology-enabled devices used in these service offerings may need to be accounted for as leases by both the vendors (i.e., lessors) and the customers (i.e., lessees).
Judgment is involved in identifying an embedded lease. A service arrangement that involves the use of a technology-enabled device may contain an embedded lease if (1) the device is explicitly or implicitly identified and (2) the customer controls the use of the identified device. If it is not practical for a vendor to substitute the device used in the service offering or it does not make economic sense for the vendor to substitute the device from a cost-benefit perspective, the arrangement has an identified device. The notion of control involves the customer obtaining substantially all of the economic benefit from the use of the device and directing how and for what purpose the device is used.
A service arrangement with an embedded lease will typically have lease and nonlease components. Both vendors and customers need to separately identify the components and allocate contract consideration to these components on the basis of their relative standalone selling prices. Lessees have the ability to elect to combine nonlease components with the associated lease components by class of underlying asset. Lessors can make a similar election, provided certain criteria are met.
Under the new leasing standard, the impact of a services contract containing an embedded lease include:
The lessee (customer) will classify the embedded lease component as an operating or finance lease and will need to include both a right-of-use asset and corresponding lease liability on its balance sheet. If the lessee elects to combine a nonlease component with the associated lease component, the "gross-up" will be larger.
The lessor (vendor) will classify the embedded lease component as a sales-type, direct financing, or operating lease. Under the new leasing standard, such an arrangement will sometimes be classified as a sales-type lease, which will result in the derecognition of the device at the lease commencement date. This could result in a "day one loss" in situations where a significant amount of the payments are variable (e.g., customer usage-based payments).
For more information on embedded leases and the related accounting impact, refer to Chapter 2 of our Leases guide.
A goodwill impairment test is performed annually and when events or circumstances are identified that indicate it is more likely than not that the asset is impaired. New guidance for goodwill impairments (ASU 2017-04) is effective on January 1, 2020 for calendar year-end PBEs that have not early adopted. The new guidance was meant to reduce the time and effort to account for goodwill impairments by removing the second step of what was previously a two-step impairment test. Under the new guidance, goodwill impairment is measured as the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill.
As a reminder, companies that adopt the new guidance for their annual impairment test must also apply the new guidance for any interim testing during the fiscal year of adoption. For example, assume a calendar year-end company expects to early adopt the new goodwill impairment guidance in the fourth quarter of 2019 for its annual test. The company must also apply the new guidance if there is a triggering event in any interim period in 2019. Conversely, if the company performs a trigger-based interim test and recognizes an impairment under the old guidance, it must also perform its annual test using the old guidance.
For more information, refer to Chapter 9 of our Business combinations and noncontrolling interests guide.
The FASB continues to receive feedback that the goodwill impairment process is costly for preparers, even with recent amendments that were meant to simplify impairment testing. In July 2019, the FASB issued an Invitation to Comment (ITC) to determine if and how subsequent accounting for goodwill and certain intangibles should be simplified, taking into account the impact on providing decision useful information to users. Comments are due by October 7, 2019.
The ITC's key considerations include:
Goodwill amortization - The ITC considers whether goodwill should be amortized or if amortization should be a policy election. Additionally, the FASB is looking for perspectives on the related method of amortization and whether the period should be fixed or capped.
Impairment testing - The ITC discusses whether the annual impairment testing requirement should be removed in favor of testing only upon the occurrence of a triggering event and considers if testing should be performed at a different level than is currently required (e.g., at an entity level).
Intangible assets - The ITC considers whether companies should be permitted to subsume certain intangible assets acquired in a business combination into goodwill. These intangible assets may include (1) certain customer-related intangible assets and noncompete agreements or (2) all identifiable intangible assets. The ITC does not address the indefinite-lived intangibles model.
For more information on the ITC, refer to our podcast, The FASB's goodwill accounting project: 5 things you need to know.
On July 30, 2019, the FASB issued an exposure draft proposing clarifications to certain interactions between the guidance in Investments - Equity Securities (ASC 321), Investments - Equity Method and Joint Ventures (ASC 323), and Derivatives and Hedging (ASC 815).
