Standards Update: 10/30/20
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. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
- ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
- ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs
ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
The FASB has issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The FASB issued this ASU to address the complexity associated with applying existing guidance to certain financial instruments with characteristics of liabilities and equity. ASU No. 2020-06 impacts entities that issue convertible instruments or contracts in an entity’s own equity.
Currently, there are five accounting models for convertible debt instruments, and except for the traditional convertible debt model, each requires a convertible debt instrument be separated into a debt component and an equity or a derivative component. Preparers of financial statements found the guidance difficult to navigate, resulting in incorrect or inconsistent applicable. In addition, users of financial statements found the separation of instruments into two components confusing.
ASU No. 2020-06 simplifies the accounting for convertible instruments and preferred stock by removing the existing guidance in ASC 470-20, Debt – Debt with Conversion and Other Options, that requires entities to account for embedded conversion features in equity, separately from the host convertible debt or preferred stock. Upon adoption of ASU No. 2020-06, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, unless the conversion features are required to be recognized as derivatives under ASC 815, Derivatives and Hedging or result in substantial premiums accounted for as paid-in capital.
ASU No. 2020-06 also includes amendments to disclosure requirements for convertible instruments to improve the usefulness and relevance of the information provided in the footnotes to the financial statements.
Contracts in an Entity’s Own Equity
Existing guidance in ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, requires an entity to determine whether a contract qualifies for a scope exception from derivative accounting. ASC 815-40 addresses both, freestanding financial instruments and embedded features that have all the characteristics of a derivative instrument and freestanding financial instruments that potentially are settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative instrument. Currently, the contract is required to be recognized as an asset or a liability, unless both of the following criteria are met:
- the instrument or the embedded derivative feature’s settlement amount is indexed to the entity’s own stock (indexation criterion), and
- the instrument or the embedded derivative feature would otherwise be classified as equity (settlement criterion).
ASU No. 2020-06 reduces the complexity related to determining whether an instrument or embedded derivative feature meets the settlement criterion by removing the conditions related to settlement in unregistered shared, collateral, and shareholder rights and clarifying the condition related to the failure of timely file with the SEC. Guidance related to the indexation criterion was not amended. The ASU also clarifies that entities should reassess the above criterion at each reporting date for both freestanding instruments and embedded features.
In addition, the amendments require instruments that are required to be classified as an asset or liability because they do not meet the indexation criterion to be measured subsequently at fair value, with changes reported in earnings and disclosed in the financial statements. Previously, the subsequent measurement of such instruments was not addressed.
Finally, ASU No. 2020-06 clarifies that the disclosure requirements in ASC 815-40 applies only to freestanding instruments. Embedded features are not subject to these disclosure requirements.
Effective Date and Transition
For nonpublic entities and smaller reporting companies, as defined by the SEC, ASU No. 2020-06 is effective for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted, but not earlier than fiscal years beginning after Dec. 15, 2020.
Entities may adopt the amendments through either a modified retrospective method or transition or a fully retrospective method of transition.
Modified Retrospective Method
If using the modified retrospective method, the guidance should be applied to transactions outstanding as of the beginning of the fiscal year in which the ASU is adopted. The amendments should not be applied to transactions that were settled or expired during prior reporting periods. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption.
Fully Retrospective Method
If the fully retrospective method is elected, the cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented.
ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
The FASB has issued ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets to improve transparency in the reporting of contributed nonfinancial assets, also known as gifts-in-kind, for not-for-profit organizations. Examples of contributed nonfinancial assets include fixed assets, such as land, buildings, and equipment; the use of fixed assets or utilities; materials and supplies, such as food, clothing, or pharmaceuticals; intangible assets; and recognized contributed services.
Current guidance in ASC 958-605, Not-for-Profit Entities–Revenue Recognition includes recognition, initial measurement, and disclosure requirements for contributed services, but does not address specific presentation requirements for contributed nonfinancial assets or disclosure requirements for contributed nonfinancial assets other than contributed services. The amendments in ASU No. 2020-07 are intended to enhance presentation and disclosure requirements for all contributed nonfinancial assets.
ASU No. 2020-07 requires not-for-profit organizations to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets.
The amendments also require a not-for-profit organization to disclose the following:
- Contributed nonfinancial assets recognized within the statement of activities disaggregated by category that depicts the type of contributed nonfinancial assets.
- For each category of contributed nonfinancial assets identified in (1) above:
a. Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were used.
b. The organization’s policy, if any, about monetizing rather than utilizing contributed nonfinancial assets.
c. A description of any donor-imposed restrictions associated with the contributed nonfinancial assets.
d. The valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in ASC 820, Fair Value Measurement, at initial recognition.
e. The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient organization is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.
Effective Date and Transition
The amendments in ASU No. 2020-08 are effective for annual reporting periods beginning after June 15, 2021. Entities should apply the provisions of ASU No. 2020-07 on a retrospective basis. Early adoption of ASU 2020-07 is permitted.
ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs
The FASB has issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs to address unintended application of existing guidance.
ASU No. 2020-08 clarifies that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of paragraph 310-20-35-33 for each reporting period.
Effective Date and Transition
The amendments in ASU No. 2020-08 affect guidance in ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, but the effective dates of ASU No. 2017-08 were not changed.
For nonpublic entities, ASU No. 2020-08 is effective for fiscal years beginning after Dec. 15, 2021. Early application is permitted for fiscal years beginning after Dec. 15, 2020.
Entities are required to apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.
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