Standards Update: 5/29/19
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. 2019-01, Leases (Topic 842): Codification Improvements
- ASU No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials
- ASU No. 2019-03, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections
- ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
- ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief
As part of its agenda, the Financial Accounting Standards Board (FASB) continues to clarify the FASB Accounting Standards Codification and correct unintended application. Accounting Standards Update (ASU) No. 2019-01, Leases (Topic 842): Codification Improvements, is specifically intended to address three implementation issues related to ASU No. 2016-02, Leases (Topic 842), released in February 2016.
Issue 1: Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers
The fair value of the leased property is a key factor in determining the proper classification and accounting of leases under Topic 842. Previous accounting guidance provides an exception for lessors who are not manufacturers or dealers in determining the fair value of assets underlying leases. The exception allows such entities to use the cost of the underlying asset, reflecting any volume or trade discounts that may apply, instead of using fair value as defined in Topic 820, Fair Value Measurement, which is “the price that would be received to sell the underlying asset in an orderly transaction between market participants at the measurement date (exit price)”. ASU No. 2016-02 did not carry forward this exception from the previous accounting guidance.
This ASU reinstates the exception above. However, ASU No. 2019-01 states that if a significant lapse in time occurs between the acquisition of the asset and lease commencement, those lessors are required to apply the definition of fair value in Topic 820.
Issue 2: Presentation on the Statement of Cash Flows—Sales-type and Direct Financing Leases
Previous accounting guidance did not address how cash received by lessors from sales-type and direct financing leases should be presented in the statement of cash flows. ASU No. 2016-02 required all lessors to present cash receipts from leases within operating activities. However, lessors within the scope of Topic 942, Financial Services—Depository and Lending, have been presenting such receipts within investing activities based on an illustrative example in Topic 942, which was not eliminated when ASU No. 2016-02 was issued.
ASU No. 2019-01 addresses the conflicting guidance by requiring lessors that are depository and lending institutions within the scope of Topic 942 to present all principal payments received under leases within investing activities.
Issue 3: Transition Disclosures Related to Topic 250, Accounting Changes and Error Corrections
Upon adoption, Topic 842 requires entities to provide the transition disclosures under Topic 250, Accounting Changes and Error Corrections, except for the effect on income from continuing operations, net income, any other affected financial statement line item, and any affected per-share amounts for the current annual period and any prior annual periods retrospectively adjusted. However, ASU No. 2016-02 did not explicitly state entities could apply this exception to the disclosure requirements in the interim periods for the fiscal year in which Topic 842 is adopted. ASU No. 2019-01 explicitly extends this exception to the disclosure requirements to such interim periods.
Effective Date and Transition
The effective date and transition provisions of ASU No. 2019-01 only apply to Issues 1 and 2, since Issue 3 amends the transition provisions in Topic 842. ASU No. 2019-01 amends requirements within Topic 842, which is effective for fiscal years beginning after Dec. 15, 2018, for public business entities; not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or over-the-counter market; and employee benefit plans that file financial statements with the U.S. Securities and Exchange Commission. For all other entities, Topic 842 is effective for fiscal years beginning after Dec. 15, 2019. Early application is permitted. Entities should apply the requirements in ASU No. 2019-01 as of the date that Topic 842 is first applied using the same transition methodology.
ASU No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials
Previous guidance in Subtopic 926-20, Entertainment—Films—Other Assets—Film Costs, included different capitalization requirements for production costs in the entertainment industry for films and episodic television series. Users of financial statements that included production costs raised concerns about whether the requirements within Subtopic 926-20 provided relevant information considering changes in production and distribution models within the industry. The FASB issued ASU No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, to provide better, more relevant information regarding the economics of an episodic television series and align the accounting for films and episodic television series.
ASU No. 2019-02 removes additional requirements for production costs of an episodic television series to be capitalized, aligning the requirements with those of films. Also, the ASU requires an entity to reassess estimates of the use of a film for a film in a film group and account for any changes prospectively.
Under the amendments of ASU No. 2019-02, impairment is tested for a film or license agreement for program material within the scope of Subtopic 920-350 at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. ASU No. 2019-02 also adds examples of events or changes in circumstances that indicate impairment testing should be performed and aligns the impairment model in Subtopic 920-350 with the fair value model in Subtopic 926-20. In addition, the ASU requires unamortized film costs to be written off once a film is substantively abandoned.
The ASU includes additional disclosure requirements about content that is either produced or licensed to increase the transparency of information provided to users.
