Accounting and Audit Standards UpdateNovember 30, 2016
Christie Bluhm, CPA
The mission of the Financial Accounting Standards Board (FASB) is to establish and improve financial accounting and reporting standards to provide decision-useful information to investors and other users of the financial reports. FASB continues to focus on areas in which a significant amount of questions or uncertainty arise within reporting. As you wrap up your year, consider the following accounting standards updates that are effective for 2016 calendar year end reporting – including debt issuance cost presentation, accounting for fees in cloud-based arrangement, going concern, elimination of extraordinary items and Private Company Council alternatives.
Presentation of Debt Issuance Costs
ASU 2015-03,Interest–Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, requires companies to present debt issuance costs for long-term debt as a direct deduction from the carrying value of that debt liability, consistent with the presentation of debt discounts. These costs should be amortized as interest expense using the effective interest method. Entities must disclose the carrying amount of the debt. A recommendation is to show long-term debt net of the related debt issuance costs on the face of the balance sheet with related disclosures of the carrying amounts of the debt and issuance costs disclosed in the notes.
For both public business entities and private companies, ASU 2015-03 has an effective date of fiscal years starting after December 15, 2015. The amendments of ASU 2015-03 must be applied retrospectively, in which the balance sheet of each period presented is adjusted to indicate the impact of the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.
Simplifying the Presentation of Debt Issuance Costs Associated with Line-of-Credit Arrangements(ASU 2015-15) was issued to addressdebt issuance costs related to line-of-credit arrangements. The ASU states it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date is the same as ASU 2015-03.
Accounting for Cloud Computing Costs
ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, clarifies that customers should determine whether a cloud computing arrangement includes the license of software. If a software license is included, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for under ASC 350-40. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract.
An arrangement would contain a software license element if both of the following criteria are met:
- The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty
- It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software
If both of the above criteria are met, a related asset should be established and then amortized over the expected useful life.
For public entities, the ASU is effective for annual periods and interim periods beginning after December 15, 2015; for all other entities, the ASU is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Entities may adopt the guidance retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date.
Going Concern Evaluation and Disclosure
ASU 2014-15, Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, provides guidance on the responsibility of management to evaluate whether there is substantial doubt for an entity to continue as a going concern. The changes in ASU 2014-15 are effective for annual periods beginning after December 15, 2015.
Under existing U.S. GAAP, there is no guidance regarding management’s responsibility for a going concern evaluation or related disclosures. U.S. auditing standards require auditors to perform the going concern evaluation for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited, and to disclose potential effects on the financial statements.
The update requires management to evaluate whether there are any conditions that indicate substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued (not the date of the financial statements) for each annual and interim reporting period.
The update defines substantial doubt for the purposes of this evaluation. Substantial doubt exists when there is an indication that it is probable the entity will not be able to meet its obligations as they become due, within one year of the financial statements being issued. If substantial doubt exists, management should evaluate its plan to mitigate the conditions causing this substantial doubt and whether it will be alleviated. Should the substantial doubt be alleviated through management’s plans, the entity should disclose the conditions that raised the substantial doubt, management’s evaluation of those conditions and management’s plans that alleviated the conditions. If the substantial doubt is not alleviated, the entity should disclose the same items as above, in addition to a statement noting there is substantial doubt about the entity’s ability to continue as a going concern.
Elimination of Extraordinary items
ASU 2015-01,Income Statement – Extraordinary and Unusual Items, eliminates the concept of extraordinary items in an entity’s income statement. The changes are effective for fiscal years and interim periods commencing within those fiscal years, beginning after December 2015. The FASB believes this will avoid inconsistencies in reporting, save time and reduce costs.
Private Company Reporting
The Private Company Council (PCC) has continued to work under its principal responsibilities of determining whether exceptions or modifications to existing nongovernmental GAAP are required to address the needs of private company financial statements users and to serve as the primary advisory report to the FASB on the appropriate treatment for private companies for items under consideration on the FASB’s agenda.
To date, the FASB has issued the following standards proposed by the PCC:
- ASU 2014-02: Accounting for Goodwill
- ASU 2014-03: Derivatives and hedging simplification
- ASU 2014-07: Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
- ASU 2014-18: Accounting for Intangible Assets in Business Combination
- ASU 2016-03: PCC Effective date and transition guidance
ASU 2016-03 made all above ASU’s effective immediately and allows private companies to forego a preferability assessment the first time they elect the accounting alternatives identified above.