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Financial Reporting and Regulatory Update

First Quarter 2019

From the FASB

Final standards

Lease accounting clarifications

On March 5, 2019, the FASB issued Accounting Standards Update (ASU) 2019-01, “Leases (Topic 842): Codification Improvements” to clarify the following with respect to lease accounting guidance:

  • Lessors that are not manufacturers or dealers are allowed to use cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset (similar to the exception allowed in Topic 840). However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.
  • All lessors that are depository and lending entities within the scope of Topic 942 will present all “principal payments received from leases” under sales-type and direct financing leases within investing activities on the statement of cash flows.
  • An additional exception is provided to the transition disclosures required by Topic 250, which requires entities to provide in the fiscal year in which a new accounting principle is adopted the identical disclosures for interim periods after the date of adoption.

Effective dates

The amendments clarifying transition disclosures is effective consistent with ASU 2016-02, “Leases (Topic 842),” which generally is first effective for calendar year-end public business entities (PBEs) in the March 31, 2019, interim financial statements, and for calendar year-end non-PBEs in the Dec. 31, 2020, annual financial statements.

The amendments on the fair value exception and on the presentation on the statement of cash flows are effective for PBEs, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Early application is permitted. An entity should apply the amendments as of the date it first applied Topic 842, using the same transition methodology.

Film industry

On March 6, 2019, the FASB issued ASU 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 (a consensus of the FASB Emerging Issues Task Force),” which applies only to those entities in the film and episodic television series industry. This ASU was issued to:

  • 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/or license agreements
  • Add presentation and disclosure requirements

Effective dates

For 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. Early adoption is permitted, including in an interim period.

Definition of collections

On March 21, 2019, the FASB released ASU 2019-03, “Not-for-Profit Entities (Topic 958): Updating the Definition of Collections.”

The amendments modify the definition of the term “‘collections’.” Generally accepted accounting principles state that an entity is not required to recognize contributed works of art, historical treasures, and similar assets if the donated items are added to collections and meet certain criteria. One criterion states that the entity is subject to an organizational policy that requires the proceeds from collection items that are deaccessioned (that is, removed from a collection) to be used to acquire other items for collections. The amendments modify that criterion to allow the proceeds to also be used to support the direct care of existing collections in addition to acquiring other items for collections.

The amendments require an entity that holds collections to disclose its policy for the use of proceeds for collection items that are deaccessioned. If an entity has a policy that allows proceeds from deaccessioned collection items to be used for the direct care of existing collections, the entity should disclose its definition of direct care.

Accounting for collections is an issue primarily for certain not-for-profit entities that hold collections; however, the amendment in this update would apply to all entities, including business entities that maintain collections.

Effective dates

The amendments are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application of the amendments is permitted. The amendments should be applied on a prospective basis.

Proposals

Targeted transition relief of credit losses guidance

On Feb. 6, 2019, the FASB issued a proposed ASU, “Targeted Transition Relief for Topic 326, Financial Instruments -- Credit Losses,” to provide clarification and improvement in implementing ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.”

Since the issuance of ASU 2016-13, stakeholders have voiced concerns regarding inconsistencies in accounting for certain financial instruments. For instance, an entity may elect the fair value option under Topic 825-10 for newly originated or purchased assets after adopting ASU 2016-13, while other assets may continue to be measured at amortized cost, requiring entities to maintain dual measurement methodologies that may result in noncomparable financial statement information for users.

The proposed amendments provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis (except for held-to-maturity securities). This election would be made on an instrument-by-instrument basis.

For entities that have not yet adopted ASU 2016-13, the amendments in this proposal would align with the transition and effective date requirements in ASU 2016-13. The exposure draft does not yet include an effective date for entities that have already adopted ASU 2016-13.

Comments were due on March 8, 2019.

Recognizing contract liabilities assumed in a business combination

On Feb. 14, 2019, the FASB issued a proposed ASU, “Business Combinations (Topic 805): Revenue From Contacts With Customers – Recognizing an Assumed Liability,” to clarify when contract liabilities should be recognized in a business combination.

The amendments in this proposal would require an entity (the acquirer) to recognize a liability assumed in a business combination from a contract with a customer if that liability represents an unsatisfied performance obligation under Topic 606 when the acquiree has received consideration from the customer or the amount is due from the customer.

