Accounting and Auditing Standards UpdateDecember 15, 2015
Sean L. Morse, CPA, MSAT
The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting that foster financial reporting that provides decision-useful information to investors and other users of financial reports. The Accounting Standards Updates (ASU) discussed below were issued between July 1, 2015 and the date of this article. These updates will affect manufacturers, distributors and retailers.
Simplifying the Measurement of Inventory (ASU 2015-11) - The purpose of the standard is to simplify the accounting requirements, as well as to more closely align the measurement of inventory in generally accepted accounting principles (GAAP) with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.
An entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Under legacy GAAP, inventory is measured at the lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The new guidance must be applied prospectively after the date of adoption.
Revenue from Contracts with Customers – Deferral of Effective Date
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The effective date for private companies was for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. In response to stakeholders’ requests to defer the effective date of the guidance in Update 2014-09, and in consideration of feedback received through extensive outreach with preparers, practitioners and users of financial statements, in August 2015, the Board issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year. As such, for public business entities, the effective date is annual reporting periods and interim periods therein, beginning after December 15, 2017. The effective date for all other entities is for annual reporting periods beginning after December 15, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016.
Presentation of Debt Issuance Costs
ASU 2015-03, Interest–Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs was issued in April 2015. The standard 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 pursuant to Accounting Standards Codifications (ASC) 835-30-35-2 through 35-3. 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. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. FASB ASU 2015-15, which was issued in August 2015, amends subtopic 835-30 to include that the Securities and Exchange Commission would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
For both public business entities and private companies, ASU 2015-03 will have an effective date of fiscal years starting after December 15, 2015. Early adoption will be allowed for financial statements that have yet to be issued. The amendments of ASU No. 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.
Income Taxes: Balance Sheet Classification of Deferred Taxes
The FASB issued ASU 2015-17 in November 2015, which will be effective for years beginning after December 15, 2016 for public business entities and for years beginning after December 15, 2017 for all other entities. This ASU requires that all deferred tax assets and liabilities be reported as non-current, eliminating the need to analyze temporary differences to determine if deferred tax assets should be reported as current or non-current. This pronouncement was issued as part of the FASB’s project focused on making financial reporting less costly without reducing the quality of the information provided.
In addition to the standards discussed above, the following standard is expected to be finalized in
The FASB issued their revised exposure draft on Leases, Topic 842, in May 2013. In the revised draft, the lessee accounting model requires all leases in which the lessee consumes more than an insignificant portion of the economic benefits embedded in the underlying asset to be recorded on the balance sheet. Utilizing this new lease classification requirement, essentially all leases with a term in excess of 12 months will need to be recorded on the balance sheet. The revised draft includes two approaches to recording the lease expense. The dividing line on which approach will be required will depend on whether the lease term is for an insignificant part or a major part of the total economic life of the underlying asset. For leases that consume more than an insignificant portion of the total economic life of the underlying asset, in general, companies should apply the current “capital lease” approach, whereas those leases that consume an insignificant portion should apply a straight-line lease expense recognition. As a practical application, property leases should be recorded using the straight-line structure and non-property leases using the current capital lease expense structure. The lessor’s accounting model uses the same dividing line and presumptions as the lessee’s. Leases in which the lessee consumes more than an insignificant part of the total economic life of the underlying asset will result in the lessor applying the receivable/residual approach, whereas a lease in which the lessee consumes only an insignificant portion of the total economic life of the underlying asset will result in the lessor utilizing an approach that is similar to current operating lease accounting.
The points summarized above were finalized on November 11, 2015. The final standard is due to be issued in early 2016. The standard will be effective for years beginning after December 15, 2018 for public business entities and for years beginning after December 15, 2019 for all other entities, with early implementation allowed upon final issuance of the standard.