Standards Update: 6/17/16

Removal of Effective Date for Private Company Exceptions

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-03, Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council) (ASU No. 2016-03).

ASU No. 2016-03 makes the guidance effective immediately for the following ASUs by removing their effective dates:

• ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill
• ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach
• ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
• ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination

The amendments also include transition provisions, providing that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of ASU No. 2016-13. In essence, this allows a private company to adopt the policies of the related private company exceptions without the initial adoption being reported as a change in accounting policy. Any subsequent change to these accounting policy elections would require justification that the change is preferable.

The amendments in ASU No. 2016-03 are effective immediately.

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Simplified Equity Method of Accounting

Also in March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (ASU No. 2016-07) as part of its simplification initiative. The amendments affect all entities that have an investment that qualifies for the equity method of accounting as a result of an increase in the level of ownership interest or changes in the degree of influence over the investment.

ASU No. 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that it was held.

ASU No. 2016-07 now requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The equity method is applied on a prospective basis, not as a retroactive adjustment of the investment.

Additionally, ASU No. 2016-07 requires an entity that has an available-for-sale equity security that qualifies for the equity method of accounting to recognize the unrealized gain or loss in accumulated other comprehensive income at the date the investment qualified for the equity method.

For all entities, the effective date of ASU No. 2016-07 is for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016. Early adoption is permitted.

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Proposed Changes in Presentation of Restricted Cash

The FASB has issued Proposed ASU EITF-15F, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230) (Exposure Draft) that would provide guidance on the presentation of changes in restricted cash on the statement of cash flows. Currently, there is no specific guidance on the presentation of restricted cash leading to diversity in practice.

Transfers between cash and restricted cash are currently classified by entities as operating, investing, or financing activities, or as a combination of those activities. Cash receipts and payments related to restricted cash are sometimes shown as cash inflows and outflows and sometimes shown as noncash activities on the statement of cash flows. The goal of the exposure draft is to create consistency among all entities.

Currently under the Exposure Draft, changes in restricted cash and restricted cash equivalents would be included in changes in other cash and equivalents when reconciling the total change on the statement of cash flows. This means that the restricted cash would not be presented separately from operating cash but that the beginning and ending cash balances on the statement of cash flows would include all cash, cash equivalents and restricted cash. Since the restricted cash would be included in the other cash activity, changes in restricted cash would not be presented as a separate line item in operating, investing, or financing activities on the statement of cash flows.