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FASB proposes delaying effective date of new rev rec guidance

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Contents
FASB proposes deferring effective date of revenue recognition standard
Board publishes ASUs based on EITF consensuses
     Effects on historical EPU of master limited partnership dropdown transactions
     Disclosures for investments in entities that calculate net asset value per share
Guidance on recognition of breakage for prepaid cards proposed
Dodd-Frank Wall Street Reform and Consumer Protection Act
     SEC proposes rule for pay versus performance disclosure
Comment letters issued




FASB proposes deferring effective date of revenue recognition standard

On April 29, the Board issued a proposed ASU, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of the new revenue recognition standard by one year.

Under the proposed ASU, the new revenue guidance would be effective as follows:


  • For public entities: Annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period
  • For all other entities (nonpublic): Annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019

Entities could also early adopt the new revenue guidance in line with the original effective date, including the early-adoption options in ASC 606 published for nonpublic entities (that is, as early as annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period).

The comment period on the proposed ASU ends May 29.

At its April 28 meeting, the IASB also voted to defer the effective date of IFRS 15, Revenue from Contracts with Customers, by one year.



Board publishes ASUs based on EITF consensuses

The FASB recently issued two ASUs amending the Codification for final consensuses reached by the EITF at its March 19 meeting.

Effects on historical EPU of master limited partnership dropdown transactions

ASU 2015-06, Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions – a consensus of the FASB Emerging Issues Task Force, provides guidance for calculating a master limited partnership’s (MLP) earnings per unit (EPU) under the two-class method for periods prior to a dropdown transaction that occurs after the formation of an MLP.

Some MLPs are formed through dropdown transactions in which the general partner conveys assets or businesses to the MLP in exchange for cash or for additional ownership interests or a combination of the two. If the general partner controls the MLP before and after a dropdown transaction, the transaction is accounted for as a reorganization of entities under common control, and the MLP’s statement of operations is retroactively adjusted as though the dropdown transaction had occurred at the beginning of the earliest period in which the entities were under common control.

Currently, diversity in practice exists for calculating EPU for periods prior to a dropdown transaction. Some entities allocate earnings of the transferred business before the dropdown transaction among the general and limited partners and other investors consistent with the contractual rights of the investors after the dropdown transaction. Other entities allocate all of the earnings of the transferred business prior to the dropdown transaction to the general partner.

ASU 2015-06 requires entities to allocate earnings of the transferred business for periods before a dropdown transaction to the general partner and to disclose how the rights to earnings and losses of the transferred business differ before and after the dropdown transaction for purposes of computing EPU under the two-class method.

The guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted.

Disclosures for investments in entities that calculate net asset value per share

ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) – a consensus of the FASB Emerging Issues Task Force, exempts investments measured using the net asset value (NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy and related disclosures.

The existing guidance in ASC 820 permits entities to estimate the fair value of certain investments using NAV as a practical expedient. If these investments are redeemable at the measurement date, entities must categorize them in Level 2 of the fair value hierarchy, but if they are never redeemable, entities must categorize them in Level 3.

For investments that are not redeemable at the measurement date but will become redeemable after the measurement date, entities must categorize them in Level 3 if the future redemption dates are not known or will not occur in the “near term.” However, the guidance in ASC 820 does not define “near term,” resulting in disparity in practice. Depending on its policy, an entity might reclassify certain investments between Levels 2 and 3 each period based on the relationship between the measurement date and the next redemption date.

ASU 2015-07 resolves this issue by exempting investments measured using the NAV practical expedient from categorization within the fair value hierarchy and related disclosures. Instead, entities are required to separately disclose the information required under ASC 820-10-50-6A for assets measured using the NAV practical expedient. Entities are also required to show the carrying amount of investments measured using the NAV practical expedient as a reconciling item between the total amount of investments categorized within the fair value hierarchy and total investments measured at fair value on the face of the financial statements.

