Accounting Standards UpdateJuly 02, 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 and provides decision-useful information to investors and other users of financial reports. The Accounting Standards Updates (ASU) discussed below were issued during 2015 and could affect manufacturers, distributors and retailers.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation Analysis. This standard eliminates the deferrals of FAS 167, which allowed entities with interests in certain investment funds to follow the previous consolidation guidance in FIN 46(R) and makes other changes to both the variable interest model and the voting model. Although the guidance is geared towards asset managers, it will impact all reporting entities that have variable interests in other legal entities, such as limited partnerships. In some cases, consolidation conclusions will change based on the new standard. There will also be other instances in which reporting entities will need to provide additional disclosures about entities that are currently not considered variable interest entities (VIEs) but will be considered VIEs under the new guidance. While the overall approach to consolidation under U.S. GAAP is not affected by the ASU, certain aspects of applying that approach were changed by the ASU, including the following related to the VIE consolidation model:
- Evaluation of fees paid to a decision-maker or a service provider as a variable interest
- Determination of the primary beneficiary of a VIE when fee arrangements exist
- Treatment of related parties in the VIE consolidation model
- Consolidation of certain investment funds
The most likely impact to commercial enterprises is the treatment of related parties. Under the legacy VIE consolidation model, a reporting entity determines whether it meets the power and economics criteria by giving consideration only to its own variable interests in the VIE. The ASU changes that. The ASU refers to a single reporting entity that meets the power criterion as a single decision-maker. When a single decision-maker is determining whether it is the primary beneficiary of a VIE, that single decision-maker should include its own direct economic interests in the VIE, as well as any indirect economic interests held by related parties. The indirect economic interests held by related parties should be considered proportionally under the ASU, rather than entirely. For example, if Reporting Entity A (a single decision-maker) owns a 40 percent equity interest in Entity B, and Entity B owns a 25 percent interest in the VIE, Reporting Entity A should include its effective interest of 10 percent (40 percent multiplied by 25 percent) in the VIE when evaluating whether it meets the economics criterion.
For publically traded companies, ASU 2015-02 will be effective for fiscal years starting after December 15, 2015, including any interim periods within those years. For all other entities, ASU 2015-02 will be effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments using a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the period of adoption, or apply the amendments retrospectively.
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 new standard requires companies to present debt issuance costs for long-term debt, the same way they currently present debt discounts, as a direct deduction from the carrying value of that debt liability. 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, which is now more cumbersome under the new standard. A recommendation is to show the amounts net 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 public business entities, ASU No. 2015-03 will be effective for fiscal years starting after December 15, 2015, including any interim periods within those years. All other entities 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. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items.
Benefit Plan Measurement Practical Expedient
In April 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, which permits an entity with a fiscal year end that does not fall on a month end to measure defined benefit plan obligations and assets as of the month end that is closest to the entity’s fiscal year end, and apply that methodology consistently from year to year. The ASU also requires an entity to adjust the measurement of defined benefit plan obligations and assets to reflect contributions or significant events that occur between the month end date used to measure defined benefit plan obligations and assets and the entity’s fiscal year-end. ASU 2015-04 is effective for public business entities for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The ASU requires prospective application and permits earlier application for all entities.
Accounting for Cloud Computing Costs
In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which 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 business 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. Early adoption is permitted. Entities may adopt the guidance retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date.
In May 2015, the FASB issued Accounting Standards Update (ASU) 2015-08, Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. The ASU amends various SEC paragraphs included in the FASB’s ASC to reflect the issuance of Staff Accounting Bulletin (SAB) No. 115. SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletin series and brings existing guidance into conformity with ASU 2014-17, Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.
An acquired entity is not only able to apply this guidance to change in control events occurring after the effective date, but is also permitted to apply pushdown accounting as a change in accounting principle to its most recent change in control event that had occurred before the effective date of this new guidance. The decision to apply pushdown accounting to a specific change in control event, if elected by an acquiree, is irrevocable.
The guidance also amends the reporting for a bargain purchase option. The acquired entity would not report a gain in its income statement as a result of a bargain purchase. Rather, the acquiree shall recognize the bargain purchase gain recognized by the acquirer as an adjustment to additional paid-in capital.
This guidance is effective immediately.
Sean Morse is a manager in BlumShapiro’s Accounting and Auditing Department in West Hartford, Connecticut. Sean oversees audit engagements for a wide range of clients, including non-profit and healthcare organizations, manufacturers, distributors and educational institutions. He also has experience working with the Process and Controls Group.
BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with nearly 400 professionals and staff, offers a diversity of services that includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.