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Financial Reporting and Regulatory Update

Fourth Quarter 2018

From the FASB

Final standards

Lease accounting improvements for lessors

On Dec. 10, 2018, the FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” to provide the following improvements to the lease accounting guidance for lessors:

  • Lessors are allowed, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs and, instead, to account for those costs as if they are lessee costs by excluding them from lease revenue and expense.
  • Lessors will exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. Additionally, lessors will account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by lessees as variable payments. Furthermore, lessors will record the reimbursed costs as revenue.
  • Lessors will allocate, rather than recognize (as initially required by Topic 842), variable payments to lease and nonlease components. The variable payments allocated to lease components will be recognized in accordance with Topic 842; those allocated to nonlease components will be recognized in accordance with other guidance, including “Revenue From Contracts With Customers" (Topic 606).

Effective dates

For entities that have not adopted Topic 842, this ASU has the same effective date as ASU 2016-02 (for example, March 31, 2019, interim financial statements for calendar year-end public business entities (PBEs)).

For entities that have adopted Topic 842, this ASU is effective at the original effective date of Topic 842 for those entities. Alternatively, early adoption is allowed either in the first reporting period ending after the issuance of this ASU or in the first reporting period beginning after its issuance; for calendar year-end entities that would be either the reporting period ending Dec. 31, 2018, or the period beginning Jan. 1, 2019.

Effective date and operating lease clarification for CECL model

On Nov. 15, 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” in order to align the annual and interim implementation dates for nonpublic business entities (non-PBEs) and clarify the scope of the CECL standard for operating leases as follows:

  • Effective date for non-PBEs: With this helpful clarification, non-PBEs will now adopt CECL in fiscal years beginning after Dec. 15, 2021, and interim periods within. For calendar year-ends, CECL will be effective for the first quarter of 2022. This change in the effective date eliminates the complexity in the banking industry for regulatory reports of non-PBEs to file three call reports using the incurred loss model during 2021 and then reverse nine months of incurred loss accounting and record 12 months of CECL in the fourth quarter of 2021.
  • Operating leases: Impairment of operating lease receivables is in the scope of Accounting Standards Codification (ASC) Topic No. 842, “Leases,” and not within the scope of CECL.

Clarifications for collaborative arrangements

On Nov. 5, 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606,” to address diversity in practice and uncertainties on how the guidance in Topic 606 interacts with the guidance for collaborative arrangements. A collaborative arrangement is defined in the FASB Master Glossary and Topic 808 as “a contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties that meet both of the following requirements:

  • “They are active participants in the activity.
  • “They are exposed to significant risks and rewards dependent on the commercial success of the activity.”

This ASU clarifies the following with respect to collaborative arrangements:

  • Apply Topic 606 to such arrangements when the arrangement participant is a customer in the context of a unit of account.
  • When assessing whether the collaborative arrangement or part of it is in the scope of Topic 606, apply the unit-of-account guidance in Topic 808 that now aligns with Topic 606 (for a distinct good or service).
  • Present revenue in the scope of Topic 606 separate from the collaborative arrangement revenue that is outside the scope of Topic 606.

Effective dates

For PBEs, the update is effective for fiscal years beginning after Dec. 15, 2019, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. Early adoption is permitted, including in an interim period.

Adoption of this update prior to the adoption of Topic 606 is prohibited.

Targeted improvements to variable interest entity (VIE) model – related party guidance

On Oct. 31, 2018, the FASB issued ASU 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities,” that aims to improve VIE guidance for related party matters that have arisen related to the consolidation guidance in ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”

The guidance supersedes the private company accounting alternative for common control leasing arrangements provided by ASU 2014-07, “Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements,” and expands it to all qualifying common control arrangements. Private entities can elect not to apply VIE consolidation guidance to any arrangement with legal entities that are under common control if neither the parent nor the legal entity is a PBE. The accounting policy election must be applied to all current and future legal entities under common control consistently, and other consolidation guidance including the voting interest entity guidance remains applicable. When a private company makes the policy election, it must provide detailed disclosures about involvement with, and exposure to, the legal entity under common control.

In addition, the ASU revises the analysis for determining whether a decision-making fee paid by a VIE is a variable interest such that indirect interests in a VIE held through related parties in common control arrangements would be considered on a proportional basis (thus eliminating the requirement to consider such indirect interests as the equivalent of a direct interest). This revision is consistent with the analysis for determining whether a reporting entity in a related party group is the primary beneficiary of a VIE by including indirect interests on a proportional basis (pursuant to amendments in ASU 2016-17).