The proposed amendments could impact companies that hold equity instruments or equity method investments. Specifically, the proposed amendments clarify that observable transactions that result in a company applying or discontinuing the equity method of accounting for an investment should be considered for the purposes of applying the measurement alternative in ASC 321. This proposed change would likely result in a retained or previously held investment being recorded at fair value when initially applying either ASC 321 or ASC 323 due to a change in ownership.
Under the proposed amendments, forward or option contracts for the purchase of equity instruments that will be accounted for under the equity method would be subject to ASC 321 prior to settlement. Unless a company elects to apply the measurement alternative, these instruments would be measured at fair value at contract inception and any changes in fair value would be recorded in earnings each reporting period.
If an instrument qualifies for the measurement alternative and a company elects to apply it, the instrument would be remeasured to fair value upon an impairment or an observable transaction in the instrument, the investee’s common stock, or investments similar to the instrument or the investee’s common stock. Upon exercise of the option or settlement of the forward contract, investments that will be accounted for under the equity method would be recorded at fair value. That is, even companies electing the measurement alternative would record equity instruments at fair value upon settlement, regardless of whether any observable transactions or impairments occurred prior to settlement or exercise.
For example, assume an investor enters into a purchase agreement whereby it will pay $2 million for a 25% interest in an investee’s common stock to close at a future date. At closing the investor will account for the investment using the equity method. Under the proposed guidance, a purchase agreement is a forward contract that would be within the scope of ASC 321. If through closing, the fair value of the 25% investment had increased to $2.1 million, the investor would recognize a cumulative gain of $100,000 and record its equity method investment at $2.1 million. The period(s) in which the $100,000 gain would be recognized depends on whether the investor elects the measurement alternative and whether any observable transactions occur in the investee’s common stock. In addition, if observable transactions (or impairments) occur during the life of the contract, gains may occur in some periods and losses in others depending on fluctuations in the fair value of the contract.
The proposed guidance would not apply to forward contracts to purchase a controlling financial interest in an acquiree (ASC 805), arrangements that are deemed to be in-substance common stock within the scope of ASC 323, or derivatives accounted for using ASC 815.
The comment period closed in August and the effective date of the proposed amendments will be determined based on stakeholder feedback received. If issued, it is expected that the proposed updates would be applied prospectively.
The London Interbank Offer Rate (LIBOR) is a measure of the average interest rate at which major global banks borrow from one another and is used as a reference rate for various commercial and financial contracts. Currently, it is expected that LIBOR will be discontinued after 2021, which could give rise to significant operational and financial reporting implications as companies work to identify contracts exposed to LIBOR and paths to transition to an alternative reference rate.
On July 12, 2019, the SEC staff issued a statement on LIBOR transition. The statement reiterated that the expected discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for certain market participants. The staff indicated that it is actively monitoring the extent to which registrants are identifying and addressing risks associated with LIBOR transition. The staff encouraged market participants to begin the process of identifying existing contracts that extend past 2021 to determine their exposure to LIBOR and identify whether their existing contracts address circumstances where LIBOR is no longer available. As part of managing the transition, the staff also encouraged companies to identify what alternative reference rate might replace LIBOR in existing contracts.
In addition to providing practical guidance regarding the expected transition from LIBOR, the statement also identified areas of disclosure that the SEC's Division of Corporation Finance will be monitoring in future filings with the SEC. These areas include:
The status of efforts regarding transition and significant areas yet to be addressed
Any identified material exposures to LIBOR for which the impacts are not yet known or cannot be reasonably estimated
The information used by management and the Board of Directors to assess and monitor transition, including qualitative and quantitative disclosures as applicable
For more information, refer to the SEC staff’s public statement on LIBOR transition.
To alleviate some of the potential financial reporting implications, the FASB has been exploring various alternatives to provide relief for companies that will need to transition to an alternative reference rate once LIBOR has been discontinued. One of the initiatives was completed in late 2018 when the FASB amended its hedge accounting guidance to add the Secured Overnight Financing Rate (SOFR), a potential replacement for LIBOR, as a benchmark interest rate that could be designated in certain hedging relationships. The FASB has also been actively working on a project to address broader financial reporting implications that may result from a market-wide transition from LIBOR to SOFR (or another alternative reference rate).
