On the Horizon -- FASB proposal addresses accounting for down round features

Contents FASB issues proposal to address narrow aspects of distinguishing liabilities from equity    
SEC      CorpFin adds certain C&DIs related to foreign private issuers
GASB issues guidance for certain asset retirement obligations Comment letter issued

FASB issues proposal to address narrow aspects of distinguishing liabilities from equity The Board issued the proposed ASU, IAccounting for Certain Financial Instruments with Down Round Features, II – Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.

Part I of the proposal, which would affect all entities that issue certain equity-linked instruments (or embedded features) that include down round features, addresses the complexity of accounting for these types of financial instruments by changing the accounting for certain of these financial instruments. Under the proposed Part I amendments, an entity would not consider the down round feature when assessing whether the instrument is indexed to its own stock.

Under Part I of the proposal, when the down round feature is triggered (meaning that the exercise price of the related equity-linked financial instrument is adjusted downward), an entity would recognize the value of the effect of the down round feature as a

  • Dividend in equity if the financial instrument is classified as equity
  • Charge to net income if the financial instrument is classified as a liability

The proposed amendments in Part I would also require an entity to disclose the following information when a down round feature has been triggered during the reporting period:

  • A statement indicating that the feature has been triggered
  • The value of the effect of the triggered down round feature
  • The financial statement line item where that effect is recorded

The proposed amendments in Part II, which do not have an accounting effect, would address the difficulty of interpreting the guidance in ASC 480-10, Distinguishing Liabilities from Equity, due to the existence of extensive pending content in the Codification. This pending content has resulted from the indefinite deferral of accounting requirements related to mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. As a result, the amendments in Part II would recharacterize the pending content related to the indefinite deferral of certain provisions of ASC 480-10 as a scope exception.

An entity would apply the proposed amendments in Part I using a modified retrospective approach, with a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) of adoption. The cumulative effect of the change would be recognized as an adjustment to beginning retained earnings in the fiscal year and interim period of adoption.

As the proposed amendments in Part II do not have an accounting effect, no transition guidance is required for Part II.

Comments on the proposal are due February 6, 2017.

SEC The Compliance and Disclosure Interpretations described below reflect the views of the SEC staff. They are not rules, regulations, or statements of the Commission and have not been approved by the Commission. The interpretations are intended as general guidance and should not be relied on as definitive.

CorpFin adds certain C&DIs related to foreign private issuers The staff of the SEC’s Division of Corporation Finance recently added questions to its Compliance and Disclosure Interpretations (C&DIs) related to foreign private issuers. The new questions cover a range of matters, including

  • Question 150.02 was added to the Exchange Act Rules C&DIs to address filing requirements when a non-reporting FPI succeeds to the reporting obligation of an issuer under Exchange Act Rule 12g-3.
  • Questions 110.03 – 110.07 were added to the Exchange Act Forms C&DIs to address certain matters related to Form 20-F, including the due date and requirements in certain guarantor situations.
  • Questions 102.03 – 102.04 were added to the Securities Act Forms C&DIs to address the use of F-Series registration statements to register securities in certain guarantor situations and Form 20-F with respect to reporting obligations.

GASB issues guidance for certain asset retirement obligations The Governmental Accounting Standards Board (GASB) issued Statement 83, Certain Asset Retirement Obligations, which addresses the accounting by state and local governments for certain asset retirement obligations (AROs). The new standard establishes guidance for determining the timing and pattern of recognizing liabilities and the corresponding deferred outflow of resources related to certain AROs. The main provisions of the new guidance are summarized below.

An ARO is a legally enforceable liability that can arise from existing laws and regulations that require state and local governments to take specific actions to retire certain tangible capital assets. Obligations to retire a tangible capital asset can also arise from

  • Contracts
  • Court judgments
  • Internal obligating events, such as the occurrence of contamination

The new guidance requires state and local governments to recognize a liability and a corresponding deferred outflow of resources if both

  • A legally enforceable obligation to perform future asset retirement activities related to tangible capital assets has been incurred.
  • The amount of the liability is reasonably estimable.

An ARO should initially be measured based on the best estimate of the current value of outlays expected to be incurred. The deferred outflow of resources associated with an ARO should be measured at the amount of the corresponding liability upon initial measurement and generally recognized as an expense during the reporting periods that the tangible capital asset provides service. The new standard also requires that the current value of the ARO be adjusted at least annually for the general effects of inflation or deflation.

In addition, affected governments are required to evaluate at least annually all relevant factors to determine whether the effects of one or more of these factors are expected to significantly change the estimated asset retirement outlays. An ARO should be remeasured when the result of the evaluation indicates that there is a significant change in the estimated outlays.

The requirements of the new guidance are effective for reporting periods beginning after June 15, 2018. Earlier application is encouraged.

The new guidance should be applied retroactively by restating all prior-year financial statements. If restatement is not practicable, the cumulative effect of applying the new guidance, if any, should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest period restated. Certain transition disclosures are required in the period of adoption, including the reason for not restating any prior periods, if applicable.

Comment letter issued On December 5, the firm issued a comment letter in response to the AICPA’s Assurance Services Executive Committee’s Proposed Description Criteria for Management’s Description of an Entity’s Cybersecurity Risk Management Program.

© 2016 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.