These amendments are expected to result in more decision-makers not consolidating VIEs.

Effective dates

For organizations that are not private companies, the amendments are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within. The amendments are effective for private companies for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. Early adoption is permitted.

Retrospective application to the earliest period presented is required.

Additional benchmark interest rate for hedge accounting

On Oct. 25, 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” to expand the number of benchmark interest rates that can be used in accounting hedge designations. The ASU adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the transition from the London Interbank Offered Rate (LIBOR) to SOFR and provides sufficient lead time to prepare for changes to interest-rate risk hedging strategies for both risk management and hedge accounting purposes. 

Existing benchmarks under Topic 815 include U.S. Treasury, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The OIS rate based on SOFR would be the fifth U.S. benchmark rate. Similar to the Fed Funds OIS rate, which is a swap rate based on the underlying overnight Fed Funds Effective Rate, the OIS rate based on SOFR will be a swap rate based on the underlying overnight SOFR rate.

Including the OIS based on SOFR as a benchmark interest rate will help companies transition away from LIBOR by providing an alternative rate.

Effective dates

For entities that have not adopted ASU 2017-12 (“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”), this standard, ASU 2018-16, will be effective concurrent with ASU 2017-12 which is:

  • For PBEs, fiscal years beginning after Dec. 15, 2018, and interim periods within
  • For non-PBEs, fiscal years beginning after Dec. 15, 2019, and interim periods beginning after Dec. 15, 2020

If ASU 2017-12 was early adopted, then ASU 2018-16 can be early adopted, including in an interim period.

If ASU 2017-12 has been adopted, the effective date for ASU 2018-16 is:

  • For PBEs, fiscal years beginning after Dec. 15, 2018, and interim periods within
  • For non-PBEs, fiscal years beginning after Dec. 15, 2019, and interim periods within

Proposals

Private company accounting alternatives extended to not-for-profit entities

On Dec. 20, 2018, the FASB issued a proposal, “Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities,” to allow not-for-profit (NFP) entities to apply certain accounting alternatives that previously were provided only for private companies. Specifically, an NFP entity would be allowed to elect two separate accounting alternatives: 1) amortize goodwill over 10 years or less, and test for impairment upon a triggering event as well as have the option to elect to test for impairment at the entity level, and 2) include certain customer-related intangible (CRI) assets and all noncompete agreements in goodwill as part of a business combination. An NFP entity may adopt the former alternative, to amortize goodwill, without adopting the latter alternative, to include CRIs and noncompete agreements in goodwill. However, an NFP entity that elects to include certain CRIs and noncompete agreements in goodwill must also adopt the alternative to amortize goodwill.

Comments are due Feb. 18, 2019.

Lease accounting clarifications for lessors that are financial institutions

On Dec. 19, 2018, the FASB released a proposal, “Leases (Topic 842): Codification Improvements for Lessors,” that would provide two clarifications for lessors that are not manufacturers or dealers – generally for financial institutions and captive finance companies. The proposed clarifications relate to the following:

  • Fair value of the leased property. Topic 840 provided an exception for lessors that are not manufacturers or dealers to measure the value of leased property at the underlying asset’s cost, reflecting any volume or trade discounts, instead of applying Topic 820 for fair value measurement (that is, exit price). Topic 842 does not currently provide this exception, and those lessors have noted their belief that it was not the board’s intention to change their financial reporting for the leased property values. The proposal would carry the exception from Topic 840 over to Topic 842 and allow lessors that are not manufacturers or dealers to measure the value of leased property at cost, reflecting any volume or trade discounts that may apply. If a significant lapse of time occurs between the asset acquisition and lease commencement, the exception would not apply, and the definition of fair value in Topic 820 would apply.
  • Presentation of principal payments received from leases under sales-type and direct financing leases for financial institutions. Conflicting guidance on the presentation of these cash flows exists in Topic 942 (requires investing classification) and Topic 842 (requires operating classification). The proposal would require lessors in the scope of Topic 942 (that is, depository and lending institutions) to present cash flows for principal payments received from sales-type and direct financing leases in investing activities, which would be consistent with how they are presented by these institutions prior to the application of Topic 842.  

Comments were due Jan. 15, 2019.