ASU 2015-07 also amends the guidance in two other Codification Topics as follows:

  • ASC 230-10-15-4, Statement of Cash Flows, is amended so that an investment company may be exempted from presenting a statement of cash flows when substantially all of its investments are measured at Level 1 or Level 2 of the fair value hierarchy or are measured using the NAV practical expedient, and are redeemable in the near term at all times.
  • ASC 715, Compensation – Retirement Benefits, clarifies that entities can value pension plan assets using the NAV practical expedient and states that such investments should not be categorized within the fair value hierarchy in the plan sponsor’s financial statements.

The guidance requires retrospective application and is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015. For all other entities, the guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted.



Guidance on recognition of breakage for prepaid cards proposed

The FASB issued a proposed ASU, Recognition of Breakage for Certain Prepaid Stored-Value Cards – a consensus of the FASB Emerging Issues Task Force, to provide breakage guidance for issuers of certain types of prepaid stored-value cards.

Some entities sell prepaid stored-value cards to consumers that can be redeemed for goods or services from a third party. When an issuer sells a prepaid stored-value card to a consumer, it recognizes a liability for its obligation to provide the consumer with the ability to purchase goods or services from a third party. When the consumer uses the card to purchase goods or services, the issuer derecognizes its liability to the consumer and recognizes a liability to the third party. Consumers might not redeem all or a portion of a prepaid stored-value card.

There is diversity in practice among issuers of these types of prepaid stored-value cards over whether to derecognize a portion of the liability to consumers for cards that will not be used (commonly referred to as “breakage”). Some entities believe that prepaid stored-value cards represent financial liabilities within the scope of ASC 405-20, Extinguishments of Liabilities, that are not subject to adjustment for breakage. Others believe that it is appropriate to analogize to a nonauthoritative 2005 SEC staff speech, which indicates that it may be acceptable for a vendor to derecognize a liability to a consumer that arose under an arrangement in which the consumer made a payment in advance of vendor performance if the vendor demonstrates that the likelihood of the consumer requiring performance is remote.

The guidance in the proposed ASU would apply to a prepaid stored-value card with all of the following characteristics:

  • No expiration date
  • Not subject to unclaimed property laws
  • Redeemable for cash or for goods or services at third-party merchants, or for both
  • Not attached to a segregated bank account like a customer depository account

The proposed guidance would specify that the liabilities related to these types of prepaid stored-value cards would be financial liabilities. The proposal would amend the guidance in ASC 405-20 to direct issuers to recognize breakage for these cards as revenue in proportion to the pattern of rights expected to be exercised by the consumer, but only to the extent that it is probable that a significant reversal of revenue will not subsequently occur. If an entity does not expect to be entitled to breakage for these types of prepaid stored-value cards, it would derecognize the amount due to breakage when the likelihood of the customer exercising its right becomes remote. The proposed amendments are consistent with the breakage guidance in ASC 606.

Entities would adopt the proposed guidance using a modified retrospective approach, recognizing a cumulative catch-up adjustment to opening retained earnings in the period of adoption. The proposed effective dates will be determined after the EITF considers feedback from stakeholders.

The comment period on the proposed ASU ends June 29.



Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates numerous studies and regulatory rule changes. Initiatives that impact financial reporting are described in the Weekly Update as information becomes available.

SEC proposes rule for pay versus performance disclosure

On April 29, the SEC proposed amendments to existing executive compensation disclosure rules, pursuant to Section 953(a) of the Dodd-Frank Act, which would require an issuer to disclose the relationship between executive compensation actually paid and its financial performance. The proposed rule would also require an issuer to provide certain information for its peer group as well as tag this disclosure using XBRL. It is intended to increase transparency and to provide better information to shareholders when they vote to elect directors and in connection with executive compensation.

The proposed disclosure would be required in any proxy or information statement that requires executive compensation disclosure under Item 402 of Regulation S-K. Smaller reporting companies would be permitted to provide scaled disclosures and emerging growth companies, registered investment companies, and foreign private issuers would not be subject to the proposed disclosure requirements.

The comment period ends 60 days after publication of the proposed rule in the Federal Register.



Comment letters issued

On April 30, Grant Thornton LLP submitted a comment letter to the FASB in response to the proposed Accounting Standards Update, Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives.

On the same date, Grant Thornton International Ltd also submitted a comment letter to the Basel Committee on Banking Supervision in response to the consultative document, Guidance on Accounting for Expected Credit Losses.



© 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.