The FASB recently released an exposure draft addressing transition relief for existing hedging relationships and other contract modifications (e.g., loan modifications) that occur due to the discontinuation of LIBOR. Comments on the exposure draft are due by October 7, 2019.
For more information, refer to PwC's dedicated LIBOR and reference rate reform page.
Brexit is once again in the headlines as the United Kingdom (UK) and its Prime Minister, Boris Johnson, continue to negotiate an exit from the European Union. Companies should continue to consider how this evolving and dynamic political landscape will impact their organizations as the outcome will likely result in significant changes for many UK companies. However, this is not just a concern for UK companies. Brexit may also impact non-UK companies with UK operations or that conduct business with UK-based customers. By now, companies should have identified and assessed the Brexit-related risks and should be considering the impact on their accounting and financial reporting. Some of the accounting and reporting areas to consider include: financial statement disclosures (e.g., risks and uncertainties), restructuring, tax law changes, asset impairments, and financial asset valuations.
For more information, listen to our podcast, Brexit: Five things you need to know about the accounting considerations. For considerations under IFRS, see In depth INT2018-15, Accounting implications of the UK’s Brexit decision.
The SEC continues to take action against companies that improperly identify risks they face from the misuse of customer data. Specifically, the SEC is focused on registrants who were aware of material breaches or improper use of customer data but failed to timely disclose such information to investors. As a reminder, the SEC issued interpretive guidance on February 21, 2018 clarifying the required disclosures associated with cybersecurity. In this guidance, the SEC stated that companies should assess whether they have sufficient controls and procedures in place to identify cybersecurity risks and incidents, as well as to prevent improper trading on non-public data. The SEC’s guidance identified the following sections of periodic reports and registration statements where disclosure of cybersecurity risks and incidents would be expected:
Description of Business
Financial Statement Disclosures
Board Risk Oversight
For more information, refer to our In brief US2018-07, SEC issues interpretive guidance on cybersecurity disclosures, and our publication on Rethinking cybersecurity disclosures to investors.
Comment letter trends
The SEC staff has begun issuing comments related to the new leasing standard that was adopted in Q1 2019 by most public companies. At this point, however, few leasing comments have been issued and there are no discernible trends to note in the staff’s comments. Our SEC comment letter trends site is continually updated for the latest trends, which will include any future trends identified related to the leasing standard. Continue to monitor this site for any changes and developments regarding comments related to leasing and other topics.
The following identifies the FASB's recently released guidance, grouped by effective date for calendar year-end PBEs. As discussed in Front and center, the FASB has proposed changes to the effective dates for some of these standards. The effective dates below are prior to the impact of the proposed changes, however the proposed changes have been noted for the standards potentially impacted.
(a) FASB proposed ASU: Effective in 2020 for SEC filers other than smaller reporting companies (SRCs, as defined by the SEC); effective in 2023 for all other companies, including SRCs
(b) FASB proposed ASU: Effective in 2022 for SEC filers other than smaller reporting companies (SRCs, as defined by the SEC); effective in 2024 for all other companies, including SRCs
For further information on the new accounting guidance for public companies, including available PwC resources, refer to: Effective dates for new FASB guidance for calendar year-end public companies
The following identifies the FASB's recently released guidance, grouped by effective date for calendar year-end nonpublic companies ("non-PBEs"). As discussed in Front and center, the FASB has proposed changes to the effective dates for some of these standards. The effective dates below are prior to the impact of the proposed changes, however the proposed changes have been noted for the standards potentially impacted.
(a) FASB proposed ASU: Effective in 2021 for calendar year-end non-PBEs
(b) FASB proposed ASU: Effective in 2023 for calendar year-end non-PBEs
(c) FASB proposed ASU: Effective in 2024 for calendar year-end non-PBEs
For further information on the new accounting guidance for nonpublic companies, including available PwC resources, refer to:
Partner, National Professional Services Group, PwC US
Director, National Professional Services Group, PwC US
Director, National Professional Services Group, PwC US