The exposure draft does not yet include an effective date.

Comments are due by April 30, 2019.

In addition to this proposal, the FASB also issued an invitation to comment, “Measurement and Other Topics Related to Revenue Contracts With Customers Under Topic 805,” to solicit input about the measurement and other topics related to revenue contracts acquired in a business combination.

Comments are due by April 30, 2019.

Improvements to share-based consideration payable to a customer

On March 4, 2019, the FASB issued a proposed ASU, “Compensation – Stock Compensation (Topic 718) and Revenue From Contracts With Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer,” for a 45-day comment period.

In June 2018, ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” was issued requiring share-based payments awarded to a customer in conjunction with selling goods or services to be accounted for under Topic 606 “Revenue From Contracts With Customers.” While Topic 606 provides guidance on presentation, it does not provide guidance on measuring share-based payments to a customer. This proposed ASU would require entities to measure and classify share-based payments to a customer by applying the guidance in Topic 718. The amount that would be recorded as a reduction in revenue would be measured on the basis of the grant-date fair value of the share-based payment in accordance with Topic 718. The classification and subsequent measurement of the award would be subject to Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer.

For entities that have not yet adopted ASU 2018-07, the amendments in this proposal would align with the transition and effective date requirements in ASU 2018-07. The exposure draft does not yet include an effective date for entities that have already adopted ASU 2018-07.

Comments are due by April 18, 2019.

Improvements to income tax disclosures

On March 25, 2019, the FASB issued a revised proposed ASU, “Income Taxes (Topic 740) – Disclosure Framework – Changes to the Disclosure Requirements for Income Taxes – Revision of Exposure Draft Issued July 26, 2016,” which is intended to improve the relevance of current income tax disclosure requirements to financial statement users.

The proposed ASU is an update of an exposure draft issued in July 2016 that included improved disclosure requirements for income taxes as part of the FASB’s broader disclosure framework project to improve the effectiveness of disclosures. The FASB delayed finalizing the original proposal because of pending tax reform, which subsequently was passed in December 2017.

This newly proposed ASU reflects revisions that are a result of changes from tax reform under the Tax Cuts and Jobs Act and are a result of input that was received on the original 2016 exposure draft. The proposed ASU would remove disclosures that are not considered cost beneficial or relevant, including disclosure of the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months and the requirement to make a statement that an estimate of the range cannot be made. In addition to removing certain disclosure requirements, these disclosure requirements were added: 

For all entities:

  • Income (or loss) from continuing operations before income tax expense (or benefit) and before intra-entity eliminations disaggregated between domestic and foreign
  • Income tax expense (or benefit) from continuing operations disaggregated between federal, state, and foreign
  • Income taxes paid disaggregated between federal, state, and foreign

For public entities:

  • Line items in the statement of financial position in which the unrecognized tax benefits are presented, and the related amounts of such unrecognized tax benefits
  • Amount and explanation of the valuation allowance recognized and/or released during the reporting period
  • Total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards

Comments are due by May 31, 2019.

Current expected credit losses Q&As

Estimating current expected credit losses

On Jan. 10, 2019, the FASB staff released a Q&A document, “Topic 326, No. 1, Whether the Weighted-Average Remaining Maturity Method Is an Acceptable Method to Estimate Expected Credit Losses,” to address questions the staff has received about whether the weighted-average remaining maturity (WARM) method is an acceptable method to estimate expected credit losses. The WARM method was first introduced in a Feb. 27, 2018, webinar, “Community Bank Webinar: Implementation Examples for the Current Expected Credit Losses Methodology (CECL),” as an approach for smaller, less complex portfolios.

The Q&A addresses these five questions specific to the WARM method:

  1. “Is the WARM method an acceptable method to estimate allowances for credit losses under Subtopic 326-20?”
  2. “What factors should an entity consider when determining whether to use the WARM method?”
  3. “How can an entity estimate the allowance for credit losses using a WARM method?”
  4. “Are there other ways to perform the WARM estimation?”
  5. “When an entity implements CECL using a loss rate method such as the WARM method, is it acceptable to adjust historical loss information for current conditions and the reasonable and supportable forecasts through a qualitative approach as was done in the example rather than a quantitative approach?”