Effective Date and Transition
Public entities must apply the amendments in ASU No. 2019-02 for fiscal years beginning after Dec. 15, 2019. All other entities must apply the ASU for fiscal years beginning after Dec. 15, 2020. Early adoption is permitted. The changes should be applied prospectively.
The FASB became aware that the definition of collections in the Master Glossary of the FASB Accounting Standards Codification (ASC) did not agree with the definition used in the American Alliance of Museums’ Code of Ethics for Museums (the Code). The Code had been revised after the issuance of a prior FASB statement, which served as the basis for the definition of collections in the ASC. ASU No. 2019-03, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections, was issued to realign the definition used in the Master Glossary of the ASC with the definition used in the Code.
This ASU primarily impacts not-for-profit entities, but is applicable to all entities, including business entities, that maintain collections.
The ASC currently states that an entity does not need to recognize contributions of works of art, historical treasures, and similar assets if the donated items are added to collections and meet three conditions, including that an entity must be subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections. ASU No. 2019-03 modifies this condition to also allow the proceeds to be used to support the direct care of existing collections.
ASU No. 2019-03 results in the application of the same definition for reporting under generally accepted accounting principles in the U.S. (GAAP) as is used for operability and accreditation purposes, and it aligns with many entities’ missions to maintain their collections. The care and preservation of collections is the basis for permitting entities to not recognize contributed collections, and the modified definition is considered consistent with the basis for conclusions in the previous FASB statement.
The ASU also requires entities to disclose their policy for the use of proceeds from when collection items are removed from a collection. If that policy allows proceeds to be used for direct care, the entity should also disclose its definition of direct care.
Effective Date and Transition
ASU No. 2019-03 is effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2019. Early application is permitted. The amendments should be applied on a prospective basis.
Definition of “Direct Care” of Collection Items
The American Institute of Certified Public Accountants (AICPA) has issued a technical question and answer related to the determination of whether an expense should be considered “direct care” under ASU No. 2019-03. In its answer, the AICPA references the Background and Basis of Conclusions section of the ASU, which indicated that the FASB purposely did not define direct care in ASU No. 2019-03 and that instead an industry should be able to determine what constitutes direct care.
According to the AICPA’s response, characteristics that should be considered to determine if costs are related to direct care include whether the costs:
- Enhance the life, usefulness, or quality of a collection
- Provide a benefit to collections (and not the entity as a whole or other areas of the entity beyond the collections)
- Exclude expenditures that are regular and ongoing in nature (such as routine maintenance of the collection)
The FASB issued the following three ASUs related to financial instruments during 2016 and 2017:
- ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
- ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
- ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
As part of its agenda, the FASB continues to clarify the FASB Accounting Standards Codification (ASC) and correct unintended application. Through assistance provided related to the implementation of these three ASUs, the FASB identified certain areas that needed clarification and correction.
ASU No. 2019-04 identifies and addresses over 20 issues related to the implementation of the above three ASUs, providing clarification and minor improvements, which should make the ASUs easier to understand and implement. The issues are summarized in a chart within ASU No. 2019-04 and have various effective dates.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amended guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.
ASU No. 2019-05 was issued by the FASB to address concerns related to the transition requirements, which include the use of a prospective transition approach whereas certain financial assets would continue to be maintained at amortized cost before and after the effective date of ASU No. 2016-13. Stakeholders expressed concerns that the transition approach may result in both amortized cost and fair value being used for identical or similar financial instruments based on whether they were originated or purchased before or after the effective date of ASU No. 2016-13.
The amendments in ASU No. 2019-05 provide entities with an option to irrevocably elect the fair value option for eligible instruments that were previously recorded at amortized cost and are within the scope of Subtopic 326-20, Financial Instruments—Credit Losses: Measured at Amortized Cost. The fair value option election does not apply to held-to-maturity debt securities. The option is applied upon the adoption of ASU No. 2016-13 on an instrument-by-instrument basis.
Effective Date and Transition
For entities that have not yet adopted ASU No. 2016-13, the effective date and transition methodology for ASU No. 2019-05 are the same as in the previous ASU. ASU No. 2016-13 is effective for nonpublic entities for fiscal years beginning after Dec. 15, 2020. ASU No. 2016-13 may be adopted early as of fiscal years beginning after Dec. 15, 2018.
For entities that have adopted ASU No. 2016-13, ASU No. 2019-05 is effective for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted, as long as an entity has adopted ASU No. 2016-13. ASU No. 2019-05 should be applied on a modified-retrospective basis using a cumulative-effect adjustment to the opening balance of retained earnings as of the date the entity adopted the amendments in ASU No. 2016-13.
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