Standards Update: 2/10/17

ASU No. 2016-18, Statement of Cash Flows: (Topic 230): Restricted Cash

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.

The update was released to address diversity in practice in the classification and presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows. Previously, Generally Accepted Accounting Principles (GAAP) did not include specific guidance in this area, except for some limited guidance for not-for-profit entities.

The main provisions of the ASU require that a statement of cash flows include the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending total amounts shown on the statement of cash flows.

In addition, disclosures are required regarding the nature and amounts of restricted cash and restricted cash equivalents, and a reconciliation of the related cash line items on the statement of financial position to the total end of period balance on the statement of cash flows.

The amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2017. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented.

ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business provides a more robust framework to use in determining when a set of assets and activities is a business to assist entities with evaluating if transactions should be accounted for as acquisitions (or disposals) of a business or of assets. There had been concern that too many transactions are accounted for under business acquisition rules, which takes additional time and costs. This ASU narrows the definition of a business and will result in fewer transactions accounted as business acquisitions.

Under current guidance, there are three elements of a business: inputs, processes and outputs. Outputs are not actually required to be present, though an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs. All the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes.

The update requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business and would be accounted for as a sale or disposal of assets without further evaluation.

Otherwise, the update:

1. Requires that a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business.
2. Removes the evaluation of whether a market participant could replace the missing elements that would be needed to meet the above criteria (1).

The amendments also provide guidance to assist entities in determining when both an input and substantive process are present and provides more stringent criteria for sets without outputs, as well as narrows the definition of the term output.

For public entities, the ASU is effective for annual periods beginning after Dec. 15, 2017. For all other entities, the ASU is effective for annual periods beginning after Dec. 15, 2018. The amendments in this ASU should be applied prospectively on or after the effective date. Early application is permitted for transitions meeting certain requirements.

ASU 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 has also issued ASU 2017-02 to clarify when a not-for-profit entity (NFP) that is a general partner or a limited partner should consolidate a for-profit limited partnership or similar legal entity once the amendments in ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02), become effective.

ASU 2015-02 superseded the guidance in Subtopic 810-20, Consolidation—Control of Partnerships and Similar Entities, utilized by NFPs that were general partners of for-profit limited partnerships to determine when consolidation was required. ASU 2015-02 added new guidance to the general consolidation guidance in Subtopic 810-10, Consolidation—Overall related to limited partnerships and similar legal entities that presumes entitles first consider variable interest entity (VIE) consolidation guidance. NFPs are generally excluded from the scope of the VIE consolidation guidance and therefore would need to navigate directly to Subtopic 810-10, which does not address when a general partner should consolidate a for-profit partnership.

The amendments in ASU 2017-02 maintain how NFP general partners currently apply the consolidation guidance previously in Subtopic 810-20 by adding that guidance, along with when NFP limited partners should consolidate a limited partnership from Subtopic 810-10, to Subtopic 958-810, Not-for-Profit Entities—Consolidation.

ASU 2017-02 is effective for fiscal years beginning after Dec. 15, 2016, and early adoption in permitted.  If a NFP has not yet adopted the provisions of ASU 2015-02, the entity is required to adopt ASU 2017-02 at the same time that ASU 2015-02 is adopted. NFPs that have already adopted the provisions of ASU 215-02 are required to adopt the provisions of ASU 2017-02 retrospectively for all periods presented.

ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

With ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, the FASB provided an accounting alternative for the subsequent measurement of goodwill for private companies. The FASB has since added a project to evaluate the need for similar amendments for other entities, including public business entities and not-for-profit entities not permitted to apply the accounting alternative. ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment was a result of this project.

The amendments in this ASU are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. Private companies that have adopted the private company alternative for goodwill but have not applied the alternative related to including certain intangible assets in goodwill are permitted, but not required, to adopt the amendments without having to justify preferability of the accounting change if it is adopted on or before the effective date. Private companies that have included such intangible assets in goodwill and thus, also adopted the goodwill alternative, are not permitted to adopt this guidance upon issuance without following justification as to why it is preferable.

ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

Instead, the amendments require an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2, making the same impairment assessment applicable to all reporting units. Disclosures are required to include the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity will still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

The amendments in this ASU should be applied on a prospective basis. Public businesses that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments for its impairment tests in fiscal years beginning after Dec. 15, 2019. Public businesses that are not SEC filers should adopt the amendments for its impairment tests in fiscal years beginning after Dec. 15, 2020. All other entities that are adopting the amendments, including NFPs, should do so for their goodwill impairment tests in fiscal years beginning after Dec. 15, 2021. Early adoption is permitted for impairment tests performed on testing dates after Jan. 1, 2017.