Improvements to financial instruments ASUs

On Nov. 19, 2018, the FASB issued a proposed ASU, “Codification Improvements – Financial Instruments,” for a 30-day comment period. The 107-page proposal includes changes to three existing ASUs as follows:

Proposed changes to ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (11 proposed changes):

  • Topic 1: Proposed changes resulting from the June 11, 2018, Transition Resource Group (TRG) for Credit Losses meeting
    • Issue 1A: Accrued interest
      • Measure the allowance on accrued interest receivable (AIR) balances separately from other components of the amortized cost basis and net investments in leases.
      • Make an accounting policy election to present AIR and the related allowance from the associated financial assets and net investments in leases on the balance sheet. If the AIR and related allowance are not presented as a separate line item on the balance sheet, an entity would disclose the AIR and related allowance for credit losses and where the balance is presented.
      • Elect a practical expedient to separately disclose the total amount of AIR included in the amortized cost basis as a single balance for certain disclosure requirements.
      • Make an accounting policy election to write off AIR by either reversing interest income or adjusting the allowance for credit losses.
      • Make an accounting policy election not to measure an allowance on AIR if an entity writes off the uncollectible accrued interest receivable balance in a timely manner.
    • Issue 1B: Transfers between classifications or categories for loans and debt securities
      • Reverse any allowance for credit losses or valuation allowance previously measured on a loan or debt security, transfer the loan or debt security to the new classification or category, and apply the applicable measurement guidance in accordance with the new classification or category.
    • Issue 1C: Recoveries
      • Clarify that an entity should include recoveries when estimating the allowance.
      • Clarify that recoverable amounts included in the allowance should not exceed the aggregate of amounts previously written off and expected to be written off. For collateral-dependent financial assets, clarify that an allowance that is added to the amortized cost basis should not exceed amounts previously written off.
  • Topic 2: Proposed changes identified by stakeholders
    • Issue 2A: Conforming amendment to Subtopic 310-40, “Receivables – Troubled Debt Restructurings by Creditors” – proposed change to correct a cross-reference such that an entity is required to use the fair value of collateral when foreclosure is probable. 
    • Issue 2B: Conforming amendment to Subtopic 323-10, “Investments – Equity Method and Joint Ventures (Topic 323)” – proposed reference to Subtopic 323-10 for subsequent accounting when the investor has other investments, such as loans and debt securities, in the equity method investee. 
    • Issue 2C: Clarification that reinsurance recoverables are within the scope of Subtopic 326-20 – clarify the board’s intent to include all reinsurance recoverables in the scope.
    • Issue 2D: Projections of interest-rate environments for variable-rate financial instruments – clarify the board’s intent to provide flexibility by removing the prohibition of using projections of future interest-rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments. An entity should use the same projections or expectations of future interest-rate environments both in estimating expected cash flows and in determining the effective interest rate used to discount those expected cash flows.
    • Issue 2E: Consideration of prepayments in determining the effective interest rate (EIR) – permit an accounting policy election to adjust the EIR used to discount expected future cash flows for expected prepayments to appropriately isolate credit risk in determining the allowance.
    • Issue 2F: Consideration of estimated costs to sell when foreclosure is probable – specifically require that an entity consider the estimated costs to sell if it intends to sell, rather than operate, the collateral when foreclosure is probable.
  • Topic 5: Proposed changes resulting from the Nov. 1, 2018, TRG for Credit Losses meeting
    • Issue 5A: Vintage disclosures – line-of-credit arrangements converted to term loans – proposed to present the amortized cost basis of line-of-credit arrangements that are converted to term loans within each credit quality indicator in the origination year that corresponds with the period in which the most recent credit decision after original credit decision was made. If a line is converted to term without an additional credit decision or because of a troubled debt restructuring, it will be presented in a separate column as proposed in example 15.
    • Issue 5B: Contractual extensions and renewals – clarify that an entity should consider extension or renewal options (excluding those that are accounted for as derivatives in accordance with Topic 815) that are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the entity.

Proposed changes to ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (four proposed changes):

  • Issue 4A: Scope clarifications for Subtopics 320-10, “Investments – Debt Securities – Overall,” and 321-10, “Investments – Equity Securities – Overall” – clarify board intent to exclude health and welfare plans accounted for under Topic 965, “Plan Accounting Health and Welfare Benefit Plans,” from the scope of Subtopics 320-10 and 321-10. 
  • Issue 4B: Held-to-maturity debt securities fair value disclosures – clarify the board’s intent to remove the disclosure of the fair value of held-to-maturity debt securities measured at amortized cost basis for non-PBEs.
  • Issue 4C: Applicability of Topic 820, “Fair Value Measurement,” to the measurement alternative – require an entity to remeasure an equity security without readily determinable fair value at fair value when an orderly transaction is identified for an identical or similar investment of the same issuer in accordance with Topic 820, using fair value as of the date the observable transaction occurred. Applicable disclosure requirements in ASC 320 should be followed for a nonrecurring fair value.
  • Issue 4D: Remeasurement of equity securities at historical exchange rates – clarify that the only equity securities required to follow paragraph 830-10-45-18 and remeasure at historical exchange rates are those equity securities without readily determinable fair values accounted for under the measurement alternative.

