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FASB discusses improvements to liability and equity accounting

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FASB September 16 meeting highlights posted
     Targeted improvements to liability and equity accounting
     Targeted improvements to accounting for long-duration insurance contracts
     Disclosures about interest income on purchased debt securities and loans
EITF meeting held on September 17
     Issue 15-B: “Recognition of Breakage for Prepaid Stored-Value Cards”
     Issue 15-F: “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”
Comment letter issued




FASB September 16 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 September 16, the FASB discussed targeted improvements to liability and equity accounting and to the accounting for long-duration insurance contracts, as well as disclosures about interest income on purchased debt securities and loans.

A summary of its tentative decisions follows.

Targeted improvements to liability and equity accounting

In considering the accounting for an equity-linked financial instrument with a down-round feature, the Board tentatively decided that an entity should not consider the down-round feature when assessing whether the instrument is indexed to its own stock as part of its analysis to classify the instrument as equity or a liability. The entity would recognize the fair-value effect of the feature when triggered as follows:

  • In equity as a deemed dividend for a financial instrument classified as equity
  • Through a charge to net income for a financial instrument classified as a liability

An entity would be required to disclose that the feature was triggered and where the effect of the feature was recognized in the financial statements.

The Board tentatively decided to include within the scope of the proposed changes instruments that give the holder the option to purchase equity shares at a fixed strike price, which would be reduced if the entity either

  • Sells shares of its common stock for an amount less than the initial strike price
  • Issues an equity-linked financial instrument with a strike price below the instrument’s initial strike price

As tentatively decided, a cumulative-effect transition approach would be required when entities adopt the proposed changes.

The Board also discussed the indefinite deferral in ASC 480, Distinguishing Liabilities from Equity, related to mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The Board tentatively decided to replace the indefinite deferral with a scope exception, which will be defined using the current scope of the indefinite deferral.

The Board directed the staff to draft a proposed ASU on the tentative decisions to improve liability and equity accounting.

Targeted improvements to accounting for long-duration insurance contracts

The Board tentatively decided to require insurance entities to measure benefits with other-than-nominal capital market risk associated with nontraditional contracts at fair value. At a future meeting, the Board will discuss whether the change in fair value that is attributable to an entity’s own credit risk should be recognized in other comprehensive income

Disclosures about interest income on purchased debt securities and loans

The Board decided to include measurement within the scope of its project, and tentatively agreed that entities should amortize all premiums to the first call date and all discounts to the maturity date for purchased callable debt securities.

The Board also directed the staff to research the following topics:

  • Disclosure requirements related to the accounting for interest income on callable debt securities and callable loans
  • Whether and how to limit the scope of the instruments subject to the proposed changes



EITF meeting held on September 17

Because consensuses and consensuses-for-exposure are subject to ratification by the FASB and some of the details of conclusions reached at an EITF meeting are determined during the process of developing the minutes of the meeting, the following descriptions are preliminary.

At its meeting on September 17, the FASB’s Emerging Issues Task Force (EITF) discussed the two issues summarized below, reaching no final consensuses or consensuses-for-exposure.

Issue 15-B: “Recognition of Breakage for Prepaid Stored-Value Cards”

The EITF discussed feedback received on the proposed ASU, Recognition of Breakage for Certain Prepaid Stored-Value Cards – a consensus of the FASB Emerging Issues Task Force.

The guidance in the proposed ASU would have applied to prepaid stored-value cards 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 considered financial liabilities. It would amend the guidance in ASC 405-20, Extinguishments of Liabilities, directing 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 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, Revenue from Contracts with Customers.

At its September 17 meeting, the Task Force decided to amend the scope of the proposed guidance by eliminating the four criteria described above. Instead, the scope of the proposed guidance would broadly include instruments with characteristics similar to prepaid stored-value cards. The FASB staff will draft scoping language for the Task Force’s review and discussion at its next meeting.

In addition, the Task Force decided that instruments within the scope of the proposed guidance would be excluded from the disclosure requirements in ASC 825, Financial Instruments.

The EITF affirmed that entities would adopt the proposed guidance using either a modified retrospective approach, recognizing a cumulative catch-up adjustment to opening retained earnings in the period of adoption, or a full retrospective approach.

The effective date would be aligned with the effective date of the guidance in ASC 606, except that entities could early adopt the proposed guidance before adopting ASC 606. Entities would not be required to align their transition methods for this proposed guidance and ASC 606.

Issue 15-F: “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”

The FASB asked the EITF to address nine areas where diversity in practice exists with respect to classifying cash receipts and payments within the statement of cash flows. At its June 18 meeting, the Task Force discussed six of these issues. It reached the following tentative decisions on the remaining three issues at its September 17 meeting:

  • Cash proceeds received from the settlement of corporate-owned life insurance (COLI) policies would be classified as cash inflows from investing activities. Entities would be permitted, but not required, to classify cash outflows related to COLI policies in the same category as cash proceeds.
  • Distributions from an equity-method investee would be classified as cash inflows from operating activities, unless the difference between cumulative distributions received and those received in prior years that were determined to be returns of investment exceeds cumulative equity in earnings recognized by the investor (that is, there are excess distributions). Current-period distributions up to the amount of excess distributions would be classified as cash inflows from investing activities.
  • A transferor’s beneficial interest obtained in a financial asset securitization would be disclosed as a noncash investing activity, and cash receipts from payments on a transferor’s beneficial interest in securitized trade receivables would be classified as cash inflows from investing activities.

In addition, the Task Force will provide additional implementation guidance and examples to clarify when an entity should (1) separate cash receipts and cash payments, and classify them into multiple classes of cash flows, and (2) aggregate cash receipts and cash payments into a single class of cash flows based on the predominant cash flow. The former would be appropriate when it is clear that a cash receipt or cash payment consists of multiple components. The latter would be appropriate when an entity receives cash or makes a cash payment for an asset that it plans to use in multiple ways (for example, for operating and investing activities). Specific disclosures would not be required when classification is based on the predominant cash flow.

The EITF will continue discussing classification issues related to restricted cash at its next meeting.




Comment letter issued

On September 9, the firm issued a comment letter in response to the SEC Concept Release, Possible Revisions to Audit Committee Disclosures.



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