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Standards Update: 11/26/18

November 26, 2018

KSM

The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below are select ASUs that were recently issued.

ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

Accounting Standards Update (ASU) No. 2018-17, Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17), impacts entities that must determine whether to consolidate a legal entity under the Variable Interest Entities guidance in Subtopic 810-10, Consolidation – Overall (VIE guidance).

Private Company Accounting Alternative

Currently, private companies may elect to not apply the VIE guidance to qualifying common control leasing arrangements. This private company accounting alternative is allowed under the amendments in ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (ASU 2014-07). ASU 2018-17 effectively expands this private company accounting alternative to apply to all legal entities under common control and supersedes the amendments in ASU No. 2014-07.

Under ASU 2018-17, a legal entity is not required to be evaluated by a private company under VIE guidance, if all of the following criteria are met:

  • The reporting and legal entity are under common control
  • The reporting and legal entity are not under common control of a public business entity
  • The legal entity is not a public business entity
  • The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of Topic 810, without consideration of the VIE guidance in this determination.

Once elected, the accounting alternative is an accounting policy election that applies to all current and future legal entities under common control that meet the criteria. Other consolidation guidance would still be applicable, unless a scope exception applies.

Under this accounting alternative, an entity will need to provide detailed disclosures, including the following:

  • The nature and risks associated with a reporting entity’s involvement with the legal entity under common control
  • How a reporting entity’s involvement with the legal entity under common control affects the reporting entity’s financial position, financial performance, and cash flows
  • The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position resulting from its involvement with the legal entity under common control
  • The reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control – if the reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control cannot be quantified, that fact shall be disclosed
  • If the reporting entity’s maximum exposure to loss exceeds the carrying amount of the assets and liabilities, qualitative and quantitative information to allow users of financial statements to understand the excess exposure

Decision-Making Fees

Currently, reporting entities consider whether a decision-making fee is a variable interest based on the equivalent of a direct interest in its entirety. ASU 2018-17 amends this guidance to require the consideration of indirect interests held through related parties in common control arrangements based on a proportional basis to determine whether fees paid to decision makers and service providers are variable interests.

Effective Date and Transition

For entities other than private companies, ASU 2018-17 (decision-making fees) is effective for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For private companies, the ASU is effective for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. Early adoption is permitted. The amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.

ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16).

ASU 2018-16 impacts entities that apply hedge accounting to benchmark interest rate hedges under Topic 815, Derivatives and Hedging, by adding the OIS rate based on the SOFR to the list of U.S. benchmark interest rates for applying hedge accounting under Topic 815.

The other eligible U.S. benchmark interest rates are:

  • The interest rates on direct Treasury obligations of the U.S. government (UST)
  • The London Interbank Offered Rate (LIBOR) swap rate
  • The OIS Rate based on the Fed Funds Effective Rate
  • The Securities Industry and Financial Markets Association (SIMFA) Municipal Swap Rate, which was added under ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

If an entity has not adopted ASU 2017-12, this ASU is required to be adopted concurrently with ASU 2017-12. ASU 2017-12 is effective for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. For all other entities, ASU 2017-12 is effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.

For public business entities that have adopted ASU 2017-12, this ASU is effective for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. For all other entities that have adopted ASU 2017-12, this ASU is effective for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of ASU 2018-16 if the entity has already adopted ASU 2017-12.

Entities should apply ASU 2018-16 prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.

ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) to simplify and reduce the complexity for the accounting for costs that an entity incurs when implementing a cloud computing service arrangement. The ASU was designed to make the accounting of the implementation costs of hosting arrangements consistent, regardless of whether or not the arrangement conveys a license to the hosted software.

Under ASU 2018-15, the capitalization of implementation costs incurred in a hosting arrangement that is a service contract are now aligned with the requirements to capitalize implementation costs incurred to develop or obtain internal-use software under current GAAP (Subtopic 350-40). Subtopic 350-40 requires that costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed.

Under ASU 2018-15, the implementation costs that are capitalized in accordance with Subtopic 350-40 will be expensed over the term of the hosting arrangement. ASU 2018-15 notes that the term of the hosting arrangement includes the noncancellable period of the arrangement, plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise the option, (2) an option to terminate the arrangement if the customer is reasonably certain to not exercise the termination option, or (3) an option to extend (or not terminate) the arrangement in which exercise of the option is in the control of the vendor.