Proposed changes to ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (eight proposed changes):

  • Issue 3A: Partial-term fair value hedges of interest-rate risk 
    • Clarify that an entity may designate and measure the change in fair value of a hedged item attributable to both interest-rate risk and foreign exchange risk in a partial-term fair value hedge. The proposal also clarifies that one or more separately designated partial-term fair value hedging relationships of a single financial instrument can be outstanding at the same time.
  • Issue 3B: Amortization of fair value hedge basis adjustments
    • Clarify that an entity may, but is not required to, begin to amortize a fair value hedge basis adjustment before the fair value hedging relationship is discontinued. If an entity elects to amortize the basis adjustment during an outstanding partial-term hedge, that basis adjustment should be fully amortized on or before the hedged item’s assumed maturity date in accordance with paragraph 815-25-35-13B.
  • Issue 3C: Disclosure of fair value hedge basis adjustments
    • Clarify that available-for-sale debt securities should be disclosed at their amortized cost and that fair value hedge basis adjustments related to foreign exchange risk should be excluded from the disclosures required by paragraph 815-10-50-4EE.
  • Issue 3D: Consideration of the hedged contractually specified interest rate under the hypothetical derivative method
    • Clarify that an entity should consider the contractually specified interest rate being hedged when applying the hypothetical derivative method.
  • Issue 3E: Scope for not-for-profit entities
    • Clarify that a not-for-profit entity that does not separately report earnings may not elect the amortization approach for amounts excluded from the assessment of effectiveness for fair value hedging relationships. Also update the cross-references in paragraph 815-10-15-1 to further clarify the scope of Topic 815 for entities that do not report earnings separately.
  • Issue 3F: Hedge accounting provisions applicable to certain private companies and not-for-profit entities
    • Clarify that a private company that is not a financial institution as described in paragraph 942-320-50-1 should document the analysis supporting a last-of-layer hedge designation concurrently with hedge inception. Also clarify that not-for-profit entities (except for not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market) should be provided with the same subsequent quarterly hedge effectiveness assessment timing relief provided to certain private companies in paragraph 815-20-25-142.
  • Issue 3G: Application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments
    • Clarify that application of the first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments continues to be permitted.
  • Issue 3H: Update ASU 2017-12 transition guidance
    • Provide clarification about the three transition requirements in ASU 2017-12:
  1. Clarify that when an entity modifies a fair value hedge to measuring the hedged item using the benchmark rate component of the contractual coupon, the hedging relationship can be rebalanced, but new hedged items and hedging instruments cannot be added to the hedge.
  2. Clarify that an entity may transition from a quantitative method of hedge effectiveness assessment to a method comparing critical terms without dedesignating an existing relationship.
  3. Clarify that debt securities reclassified from held-to-maturity (HTM) to available-for-sale following paragraph 815-20-65-3(e)(7) would not call into question an entity’s assertion to hold to maturity those securities that continue to be classified as HTM, are not required to be designated in a last-of-layer hedge relationship, and may be sold after reclassification.

Comment deadline extended

The board received two comment letters requesting an extension of the deadline to 60 days and, at its Dec. 19 meeting, decided to extend the deadline. Stakeholders expressed a need for additional time to perform an appropriate analysis of the many implications and potential consequences of the proposal. While the board initially attempted to avoid a January deadline given the focus on financial reporting matters during that time, the requests for additional time came from preparers, which prompted the decision.

Comments are due Jan. 18, 2019. 

Film industry

On Nov. 7, 2018, the FASB issued a proposal, “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 (a Consensus of the FASB Emerging Issues Task Force),” that would apply to only those entities in the film and episodic television series industry.

The proposal would:

  • Align the accounting for production costs of episodic television series with the accounting for production costs of films
  • Require that an entity test films and license agreements in the scope of Subtopic 920-350 for impairment at the film group level, when the film is predominantly monetized with other films and license agreements
  • Add presentation and disclosure requirements

Comments were due on Dec. 7, 2018.