Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

Financial Reporting and Regulatory Update

Third Quarter 2018

From the FASB

Final standards

Implementation costs in cloud computing arrangements

In 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to provide guidance for fees paid in a cloud computing arrangement (CCA), also known as a hosting arrangement. The most common example of a CCA is software as a service (SaaS), which uses internet-based application software hosted by a service provider or third party.

Under ASU 2015-05, an entity evaluates a CCA to determine whether the arrangement includes a license (in which case, an intangible is recorded for the license) or whether the arrangement is a service contract (in which case, fees paid are expensed).

To address diversity in practice and simplify accounting for implementation costs associated with CCAs, on Aug. 29, 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU aligns the guidance for CCAs regardless of whether they include a license.

Implementation costs for CCAs that are service contracts will be capitalized during the application development stage, and costs incurred before and after that stage will be expensed as incurred. The capitalized implementation costs will be amortized over the term of the arrangement, which is consistent with existing accounting guidance for CCAs that include a license.

The amortization of the capitalized implementation costs will be presented in the same income statement line as the CCA fees. Similarly, capitalized implementation costs will be presented in the same line on the balance sheet as any prepaid CCA fees, and cash flows from capitalized implementation costs will be presented on the cash flow statement in the same line as the CCA fees.

Effective dates

An entity can choose between prospective and retrospective transition. For public business entities (PBEs), the guidance will be effective for fiscal years beginning after Dec. 15, 2019, and interim periods within. For all other entities, it is effective for annual reporting periods beginning after Dec. 15, 2020, and interim periods within annual periods beginning after Dec. 15, 2021.

Early adoption is permitted, including in an interim period.

Defined benefit plan disclosures for sponsors

The board issued, ASU 2018-14, “Compensation Retirement BenefitsDefined Benefit PlansGeneral (Topic 715-20): Disclosure FrameworkChanges to the Disclosure Requirements for Defined Benefit Plans,” on Aug. 28, 2018, to change disclosures for sponsors of defined benefit plans.

The ASU removes the following disclosures:

  • The amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year
  • The amount and timing of plan assets expected to be returned to the employer
  • Information about the June 2001 amendments to the Japanese Welfare Pension Insurance Law
  • Certain related party disclosures
  • For nonpublic entities, the roll forward of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy (but requires disclosures of amounts of transfers in and out of Level 3 as well as Level 3 plan asset purchases)
  • For public entities, the effects of a 1 percent point change in assumed healthcare cost trend rates on the net periodic benefit costs and the benefit obligation for postretirement healthcare

The ASU clarifies the following disclosures are required:

  • The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets
  • The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets

The ASU adds the following disclosure requirements:

  • The weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates
  • An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period

Effective dates

The ASU is effective for PBEs in fiscal years ending after Dec. 15, 2020, and for non-PBEs in fiscal years ending after Dec. 15, 2021. Early adoption is permitted.

Fair value measurement disclosure

On the same day as issuing the ASU to address employee benefit plan disclosures, the FASB issued ASU 2018-13 (also part of the disclosure framework project), “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to remove from, modify, and add to existing fair value measurement disclosures requirements.

The disclosure requirements that are removed include the following:

  • Transfers between Level 1 and Level 2 of the fair value hierarchy
  • The policy for determining when transfers between any of the three levels have occurred
  • The valuation processes used for Level 3 measurements
  • For nonpublic entities, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date

The following disclosure requirements are modified:

  • The Level 3 rollforward is eliminated for nonpublic entities, but disclosure of transfers in and out of Level 3 as well as purchases and issuances are required
  • For certain investments in entities that calculate the net asset value, requires disclosures about timing of liquidation and redemption restrictions lapsing if communicated to the reporting entity
  • Clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date

The following are additional or new disclosure requirements:

  • For public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date
  • For public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, but, for certain unobservable inputs, adds an option to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs
  • For nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements

Effective date

The ASU is effective for all entities in fiscal years beginning after Dec. 15, 2019, including interim periods. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date.