The accounting related to the service contract portion of the hosting arrangement was not modified by this ASU.

ASU 2018-15 is effective for public entities for fiscal years beginning after Dec. 15, 2019 and for all other entities for fiscal years beginning after Dec. 15, 2020. Early adoption is permitted. The amendments in ASU 2018-15 may be applied using either a retrospective basis or a prospective basis to all implementation costs incurred after the date of adoption.

ASU 2018-14, Compensation–Retirement Benefits–Defined Benefit Plans–General (Subtopic 715-20): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2018-14, Compensation–Retirement Benefits–Defined Benefit Plans–General (Subtopic 715-20): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14) to improve and simplify financial reporting disclosures as they pertain to defined benefit plans. ASU 2018-14 applies to all entities that sponsor a defined benefit pension plan or other postretirement plans for their employees. The amendments under ASU 2018-14 both remove existing required disclosures and add new disclosures.

The following disclosure requirements have been removed from Subtopic 715-20, Compensation–Retirement Benefits–Defined Benefit Plans–General:

  • The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year
  • The amount and timing of plan assets expected to be returned to the employer.
  • Disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law
  • The amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan
  • For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets.
  • For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs, and (b) benefit obligation for postretirement health care benefits

The following disclosure requirements have been added to Subtopic 715-20, Compensation–Retirement Benefits–Defined Benefit Plans–General:

  • The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates
  • An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period

ASU 2018-14 also clarifies that the following information should be disclosed:

  • The projected benefit obligation (PBO) and the fair value of plan assets when the PBO exceeds plan assets
  • The accumulated benefit obligation (ABO) and the fair value of plan assets when the ABO exceeds plan assets

The ASU is effective for public entities for fiscal years ending after Dec. 15, 2020 and all other entities for fiscal years ending after Dec. 15, 2021. The amendments should be applied retrospectively to all periods presented. Early adoption is permitted.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement

Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), was issued to improve and simplify the disclosure requirements related to fair value measurements. This ASU applies to all entities; however, the guidance does have specific requirements for public and nonpublic entities.

ASU 2018-13 removes the following disclosure requirements from Topic 820, Fair Value Measurement:

  • The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
  • The policy for timing of transfers between levels within the fair value hierarchy
  • The valuation processes for Level 3 fair value measurements
  • For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period

ASU 2018-13 modifies the following disclosure requirements of Topic 820, Fair Value Measurement:

  • Instead of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
  • For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
  • The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

For public entities only, ASU 2018-13 requires the following additional disclosure requirements under Topic 820, Fair Value Measurement:

  • The changes in unrealized gains and losses included in other comprehensive income for the period for recurring Level 3 fair value measurements held at the end of the reporting period.
  • The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average, if other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to encourage appropriate discretion when considering such disclosures and to clarify that materiality may be considered when evaluating disclosure requirements.

ASU 2018-013 is effective for all entities for fiscal years beginning after Dec. 15, 2019. Except for the provisions on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty, which will be applied prospectively, the amendments should be applied retrospectively to all periods presented. Early adoption is permitted upon issuance of this update. In addition, an entity is permitted to early adopt the provisions that modify or remove existing disclosure requirements and delay the adoption of new disclosure requirements to the ASU’s effective date.

ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

Accounting Standards Update (ASU) No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12), was issued to improve financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities.

Under ASU 2018-12, the following areas of financial reporting are impacted:

  • Assumptions for liability measurement: Under the new standard the assumptions used at inception to measure the liability for a traditional insurance contracts will now be reviewed and updated accordingly on an annual basis, with any changes to the liability from changes in assumptions being recorded in net income in the period the change occurs.
  • Liability discount rate: The liability discount rate will be a standardized, market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income.
  • Measurement of market risk benefits: The two previous measurement models for market risk benefits under previous guidance have been reduced to a single measurement model (determined to be fair value), which will result in greater consistency across similar market-based benefits.
  • Amortization of deferred acquisition costs: ASU 2018-12 simplifies the amortization of deferred acquisition costs to require that the balance be amortized over a constant level basis over the expected term of the related contracts.
  • Additional disclosures: Under ASU 2018-12, there are additional disclosure requirements including that an insurance entity provide disaggregated rollforwards of beginning to ending balances of the contract liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. The amendments also require that an insurance entity disclose information about significant inputs, judgments, assumptions, and methods used in measurement, including changes in those inputs, judgments, and assumptions, and the effect of those changes on measurement.

