- Accounting Standards Update 2014-18
Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination
- Accounting Standards Update 2015-01
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
- Accounting Standards Update 2015-02
Consolidated (Topic 810): Amendments to the Consolidation Analysis
- New Web Page Focused on Benefits of GAAP
In its last Accounting Standards Update (ASU) for 2014, the Financial Accounting Standards Board (FASB) continued to provide alternatives for private companies with the Private Company Council (PCC) consensus, which describes an alternative that permits an entity to avoid separate recognition of certain intangible assets acquired in a business combination. ASU 2014-18 was issued in December 2014 to address concerns from users of private company financial statements indicating that the benefits of separate identification of certain intangible assets may not justify related costs.
A private company electing to apply the accounting alternative provided under ASU 2014-18 should no longer recognize customer-related intangible assets (unless they are capable of being sold or licensed independently from other assets of the business) or noncompete agreements separately from goodwill when accounting for a business combination. Thus, when elected, fewer intangible assets will be identified separately in the financial statements.
If this accounting alternative is elected, the entity must also adopt the private company alternative to amortize goodwill provided under ASU 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. However, the accounting alternative described in ASU 2014-02 may be elected without applying ASU 2014-18.
The decision to elect the accounting alternative described in ASU 2014-18 must be made upon the occurrence of the first transaction within its scope in fiscal years beginning after Dec. 15, 2015. Early application is permitted for any financial statements not yet available for issuance.
In January 2015, FASB issued ASU 2015-01 as part of its effort to reduce complexity in accounting standards. This update eliminates the concept of extraordinary items from accounting principles generally accepted in the United States (GAAP), thus simplifying income statement presentation requirements. Previously, entities were required to separately classify, present and disclose events and transactions meeting the criteria (both unusual in nature and infrequent of an occurrence) for extraordinary classification. ASU 2015-01 reduces complexity as preparers of financial statements will no longer need to assess events or transactions to determine whether they are or are not extraordinary items under GAAP.
Although the amendment eliminates the requirements for entities to consider if an event is extraordinary, there are presentation and disclosure requirements. Those events that are unusual in nature or occur infrequently, or both, are required to be presented as a separate component of income from continuing operations or disclosed in the notes to the financial statements.
The update is effective for fiscal years beginning after Dec. 15, 2015. The amendments may be applied prospectively or retrospectively for all prior periods presented. Early adoption is permitted.
Stakeholders have expressed concerns to FASB that, in certain instances, GAAP would require a reporting entity to consolidate another entity, when the reporting entity does not have contractual rights providing the ability to act primarily on its own behalf, does not hold a majority of the entity’s voting rights, or is not exposed to a majority of the entity’s economic benefits or obligations, thus not providing useful information about the reporting entity’s results. To address those concerns, FASB previously issued an indefinite deferral for certain entities. ASU 2015-02, which was issued in February 2015, rescinds the deferral and makes changes to the consolidation guidance.
ASU 2015-02 affects reporting entities required to evaluate whether they consolidate certain legal entities and will require a reevaluation to determine what entities are consolidated. The ASU modifies the process used to evaluate whether limited partnerships and similar entities are variable interest entities (VIEs) or voting interest entities and affects the analysis performed by reporting entities regarding VIEs, particularly those with fee arrangements and related party relationships, and provides a scope exception for certain investment funds.
Limited Partnerships and Similar Legal Entities
Three main provisions of ASU 2015-02 affect limited partnerships and similar legal entities. The guidance adds a requirement that limited partnerships must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to qualify as voting interest entities. The guidance also eliminates the presumption that a general partner should consolidate a limited partnership. Finally, for limited partnerships that do qualify as voting interest entities, a limited partner should consolidate when the partner has a controlling financial interest, which may be achieved through holding a limited partner interest that provides substantive kick-out rights.
Evaluating Fee Arrangements
Currently, six criteria are used to determine whether fees paid by an entity to a decision maker or service provider represent a variable interest in the entity. If the fees paid are determined to represent a variable interest, the reporting entity must evaluate whether the interest represents a controlling financial interest, and, if so, requires consolidation of the VIE. The update eliminates three of the six criteria used in this analysis. Additionally, the update specifies that some fees paid to a decision maker are excluded from the evaluation in determining whether the interest represents a controlling financial interest if the fees are both customary and commensurate with the level of effect required to provide the services.
Related Party Relationships
Under current GAAP, when no single party has a controlling financial interest in a VIE, interests held by a reporting entity’s related parties are treated as though they belong to the reporting entity when determining the primary beneficiary of the VIE. The ASU reduces this application by requiring that related party relationship first be considered indirectly on a proportionate basis, rather than in their entirety. After this assessment is performed the analysis is complete, except in two situations. The related party relationships would be considered in their entirety when entities under common control collectively have a controlling financial interest. If this is not applicable and substantially all the activities of the VIE are conducted on behalf of a single variable interest holder, excluding the decision maker, in the related party group, that single variable interest holder must consolidate the VIE.
Guidance related to situations in which power is shared between two or more related entities that hold variable interests in a VIE was not amended by this update.
The update is effective for public business entities for fiscal years beginning after Dec. 15, 2015, and all other entities for fiscal years beginning after Dec. 15, 2016. Early adoption is permitted. The amendments provided in the ASU may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or applied retrospectively.
The Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board and Government Accounting Standards Board, has launched a new Web page that focuses on the importance of GAAP: www.accountingfoundation.org/gaap. The page explores the benefits of GAAP for all types of entities, public companies, state and local governments, private companies, and not-for-profits, describing GAAP as “the grammar and the punctuation” determining the language of financial reporting. The site provides a resource to all stakeholders of financial statements, particularly those not familiar with the benefits of GAAP.