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Standards Update: 8/20/15

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Standards Update

ASU 2015-05: Accounting for Fees Paid in a Cloud-Computing Arrangement

Accounting Standards Update 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud-Computing Arrangement (ASU 2015-05) was issued by the Financial Accounting Standards Board (FASB) in April 2015. ASU 2015-05 provides additional guidance on accounting for fees paid in a cloud-computing arrangement. The FASB determined there was no explicit guidance currently available under Generally Accepted Accounting Principles (GAAP) in the United States for these type of  transactions, specifically related to an arrangement including a software license. Under ASU 2015-05, cloud-computing arrangements include:

  1. Software as a service
  2. Platform as a service
  3. Infrastructure as a service
  4. Other similar hosting arrangements

The amendments provide guidance to customers about whether a cloud-computing arrangement includes a software license. If it is determined under the standard that a cloud-computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud-computing arrangement is determined to not include a software license, the customer should account for the arrangement as a service contract.

The amendments do not change the accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software, will be accounted for and consistent with other licenses of intangible assets.

For public business entities, the amendments will be effective for annual and interim periods beginning after Dec. 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after Dec. 15, 2015, and interim periods in annual periods beginning after Dec. 15, 2016. Early adoption is permitted for all entities.

An entity can elect to adopt the amendments either: 1) prospectively to all arrangements entered into or materially modified after the effective date; or 2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of, and reason for, the change in accounting principle, the transition method and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change.


ASU 2015-09: Disclosures About Short-Duration Contracts for Insurance Entities

During May 2015, the FASB issued Accounting Standards Update No. 2015-09, Financial Services – Insurance (Topic 944): Disclosures About Short-Duration Contracts (ASU 2015-09). All insurance entities that issue short-duration contracts are affected by ASU 2015-09, and the update requires additional disclosures for the liability for unpaid claims and claim adjustment expenses that give users more information on these significant estimates. ASU 2015-09 does not affect recognition and measurement but does add disclosure requirements.

The summary included in ASU 2015-09 gives the details of the additional disclosure requirements for the liability for unpaid claims and claim adjustment expenses. There are five items noted in the summary as the main provisions or new additional disclosures that are required. Insurance entities will also need to note any changes in methodologies and assumptions that have changed in calculating these liabilities, as well as reasons for the change and effects on the financial statements. The summary also includes a bulleted list of additional disclosures needed when these liabilities are reported at present value.

The background information and basis for conclusions section of the update highlights the Board noted that a significant amount of the information required for the additional disclosures is already needed for statutory reporting requirements, which should reduce implementation costs for insurance entities.

ASU 2015-09 will become effective for public companies for annual reporting periods beginning after Dec. 15, 2015. The update will become effective for all other entities for annual reporting periods beginning after Dec. 15, 2016. The standard applies on a retrospective basis, so all periods presented will need to comply with the update, except for requirements that only apply to the current period. The FASB has permitted early adoption for both public and nonpublic companies.

ASU 2015-11: FASB Simplifies the Valuation of Inventory

During July 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Prior to issuing this ASU, inventory was valued at the lower of cost or market under GAAP. Under prior guidance, market value was defined as replacement cost, net realizable value or net realizable value less an approximate profit margin. The FASB felt this could create a wide range for “market” value that was used to evaluate the value of inventory.

Under the ASU, inventory will be valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of the inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendment only applies to inventory that is measured using first-in, first out (FIFO) or average cost. The ASU does not apply to inventory measured at last in, first out (LIFO) or the retail inventory method. 

This amendment is effective for public business entities for fiscal years beginning after Dec. 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec.15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.


Exposure Draft: FASB Shoots to Simplify GAAP Related to Equity Method Accounting

In one of its latest proposals, the FASB is looking to simplify the equity method of accounting under proposed Accounting Standards Update, Investments  Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of Accounting.

The proposal would eliminate the requirement to separately account for the basis difference of equity method investments. The basis difference is the difference between the cost of an investment and the investor’s proportionate share of the net assets of the investee. An entity would recognize its equity method investment at its cost and would no longer determine the acquisition date fair value of the investee’s identifiable assets and liabilities assumed.

The proposal would also eliminate 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, 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 in which the investment was held.

The proposal would no longer require an equity method investor to retroactively perform a fair-value allocation of the basis difference as of the original purchase date of the investment and adjust prior earnings for equity method earnings, which include consideration of intercompany profits and losses, amortization of the basis difference, and impairment testing.

If approved, this proposal would be applied on a modified prospective basis. For existing equity method investments, accounting for the basis difference would cease as of the effective date of the proposed guidance, and any remaining basis difference would be treated as part of the basis of the investment.

The proposed amendments to eliminate retroactive application of the equity method would be applied prospectively to ownership level increases occurring after the proposed amendments become effective. No disclosures would be required at transition.

The effective date, as well as whether early adoption would be permitted for the elimination of accounting for the basis difference, will be determined after stakeholder feedback is considered on the proposed amendments. The comment period ended on Aug. 4, 2015.

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

About the Author
Justin Hayes is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Justin 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.

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