The amendments in ASU 2018-12 are effective for public companies for fiscal years beginning after Dec. 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 2021. Early adoption is permitted.

ASU 2018-11, Leases (Topic 842), Targeted Improvements

Accounting Standards Update (ASU) No. 2018-11, Leases (Topic 842): Targeted Improvements, added a simplified transition method in implementing ASU 2016-02, and for lessors, provides a practical expedient for the separation of non-lease and lease components.

Additional Transition Method

The new transition method allows entities to initially apply new lease accounting under ASU 2016-02 at the adoption date (Jan. 1, 2020 for most calendar year-end private entities) instead of at the earliest comparative period present in the entity’s financial statements, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

As an example, if an entity adopts this transition method on Jan. 1, 2020, and presents comparable financial statements (2020 and 2019), the entity will present its 2020 financial statements using the new lease accounting provisions (Topic 842, Leases) and present its 2019 financial statements using previous guidance (Topic 840, Leases). It is important to note that existing financial statement disclosure requirements would still be required in the year of adoption, if this transition method is elected.

Lessor Accounting – Separating Components of a Contract

In addition to the new transition method above, ASU 2018-11 provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component, similar to the expedient provided for lessees. This aligns lessee and lessor accounting more closely.

However, the lessor practical expedient is limited to circumstances in which the non-lease component otherwise would be accounted for under the new revenue standard (Topic 606, Revenue from Contracts with Customers), and both of the following are met:

  • The timing and pattern of transfer of the non-lease component and associated lease component are the same
  • The lease component, if accounted for separately, would be classified as an operating lease

If the non-lease component associated with the lease component is the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606, Revenue from Contracts with Customers. Otherwise, the entity must account for the combined component as an operating lease in accordance Topic 842, Leases.

For example, it is common for a building lease to include common area maintenance services (a non-lease component). The payments for these services are often based on actual amounts expended by the lessor and therefore are considered variable payments, which are excluded from the definition of lease payments in Topic 842, Leases, meaning that the non-lease component would be accounted for under Topic 606, Revenue from Contracts with Customers. The pattern of transferring the right to use the building occurs over time throughout the lease term. The pattern of transferring the services for common area maintenance generally occurs over time, as the lessee benefits from the services throughout the lease term. As a result, the practical expedient can be adopted and both the lease and non-lease component will be combined into one single component.

An entity that elects the lessor practical expedient is required to disclose the following by class of underlying asset:

  • The fact that it elected the expedient
  • Which class(es) of underlying assets the lessor made the election to
  • The nature of the lease component and nonlease component(s) that were combined as a result of applying the practical expedient and any nonlease components that were not eligible for the practical expedient and, thus, not combined
  • The Topic the entity applies to the combined component (Topic 606 or Topic 842)

Effective Date and Transition

For entities that have not adopted Topic 842, Leases before the issuance of ASU 2018-11, the effective date and transition requirements for the amendments in ASU 2018-11 related to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. ASU 2016-02 is effective for fiscal years beginning after Dec. 15, 2018 for most nonpublic entities.

For entities that have adopted Topic 842, Leases before the issuance of ASU 2018-11, the transition and effective date of the amendments related to separating components of a contract in ASU 2018-11 are as follows:

  • The practical expedient may be elected either in the first reporting period following the issuance of ASU 2018-11 or at the original effective date of ASU 2016-02 for that entity
  • The practical expedient may be applied either retrospectively or prospectively

All entities, including early adopters that elect the practical expedient related to separating components of a contract in ASU 2018-11 must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected.

ASU 2018-10, Codification Improvements to Topic 842, Leases

Accounting Standards Update (ASU) No. 2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10), makes 16 technical corrections to ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02 or Topic 842, Leases) and other accounting topics, with the intention of alleviating unintended consequences from applying the new standard.

The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other various updates.

Most importantly, ASU 2018-10 does not make any substantive changes to the core provisions or principles in the new standard.

Keywords
Accounting Standards UpdatesAssuranceLease Accounting

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