Long-duration insurance contracts

On Aug. 15, 2018, the FASB revised its accounting guidance for insurance companies that issue long-duration insurance contracts, including life insurance and annuity contracts, by issuing ASU 2018-12, “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.” Revisions to the guidance include:

  • Annual reviews of assumptions used to measure the liability for future policy benefits for traditional and limited payment insurance contracts will be required. Liability assumptions no longer will be locked in.
  • In updating assumptions, reporting entities will revise the net premium ratio using a combination of actual (historical) and expected (future) policyholder benefits. The net premium ratio cannot exceed 100 percent.
  • The cash flow assumptions used for projecting the liability for future policy benefits will be based on current best estimates without a provision for adverse deviation.
  • The premium deficiency (or loss recognition) test is eliminated for traditional and limited-payment contracts.
  • At each reporting date, a market-observable upper-medium grade (low-credit-risk) fixed-income instrument discount rate reflecting the duration characteristics of the liability for future policyholder benefits will be used to measure the liability with the effect of discount rate changes recorded in other comprehensive income.
  • Contracts defined as market risk benefit contracts in accordance with ASU 2018-12 are recorded at fair value with changes in fair value recognized in income (except for the effect of instrument-specific credit risk on fair value changes, which is included in other comprehensive income).
  • A constant level amortization method will be used to amortize deferred acquisition costs over the expected term of the related contracts.
  • Additional disclosures are required, including the following:
    • Disaggregated roll forwards of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs
    • Information about significant inputs, judgments, assumptions, and methods used in measurement, including changes in those inputs, judgments, and assumptions, and the effect of those changes on measurement

The FASB posted additional resources for this standard to its website:

Effective dates

The ASU is effective for calendar year-end PBEs in the March 31, 2021, interim financial statements. For all other calendar year-end entities, the changes will be effective in the Dec. 31, 2022, annual financial statements. Early adoption is permitted.

Lease improvements on transition and nonlease component separation

The FASB issued, on July 30, 2018, ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” to provide an optional transition method for adopting the new leases guidance in Topic 842 that will eliminate comparative period reporting under the new guidance in the year of adoption. This option addresses preparer feedback about the related costs of presenting comparative periods. Under the optional transition method, only the most recent period presented will reflect the adoption with a cumulative-effect adjustment to the opening balance of retained earnings, and the comparative prior periods will be reported under the previous guidance in Topic 840.

In addition, the ASU offers lessors a practical expedient that mirrors the practical expedient already provided to lessees in ASU 2016-02, “Leases (Topic 842).” The new practical expedient will allow lessors to elect, by class of underlying asset, to not separate nonlease components from the associated lease component when specified conditions are met. The practical expedient must be applied consistently for all lease contracts.

Effective dates

For lessors electing the practical expedient related to separating components of a contract, the effective date and transition requirements are the same as the requirements for Topic 842 issued in ASU 2016-02. For entities that have early adopted Topic 842, the ASU provides specific transition guidance for lessors electing the practical expedient.

Lease improvements

On July 18, 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which corrects inconsistencies in the guidance and clarifies how to apply certain provisions of the leases standard. The amendments in ASU 2018-10 target 16 issues:

  • Residual value guarantees
  • Rate implicit in the lease
  • Lessee reassessment of lease classification
  • Lessor reassessment of lease term and purchase option
  • Variable lease payments that depend on an index or a rate
  • Investment tax credits
  • Lease term and purchase option
  • Transition guidance for amounts previously recognized in business combinations
  • Recognition of certain transition adjustments in earnings rather than equity
  • Transition guidance for leases previously classified as capital leases under Topic 840
  • Transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840
  • Transition guidance for sale and leaseback transactions
  • Impairment of net investment in the lease
  • Unguaranteed residual asset
  • Effect of initial direct costs on rate implicit in the lease
  • Failed sale and leaseback transaction

Effective dates

ASU 2018-10 amends the guidance in Topic 842 issued in ASU 2016-02, and the effective date and transition requirements are consistent with ASU 2016-02. For entities that early adopted ASU 2016-02, the amendments are effective upon issuance.

