Standards Update: 2/25/19

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 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
• ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses
• ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors

 

ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606

Accounting Standards Update (ASU) No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, clarifies the interaction between Topic 808, Collaborative Arrangements and Topic 606, Revenue from Contracts with Customers.

Summary

The ASU is intended to address diversity in how entities account for collaborative arrangements and address new questions raised from the issuance of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU impacts entities with certain collaborative arrangements, which are defined in Topic 808 as contractual arrangements under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success.

The ASU provides improvements to the current guidance as follows:

• Clarifies that Topic 606 should be used to account for transactions between collaborative arrangement participants when the participant is a customer in the context of a unit of account, including application of recognition, measurement, presentation, and disclosure requirements included in Topic 606

• Adds unit-of-account guidance in Topic 808 aligning with guidance in Topic 606 related to identifying distinct goods and services when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606

• Requires for transactions with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer

The ASU does not impact transactions with collaborative arrangement participants that are directly related to third-party sales or accounting for nonrevenue transactions between collaborative arrangement participants.

Effective Date and Transition

ASU 2018-18 is effective for public business entities for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, 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. Amendments should be applied retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings to the later of the earliest annual period presented and the annual period that includes the date of the entity’s initial application of Topic 606.

Accounting Standards Update (ASU) No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses amends the transition requirements and scope of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis.

Summary

First, this ASU requires nonpublic business entities to implement ASU 2016-13 for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years, which aligns the implementation date for their annual financial statements with the implementation date for their interim financial statements.

Second, this ASU clarifies that receivables arising from operating leases are not within the scope of the ASU 2016-13, rather they should be accounted for in accordance with Topic 842, Leases.

Effective Date and Transition

The effective date and transition requirements are the same as those for ASU 2016-13 which is as follows:

• For public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years

• For public business entities that do not meet the definition of an SEC filer, for fiscal years beginning after Dec. 15, 2020, including interim periods within those fiscal years

• For all other entities, including not-for-profit entities within the scope of Topic 958 and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years

ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which is intended to clarify certain matters raised by the issuance of ASU No. 2016-02, Leases (Topic 842) and reduce implementation and ongoing costs associated with applying the new leases standard. The three matters addressed by the ASU are explained below.

Sales Taxes and Other Similar Taxes Collected from Lessees

The new leases standard, Topic 842, required lessors to analyze sales taxes and other similar taxes on a jurisdiction-by-jurisdiction basis to determine whether those taxes are the primary obligation of the lessor as owner of the underlying asset being leased or whether those taxes are collected by the lessor on behalf of third parties to determine whether the taxes are included or excluded from the lessor’s revenue and expense. Stakeholders believed this evaluation could be complex and costly, considering variations and changes of tax laws across jurisdictions.

This ASU permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs and exclude the costs from being reported as lease revenue with an associated expense.

Certain Lessor Costs Paid by Lessee

Topic 842 also required a lessor to report lessor costs paid by the lessee, whether paid directly to a third party on behalf of the lessor or as a reimbursement to the lessor, as revenue and expenses. Stakeholders believed application of this requirement could be costly and complex and amounts may be based on unreliable estimates, as the related lessee information may not be readily available to the lessor.

ASU 2018-20 requires lessors to exclude from revenue lessor costs paid by lessees directly to third parties. The ASU also clarifies that costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee need to be accounted for as variable payments; and therefore, included in revenue and expenses.

Recognition of Variable Payments for Contracts with Lease and Nonlease Components

Topic 842 requires lessors to recognize certain variable payments in profit or loss in the period when the changes in facts and circumstances on which the variable payment is based occur, including when the payment partially relates to nonlease components. Stakeholders had concerns that this may result in revenue for a nonlease component being recognized before its satisfied under Topic 606, Revenue form Contracts with Customers or another Topic.

This ASU modified Topic 842 to require lessors to allocate, instead of recognize, certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. The amount of variable payments allocated to the lease components will be recognized as profit or loss in accordance with Topic 842, while the amount of variable payments allocated to nonlease components will be recognized in accordance with other applicable guidance, such as Topic 606.

Effective Date and Transition

For entities that have not yet adopted Topic 842 before the issuance of ASU 2018-20, the effective date and transition requirements are the same as the effective date and transition requirements ASU 2016-02, as amended. For example, most calendar year-end private entities will adopt this ASU on Jan. 1, 2020.

Entities that have adopted Topic 842 before the issuance of ASU 2018-20 should apply the ASU at original date of effectiveness of Topic 842. The entity does have the option to implement the amendments in either the first reporting period ending after or beginning after the issuance of this ASU. These entities may adopt the amendments either retrospectively or prospectively.