On the Horizon -- Proposed ASUs to impact defined benefit plan sponsors

Contents Current reporting issue      Private company alternative for certain identifiable intangible assets

     Board issues two proposed ASUs impacting defined benefit plan sponsors
     New proposed ASU suggests solutions to eight specific cash flow issues

CAQ issues report on audit quality indicators
International Federation of Accountants      IPSASB publishes proposed standard on public sector combinations

Current reporting issue Private company alternative for certain identifiable intangible assets FASB ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination – a consensus of the Private Company Council, allows private companies an alternative election not to recognize certain intangible assets in connection with a business combination. Under this election, the value of such intangibles is subsumed into goodwill. This election requires a reporting entity to also elect the private company alternative to amortize goodwill under ASU 2014-02, Accounting for Goodwill – a consensus of the Private Company Council.

The intangible assets that qualify for this election are (1) customer-related intangible assets that are not capable of being sold or licensed independently from other assets of the business, and (2) noncompetition agreements. This private company alternative was provided to reduce the cost and complexity of measuring these intangible assets. The reduction in cost and complexity of measuring these intangible assets may be greater for certain businesses acquired than for others. The cost savings could potentially be greatest for acquisitions of businesses with acquired intangibles that are limited to these customer-related intangibles or noncompetition agreements. In contrast, there could be little cost savings for acquisitions of businesses that have other intangible assets. The reason for this is that many valuation models incorporate contributory asset charges related to the fair value of the customer-related intangible assets or noncompetition agreements in the value of other intangible assets, such as in-process research and development assets valued using a multiple period excess earnings model.

When allocating purchase consideration in a business combination, many valuation specialists perform a reconciliation of discount rates for the individual assets acquired and liabilities assumed compared to the internal rate of return and the market participant weighted-average cost of capital. This type of reconciliation oftentimes requires the valuation of in-place assembled workforce, even though in-place assembled workforce is subsumed into goodwill and not separately recognized. Intangible assets subject to the private company alternative are also subsumed into goodwill and would require fair value to be calculated to perform this type of reconciliation. In these circumstances there could be little cost savings, even when the acquired intangibles are limited to the customer-related intangibles or noncompetition agreements subject to the alternative.

Reporting entities should take this issue into account when deciding whether to elect this private company alternative based on their specific facts and circumstances.

FASB Board issues two proposed ASUs impacting defined benefit plan sponsors The FASB recently issued a proposed ASU, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, to improve defined benefit plan sponsors’ presentation of benefit costs in the income statement. At the same time, the Board also issued a proposed ASU, Changes to the Disclosure Requirements for Defined Benefit Plans, to modify the disclosure requirements for defined benefit plan sponsors.

Stakeholders have until April 25 to comment on the proposals.

Read more about the proposed ASUs in NDS 2016-01, “Improving presentation and disclosure for defined benefit plan sponsors.”

New proposed ASU suggests solutions to eight specific cash flow issues The Board issued a proposed ASU, Classification of Certain Cash Receipts and Cash Payments – a consensus of the EITF, which addresses eight specific cash flow issues. The proposal aims to reduce the existing diversity in practice in how certain cash receipts and payments are presented and classified in the financial statements.

Stakeholders have until March 29 to comment on the proposal.

See the November 19, 2015 edition of On the Horizon for a full summary of the meeting where the EITF reached a consensus-for-exposure on the eight issues.

CAQ issues report on audit quality indicators The Center for Audit Quality (CAQ) issued a report, “Future Focused: Year in Review 2015,” highlighting the CAQ’s activities and accomplishments in support of public company audit quality.

Some of the topics discussed include

  • Work performed to help public company auditors improve effectiveness
  • Support for independent research
  • Collaborative efforts around fighting financial reporting fraud and working with audit committees
  • Engagement with regulators on key issues, including audit quality indicators, effective disclosures, and auditing accounting estimates and fair value measurements

International Federation of Accountants IPSASB publishes proposed standard on public sector combinations The International Public Sector Accounting Standards Board (IPSASB) issued proposed International Public Sector Accounting Standard (IPSAS), Public Sector Combinations, which aims to establish requirements for classifying, recognizing, and measuring public sector combinations. Existing IPSAS do not provide such guidance.

The proposed standard would require public sector combinations to be classified as either amalgamations or acquisitions. Entities would apply the “modified pooling of interests” method of accounting for amalgamations and the acquisition method of accounting for acquisitions.

Stakeholders have until June 30 to comment on the proposal.  

© 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.