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KSM Blog | Katz, Sapper & Miller CPA

Standards Update: 12/17/19

Posted 7:40 PM by

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 No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer

As part of its Simplification Initiative, the FASB has issued ASU No. 2019-08 to simplify and standardize the accounting for share-based payment awards granted to customers. ASU No. 2019-08 builds upon guidance provided in ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.

Summary

Considering ASU No. 2018-07, share-based payment awards granted to customers in conjunction with selling goods or services are recorded as a reduction to the transaction price Under ASC Topic 606, Revenue from Contracts with Customers. However, Topic 606 does not address how the awards are measured or classified on the statement of financial position. This resulted in concerns of diversity in practice, as some entities may choose to apply the guidance in Topic 606 related to noncash consideration and measure the awards at contract inception. Other entities may choose to apply the guidance in Topic 718, Compensation—Stock Compensation and measure the awards at the grant date.

ASU No. 2019-08 requires that the guidance in Topic 718 be used to account for share-based payment awards granted to customers in conjunction with selling goods or services. Therefore, the amount recorded as a reduction to the transaction price will be measured at fair value on the grant date, the date the grantor (supplier) and grantee (customer) reach a mutual understanding of the key terms and conditions of the share-based payment award. Topic 718 is applied for the classification and subsequent measurement of the share-based payment award, unless the award is subsequently modified and the grantee is no longer a customer.

Effective Date and Transition

For nonpublic entities, the amendments included in ASU No. 2019-08 are effective in fiscal years beginning after Dec. 15, 2019. An entity may adopt this ASU early, but not prior to ASU No. 2018-07.

An entity may adopt ASU No. 2019-08 in the same year or in a year after the adoption of ASU No. 2018-07. If an entity adopts ASU No. 2019-08 in the same year as ASU No. 2018-07, the changes are applied through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the year in which ASU No. 2018-07 was adopted. If an entity adopts ASU No. 2019-08 after the adoption of ASU No. 2018-07, the cumulative-effect adjustment may be applied at the beginning of either the year in which ASU No. 2018-07 was adopted or the year ASU No. 2019-08 was adopted.

 

ASU No. 2019-09, Financial Services—Insurance (Topic 944): Effective Date

The FASB has formally deferred the effective date of ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts with the issuance of ASU No. 2019-09. ASU No. 2018-12 provided improvements to recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity.

ASU No. 2019-09 formally defers the effective date of ASU No. 2018-12 for all entities, to the following:

  • For public business entities that meet the definition of a SEC filer, excluding smaller reporting companies (SRCs) as defined by the Securities and Exchange Commission (SEC), ASU No. 2018-12 is effective for fiscal years beginning after Dec. 15, 2021
  • For all other entities, ASU No. 2018-12 is effective for fiscal years beginning after Dec. 15, 2023

Early application remains permitted.

 

ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates

With the issuance of ASU No. 2019-10, the FASB has formally deferred the effective date of the major, previously issued ASUs, including:

  • ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and, as a consequential amendment, ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU No. 2016-13 - Credit Losses)
  • ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU No. 2017-12 - Hedging)
  • ASU No. 2016-02, Leases (Topic 842) (ASU No. 2016-02 - Leases)

ASU No. 2016-13 - Credit Losses

  • For public business entities that meet the definition of an SEC filer, excluding SRCs, ASU No. 2016-13 and ASU No. 2017-04 are effective for fiscal years beginning after Dec. 15, 2019
  • All other entities, ASU No. 2016-13 and ASU No. 2017-04 are effective for fiscal years beginning after Dec. 15, 2022

ASU No. 2017-12 - Hedging

  • For all public business entities, including SRCs, ASU No. 2017-12 was already effective for fiscal years beginning after Dec. 15, 2018; therefore, the original effective date was retained
  • For entities other than public business entities, ASU No. 2017-02 is effective for fiscal years beginning after Dec. 15, 2020

ASU No. 2016-02 - Leases

  • For all public business entities, not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and employee benefit plans that file financial statements with the SEC, ASU No. 2016-02 is already in effect, since the ASU was effective for fiscal years beginning after Dec. 15, 2018, and thus, the effective date remained unchanged
  • For all other entities ASU No. 2016-02 will be effective for fiscal years beginning after Dec. 15, 2020

Early application continues to be allowed for these ASUs.

 

ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses

As part of the FASB’s ongoing efforts to improve the Accounting Standards Codification and address unintended application, it issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial InstrumentsCredit Losses. ASU No. 2019-11 addresses five issues primarily related to ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which are discussed below.

Issue 1: Expected Recoveries for Purchased Financial Assets with Credit Deterioration

The amendments in ASU No. 2019-11 clarify that the allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. Further, ASU No. 2019-11 clarifies that when a method other than discounted cash flow is used to estimate credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. Increases in expected cash flows after acquisition may be included.

Issue 2: Transition Relief for Troubled Debt Restructurings

Entities will now be allowed to elect an accounting policy to adjust the effective rate on existing troubled debt restructurings using prepayment assumptions upon the date of adoption of Topic 326 rather than prepayment assumptions in effect immediately before the restructuring.

Issue 3: Disclosures Related to Accrued Interest Receivables

ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments provides a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU No. 2019-11 expands this disclosure relief by allowing the practical expedient to be applied to additional relevant disclosures involving amortized cost basis.

Issue 4: Financial Assets Secured by Collateral Maintenance Provisions

Topic 326 provides a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date. ASU 2019-04 clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral security the financial asset if the practical expedient is applied. In addition, the ASU clarifies that entities should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (the unsecured portion of the amortized cost basis). Entities may conclude that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral is zero.

Issue 5: Conforming Amendment to FASB ASC 805-20, Business Combinations--Identifiable Assets and Liabilities, and Any Noncontrolling Interest

The ASU updates a cross-refence in ASC Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest from ASC Subtopic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality to ASC Subtopic 326-20, Financial Instruments—Credit Losses – Measured at Amortized Cost.

Effective Date and Transition

For entities that have not yet adopted ASU No. 2016-13, the effective dates and transition requirements are the same as ASU No. 2016-13.

For entities that have adopted ASU No. 2016-13, ASU No. 2019-11 is effective for fiscal years beginning after Dec. 15, 2019 and should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the adoption date.

For questions on how to implement these new accounting standards, please contact your KSM advisor.

Questions? Contact KSM's Audit and Assurance Technical Resource Group

  

Michael Lee
Partner
317.580.2151
mlee@ksmcpa.com

 

  

Amanda Horvath
Director
317.452.1020
ahorvath@ksmcpa.com

 

  

Jessica Boicourt
Manager
317.452.1022
jboicourt@ksmcpa.com

 

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