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FASB affirms revenue recognition amendments

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Contents
FASB October 5 and 7 meeting highlights posted
     Targeted improvements to accounting for hedging activities
     Changes to disclosures about fair value measurement
     Proposals to guidance on leases
     Board finalizes decisions on identifying performance obligations and licensing
     Targeted improvements to accounting for income taxes
GASB issues report on other postemployment benefits standards



FASB October 5 and 7 meeting highlights posted

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.

At its meeting on October 5, the FASB discussed proposed revenue recognition guidance and simplifications to the accounting for income taxes. At its meeting on October 7, the FASB discussed targeted improvements to the accounting for hedging activities, changes to disclosures about fair value measurement, and proposals to the guidance on leases.

Highlights of the Board’s discussion follows.

Targeted improvements to accounting for hedging activities

The Board continued its discussion on the accounting for hedging activities and reached the following tentative decisions:

  • Qualifying net investment hedges: Entities would record the entire change in the fair value of a hedging instrument that is included in the assessment of hedge effectiveness in the cumulative translation adjustment section of other comprehensive income (OCI). In the period the hedged item affects earnings, entities would reclassify changes in the fair value of the hedging instrument recorded in OCI to the same income-statement line item where the earnings’ effect of the hedged item is presented.
  • Net investment hedges − excluded components: The current guidance relating to the treatment of the portion, if any, of the hedging instrument’s change in fair value that is excluded from the assessment of hedge effectiveness in net investment hedges would be retained, without any revisions. Therefore, entities would continue to recognize this amount immediately in earnings. The Board tentatively decided not to provide guidance on the presentation of such changes.
  • Cash flow hedges − excluded components: Entities would be required to present recognized amounts in the same income-statement line item where the earnings’ effect of the hedged item is presented. Presently, entities must recognize immediately in net income the portion, if any, of the hedging instrument’s change in the fair value that is excluded from the assessment of hedge effectiveness in a cash flow hedge.
  • Use of total coupon cash flows in fair value hedges of benchmark interest rate risk and sub-benchmark hedges: An entity could use either the cash flows associated with the benchmark interest rate or the total coupon cash flows in calculating the change in the fair value of the hedged item attributable to interest rate risk in a fair value hedge of benchmark interest rate risk. However, if the effective interest rate of the financial instrument is less than the benchmark interest rate on the date of hedge designation (sub-benchmark hedge), an entity would be required to use the total coupon cash flows.
  • Cash flow hedges of nonfinancial items − contract features that limit exposure: A cap, floor, or negative basis associated with the price of a contractually specified component of a nonfinancial item would not prohibit an entity from designating that contractually specified component as the hedged risk, but would potentially affect the assessment of the hedge’s effectiveness if the price of the contractually specified component moves above or below the exposure limit.

Changes to disclosures about fair value measurement

The Board tentatively decided to propose certain changes to the disclosures about the uncertainty inherent in Level 3 fair value measurements and tentatively decided that those changes would not apply to private companies.

The Board also tentatively decided that the comment period on the proposed changes to the fair value measurement disclosures would be for 75 days or until February 29, 2016, whichever period is longer.

Proposals to guidance on leases

The Board discussed the proposals in the 2013 Exposure Draft, Leases, and reached the following tentative decisions:

  • Initial direct costs arising from a sales-type lease would be deferred and recognized over the lease term if the lease does not give rise to selling profit or selling loss.
  • A lessor would separately present its net investment in sales-type and direct-financing leases from other assets on the statement of financial position. A lessor would also disclose in the notes to the financial statements the components of its net investment in sales-type and direct-financing leases.
  • A lease modification that extends a lease term would change the right-of-use that the lessee already controls, but would not grant the lessee an additional right-of-use. Therefore, the lease would never be accounted for as a separate contract.
  • Revisions would not be made to the lessor modification guidance as a result of the lessee lease modification decisions.
  • Lessees would reassess the classification of a lease when there is a change in the lease term or a change in the assessment of a lessee option to purchase the underlying asset.

The Board affirmed its decision that the requirements for recognizing and presenting lease assets and lease liabilities would apply to all entities. It considered but tentatively decided not to provide different requirements for private companies and not-for-profit organizations.

Board finalizes decisions on identifying performance obligations and licensing

The Board redeliberated its proposed ASU, Identifying Performance Obligations and Licensing, and affirmed most of the amendments in the proposed update. The Board also discussed the following topics:

  • Costs of immaterial goods and services: The Board affirmed its proposal that an entity would not be required to identify promised goods or services that are immaterial in the context of the customer contract. If an entity recognizes all contract revenue before immaterial goods or services are transferred to the customer, it would accrue the related costs to transfer those promised goods or services.
  • Shipping and handling costs: The Board tentatively decided that if revenue is recognized before contractually required shipping and handling activities occur, then an entity would accrue the related costs of shipping and handling.
  • Series guidance: The guidance in ASC 606-10-25-14(b) through 25-15 requires an entity to account for a series of distinct goods or services as a single performance obligation if certain criteria are met. The Board discussed the application of this guidance and tentatively decided not to make it optional. As a result, the series provision remains a requirement.
  • Disclosure of transaction price allocated to remaining performance obligations: ASC 606-10-50-13 requires an entity to make certain disclosures about remaining performance obligations. The Board directed the staff to perform additional research about the effect of introducing a practical expedient that would permit entities not to provide the disclosures in ASC 606-10-50-13 about the amount of transaction price allocated to unsatisfied performance obligations if an entity would need to accumulate information solely for the purpose of that disclosure.
  • Licensing: The Board tentatively decided not to enact a provision that would recognize revenue for certain licenses of symbolic intellectual property at the point in time the license is granted. As affirmed, the proposed amendments would require entities to recognize revenue for all licenses of symbolic intellectual property over time.
  • Sales-based and usage-based royalties: The Board tentatively decided not to expand the scope of the royalties exception to include sales of intellectual property. In addition, the Board will make revisions to the illustrative examples and the Basis for Conclusions in the upcoming ASU to clarify the application of the sales- and usage-based royalties guidance.

The Board asked the staff to draft a final ASU for vote by written ballot.

Targeted improvements to accounting for income taxes

The Board discussed the comments received on the proposed ASUs, Intra-Entity Asset Transfers and Balance Sheet Classification of Deferred Taxes, and tentatively affirmed the proposal to require that all deferred income tax assets and liabilities be presented as noncurrent in a classified statement of financial position. Entities would have a choice of applying the amendments either prospectively or retrospectively to all periods presented and specified certain transition disclosures.

The Board also affirmed the proposal requiring public business entities to apply the guidance in annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods, and other than public business entities would apply the guidance in annual reporting periods beginning after December 15, 2017 and in interim periods within annual periods beginning after December 15, 2018.

Early adoption would be permitted for all entities as of the beginning of any interim or annual reporting period. In addition, the Board asked the staff to perform additional research and outreach on issues raised by stakeholders relating to inter-entity asset transfers.

The Board asked the staff to draft a final ASU for vote by written ballot.



GASB issues report on other postemployment benefits standards

The GASB issued a report that summarizes how the Board assessed the expected costs and benefits of the following standards on other postemployment benefits:
 
  • Statement 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
  • Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions




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