Codification improvements

The FASB issued ASU 2018-09, “Codification Improvements” on July 16, 2018. The ASU contains 30 improvements to the codification, including the following:

  • Clarifies income tax accounting for certain quasi reorganizations
  • Clarifies debt extinguishment guidance when the fair value option is elected
  • Revises an example to align with guidance that prohibits the combination of freestanding financial instruments in the scope of ASC 480-10 with noncontrolling interest, unless the combination is required by Topic 815
  • Clarifies that excess tax benefits should be recognized in the period when the tax deduction for compensation expense is taken on the tax return
  • Eliminates the three tax allocation methods from ASC 805-740-25-13 because they are not systematic, rational, and consistent as required by Topic 740
  • Clarifies that the intent to set off criteria is not required to offset derivative assets and liabilities when recognized at fair value and executed with the same counterparty under a master netting agreement
  • Clarifies how to consider transfer restrictions for fair value measurement
  • Clarifies balance sheet offsetting for broker-dealers
  • Clarifies defined contribution pension plan accounting guidance and revises an illustrative example

Effective dates

The effective dates vary by issue, as specified in the ASU. Some improvements were effective upon issuance, which was July 16, 2018, for both PBEs and non-PBEs. For year-end PBEs, other improvements are effective in the March 31, 2018, interim financial statements, and the rest are effective one year later. For year-end non-PBEs, other improvements are effective in the Dec. 31, 2019, annual financial statements, and the rest are effective one year later.

Early adoption is permitted, including in an interim period.

Proposals

Credit losses

On Aug. 20, 2018, the FASB released a proposed update, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” to clarify the FASB’s intent for the transition requirements in ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” referred to as the current expected credit loss (CECL) standard. The FASB intended for the non-public business entities (non-PBEs) to have more time to adopt the CECL standard than all PBEs, including PBEs that are not SEC filers. The proposal would require non-PBEs to adopt the CECL standard in fiscal years beginning after Dec. 15, 2021, and interim periods within (that is, in the Dec. 31, 2022, annual financial statements for calendar year-end non-PBEs).

The proposal would resolve questions raised by stakeholders about how the effective date of CECL applies to non-PBEs. The CECL transition guidance currently requires all entities that are not SEC filers to adopt the new credit loss guidance as of Jan. 1, 2021, for calendar year-end non-SEC filer PBEs and non-PBEs. Both populations of entities would have been required to have appropriate reporting systems and internal controls as of that date. Further complexity existed given the regulatory reporting required for non-PBE banks and credit unions to file three call reports using the existing incurred loss model during 2021 and then reverse nine months of incurred loss accounting and record 12 months under the new CECL model in the fourth quarter of 2021.

The proposal also clarifies that operating lease receivables are excluded from the scope of CECL (Topic 326) and are to be accounted for in accordance with Topic 842, “Leases.”

According to the proposal, the following would be the clarified effective dates for CECL:

  • For PBEs that are SEC filers, the CECL standard would be effective for fiscal years beginning after Dec. 15, 2019, including interim periods within.
  • For PBEs that are not SEC filers, the standard would go into effect for fiscal years beginning after Dec. 15, 2020, including interim periods within.
  • For non-PBEs, the standard would be effective for fiscal years beginning after Dec. 15, 2021, including interim periods within.

Early adoption would be permitted for all entities in fiscal years beginning after Dec. 15, 2018.

Comments were due Sept. 19, 2018.

Leases

On Aug. 13, 2018, the FASB released an exposure draft, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” to address three specific issues for lessors:

  • Lessors would be permitted to make an accounting policy election to not evaluate whether certain sales taxes and other similar taxes are costs of the lessor (described in ASC 842-10-15-30(b)) or costs of the lessee. Under this election, a lessor would exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes in the scope of the election. The lessor would be required to provide additional disclosures.
  • Lessors would be required to exclude certain lessor costs paid directly by lessees to third parties from variable payments and from variable lease revenue when the amount of those costs is not readily determinable by the lessor.
  • Instead of recognizing variable payments under existing guidance, lessors would be required to allocate certain variable payments to the lease and nonlease components when changes occur in facts and circumstances on which the variable payment is based. After the allocation, the amount of variable payments allocated to the lease component would be recognized as income pursuant to Topic 842, “Leases.” The amount of variable payments allocated to nonlease components would be recognized in accordance with other topics, such as Topic 606, “Revenue From Contracts With Customers.”

Comments were due on Sept. 12, 2018.