blog updates

Follow KSM
Search

KSM blog

KSM Blog | Katz, Sapper & Miller CPA

Standards Update 5/20/20

Posted 12:15 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. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

The FASB has issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The FASB is issuing this update as part of the Simplification Initiative, which aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.

Summary

ASU No. 2019-12 removes a few exceptions and revises certain requirements included in Accounting Standards Codification Topic 740, Income Taxes (Topic 740) to simplify and improve consistency in the accounting for income taxes.

The following exceptions were removed with ASU No. 2019-12:

  1. The exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
  2. The exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
  3. The exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
  4. The exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year

The Update provides revisions to the requirements in Topic 740 by:

  1. Requiring an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax
  2. Requiring an entity to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction
  3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority
  4. Requiring an entity to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date
  5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method

Effective Date and Transition

For nonpublic entities, ASU No. 2019-12 is effective for fiscal years beginning after Dec. 15, 2021. Early adoption is permitted. If early adoption is elected, all amendments must be adopted in the same period.

 

ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815

The FASB has issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 due to questions raised about the interactions between certain topics in the Accounting Standards Codification (ASC).

Summary

In January 2016, the FASB issued ASU No. 2016-01, Financial Instrument—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments—Equity Securities to the ASC.

One of the provisions in Topic 321 provided entities with the ability to measure certain equity securities without readily determinable fair values at cost, minus impairment, if any. Under this alternative, if an entity identifies observable prices changes in orderly transactions for identical or a similar investment with the same issuer, the entity should measure the equity security at fair value as of the date that the observable transaction occurred. Questions were raised about the alternative in Topic 321 and the equity method of accounting in Topic 323, specifically related to whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for purposes of applying the alternative.

ASU No. 2020-01 clarifies that an entity should consider observable transactions that would require the application or discontinuation of the equity method of accounting for purposes of applying the alternative in Topic 321 immediately before applying or discontinuing the equity method.

Questions were also raised related to the accounting for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting, specifically whether the such forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323 or Topic 815.

Topic 815 requires the application of specific subsections within the ASC for certain contracts on debt and equity securities, including contracts entered into to purchase securities that will be accounted for under Topic 320, Investments—Debt Securities or Topic 321, Investments—Equity Securities. ASU No. 2020-01 clarifies that, for the purpose of determining whether a contract meets this characteristic, an entity should not consider whether upon settlement or exercise, the item would be accounted for under the equity method of accounting or the fair value option.

Effective Date and Transition

For nonpublic entities, ASU No. 2020-01 is effective for fiscal years beginning after Dec. 15, 2021 and should be applied prospectively. Early adoption is permitted for nonpublic entities for which financial statements have not yet been made available for issuance.

 

ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842)

The FASB has issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) to add an SEC paragraph related to the issuance of SEC Staff Accounting Bulletin No. 119 and adds to an existing paragraph related to the effective date for ASU No. 2016-02, Leases (Topic 842) due to the issuance of ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.

 

ASU No. 2020-03, Codification Improvements to Financial Instruments

The FASB has issued ASU No. 2020-03, Codification Improvements to Financial Instruments as part of its ongoing project to improve or correct the Accounting Standards Codification for unintended application. The amendments provided in ASU No. 2020-03 address seven areas of improvement related to financial instruments and are not expected to have a significant effect on current accounting practice. The effective dates vary by area of improvement.

 

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

With global capital markets expected to move away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) toward reference rates that are more observable or transaction based and less susceptible to manipulation, the FASB had issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting to provide temporary optional guidance to ease the potential burden in accounting for such reference rate reform.

Summary

Reference rate reform will result in amendments to numerous debt and leases agreements, derivative instruments, and other arrangements to replace references to discontinued rates, such as LIBOR. These contract amendments are required by GAAP to be evaluated to determine whether they represent the extinguishment of the old contract and establishment or a new contract or a continuation of the existing contract. This evaluation could be burdensome to preparers of financial statements, especially for entities with a significant volume of impacted arrangements. Also, reference rate reform could disallow the application of hedge accounting guidance for certain hedging relationships, resulting in financial reporting that is not reflective of an entity’s intended hedging strategies.

ASU No. 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. It applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

Effective Date and Transition

The amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through Dec. 31, 2022.

The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after Dec. 31, 2022, except for hedging relationships existing as of Dec. 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

About the Author
Mike Lee is a partner in KSM’s Audit and Assurance Services Group. Mike works with clients to help them avoid risk and maximize efficiencies by keeping an eye on their bottom line and helping ensure accurate financial reporting. Connect with him on LinkedIn.

 

About the Author

Amanda Horvath is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. As a member of the firm’s Technical Resource Group, Amanda conducts technical accounting research that helps the firm ensure the quality of assurance engagements. Connect with her on LinkedIn.

 

About the Author
Matt Bishop is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. As a member of the firm’s Technical Resource Group, Matt is involved in technical accounting research and internal quality assurance processes, serving as a resource for KSM staff. Connect with him on LinkedIn.

About the Author
Jessica Boicourt is a manager in Katz, Sapper & Miller’s Audit and Assurance Services Group. As a member of the firm’s Technical Resource Group, Jessica is involved in technical accounting research and internal quality assurance processes, serving as a resource for KSM staff. Connect with her on LinkedIn.

 

link
Comments (0)
Post a Comment
Name:
Email: (Not Displayed)
Website: (optional)
Comment (HTML tags will be stripped):
Please type the alpha-numeric code above (case sensitive):
Error