FASB ready to draft final ASU on financial instrument impairment

Contents FASB posts highlights of March 11 meeting           Financial instruments – impairment
          Insurance – disclosures about short-duration contracts
SEC adopts GAAP taxonomy CAQ and IIA issue white paper on improving audit working relationships
IFIAR issues report on public company audit deficiencies

FASB posts highlights of March 11 meeting All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

The FASB met on March 11 to discuss transition provisions for the 2012 proposed ASU, Financial Instruments – Credit Losses, and to review disclosure requirements for short-duration insurance contracts. Highlights of the discussions are featured below.

Financial instruments – impairment For other-than-temporarily-impaired debt securities, the Board tentatively decided that entities would apply the proposed impairment guidance prospectively from the date the final standard is effective. The proposed guidance would not impact amounts recognized in accumulated other comprehensive income related to significant improvements in cash flows prior to the date of adoption. The entity would continue to accrete those amounts to interest income over the remaining life of the debt security on a level-yield basis, consistent with the existing guidance in ASC 320-10-35-35, Investments – Debt and Equity Securities. After the date of adoption, improvements in cash flows of a security attributable to improvements in credit would be recognized as a reduction in the allowance for credit losses.

The Board tentatively agreed that all assets accounted for under, or by analogy to, the guidance in ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, as well as certain beneficial interests, would be classified as purchased credit-impaired (PCI) assets at the adoption date. The proposed guidance would not permit additional assessment to determine if other acquired assets meet the revised definition of PCI. The Board also tentatively decided that the allowance for expected credit losses would include the gross amount of expected credit losses for all PCI assets at the adoption date, and that interest income on PCI assets would continue to be recognized based on the yield as of that date. Subsequent changes in the expected credit losses on PCI assets would be recognized as adjustments to the allowance for credit losses, with corresponding adjustments to the current-period provision for credit losses.

For all other assets, the Board affirmed the transition guidance in the proposed ASU, which would require entities to make a cumulative effect adjustment to the statement of financial position as of the beginning of the first reporting period the guidance is effective.
The Board also affirmed the transition disclosures in the proposed ASU.

The Board directed the staff to begin drafting a final ASU and to perform outreach to obtain stakeholders’ views on the staff’s draft, the requirement to disclose credit quality disaggregated by vintage, sweep issues, and the effective date. The staff will share the results of this outreach with the Board at a future meeting.

Insurance – disclosures about short-duration contracts The Board discussed external reviewers’ feedback on the draft ASU, Insurance: Disclosures about Short-Duration Contracts, and tentatively reached the following decisions:

  • All years presented in the claims development table that precede the current reporting period and the related disclosure about the history of claims duration would be presented as required supplementary information.
  • The guidance would include a disclosure objective for entities to provide information about claim frequency and a description of the methodologies used to determine that information, unless it is impracticable to do so.
  • For each accident year presented within the claims development table, entities would disclose the amount of incurred-but-not-reported liabilities, the expected development on reported claims, and a description of the methodologies used to determine those amounts.

The Board tentatively decided that the effective date for public business entities would be annual reporting periods beginning after December 15, 2015 and interim reporting periods within annual reporting periods beginning after December 15, 2016. All other entities would have a one-year delay. All entities would be permitted to early adopt the new guidance.

Board members agreed that the expected benefits justify the expected costs of implementing the proposed guidance and requested the staff to draft a final ASU.

SEC adopts GAAP taxonomy The Board recently announced that the SEC has adopted the 2015 GAAP Financial Reporting Taxonomy, which has been updated to address accounting pronouncements released since the previous version in addition to other improvements.

For more information on the 2015 taxonomy, the FASB is hosting a webcast, IN FOCUS: 2015 GAAP Financial Reporting Taxonomy, Changes and Beyond, Taxonomy Implementation Guides, and SEC Update, on April 2 from 1:00 to 2:15 p.m. Eastern Daylight Time.

CAQ and IIA issue white paper on improving audit working relationships The Center for Audit Quality (CAQ) and The Institute of Internal Auditors’ (IIA) Audit Executive Center have jointly issued a white paper, “Intersecting Roles: Fostering Effective Working Relationships Among External Audit, Internal Audit, and the Audit Committee,” identifying ways in which these stakeholders can achieve better working relationships.

The paper is a result of discussions from a series of roundtables conducted by the CAQ and IIA in the fall of 2014. The paper notes that stronger communication and cooperation among these three stakeholders in the financial statement audit process could help alleviate tension and improve risk management.

It also shares roundtable participants’ best practices and strategies for addressing challenges in the following areas:

  • Creating a more productive and efficient external audit process within the constructs of the PCAOB’s requirements
  • Fostering better communication between internal and external auditors to achieve a more effective working relationship
  • Introducing enterprise risk management to an organization

IFIAR issues report on public company audit deficiencies The International Forum of Independent Audit Regulators (IFIAR) issued a report, “International Forum of Independent Audit Regulators Report on 2014 Survey of Inspection Findings,” summarizing the results of its third annual survey of members’ inspection reports of public company audits. The report reflects the results from the members’ most recent annual reporting periods ended July 2014.

Members identified the highest number of audit deficiencies in the areas of internal control testing (24 percent of all inspected audits), fair value measurement (20 percent of all inspected audits), and revenue recognition (14 percent of all inspected audits).

© 2015 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.