On the Horizon: FASB issues another amendment to new revenue guidance

Contents FASB      ASU amends new revenue recognition guidance
     Proposed ASU would remove Step 2 from goodwill impairment test
     Tentative decisions from May 11 meeting posted
     Final and proposed XBRL taxonomy guides issued

     SEC approves rules on naming engagement partner and participating firms
     Revised proposed standard on auditor reporting issued

FASB ASU amends new revenue recognition guidance The Board issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends the new revenue guidance in ASC 606, Revenue from Contracts with Customers, to reflect certain clarifications in the following areas:

  • Transition
  • Collectibility
  • Noncash consideration
  • Presentation of sales and other similar taxes

ASU 2016-12 does not change the core principle of the new revenue guidance—that is, an entity must recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods and services.

The effective date and transition requirements for the amendments are the same as those for the new revenue guidance in ASC 606, with early adoption permitted:

  • For public companies: Annual periods, including interim periods therein, beginning after December 15, 2017
  • For private companies: Annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019

NDS 2016-08  discusses this new guidance in greater detail, as well as the guidance in ASU 2016-10, Identifying Performance Obligations and Licensing.

Proposed ASU would remove Step 2 from goodwill impairment test The Board issued proposed ASU, Simplifying the Accounting for Goodwill Impairment, which primarily addresses the subsequent measurement of goodwill under ASC 350-20, Intangibles – Goodwill and Other: Goodwill. The proposal aims to simplify the goodwill impairment test by removing Step 2, which is applied under the existing guidance when either (1) the carrying amount of a reporting unit exceeds its fair value under Step 1, or (2) a reporting unit with a zero or negative carrying amount fails the qualitative impairment test.

Step 2 of the existing goodwill impairment test requires an entity to compare the implied fair value of goodwill to the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an entity must then recognize an impairment charge equal to that excess. To determine the implied fair value of goodwill at the impairment testing date, an entity is currently required to determine the fair value for the reporting unit’s recognized and unrecognized assets and liabilities by following guidance that would be required for a purchase-price allocation for an acquired business.

Under the proposed ASU, an entity would still perform annual quantitative or interim goodwill impairment tests by comparing the fair value of its reporting unit to the carrying amount. However, instead of determining the impairment charge, if any, under Step 2, an entity would generally recognize an impairment charge equal to the amount by which the carrying amount of the reporting unit exceeds the fair value, not to exceed the carrying amount of the goodwill assigned to that reporting unit.

In addition, the proposed ASU would apply to all reporting units, including reporting units with zero or negative carrying amounts, and would require disclosure of both the existence of any such reporting units and the corresponding amounts of goodwill allocated.

Much of the existing guidance for subsequent measurement of goodwill under ASC 350-20-35 will not change, including an entity’s ability to carry out a qualitative assessment and how the fair value of a reporting unit is measured.

The amendments to remove Step 2 of the impairment test would apply to all entities that present goodwill in their financial statements, except for private companies that have elected the private company alternative for subsequent measurement of goodwill, and would be applied prospectively. The FASB will determine the effective date and whether it will permit early adoption after it considers stakeholder feedback on the proposed ASU.  

Comments on the proposed ASU are due on July 11.

Tentative decisions from May 11 meeting 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.

The FASB met on May 11 to continue deliberations on its project to improve the equity method of accounting, and decided to remove this project from its agenda.

Earlier this year, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to retroactively adopt the equity method of accounting for certain increases in the level of ownership or degree of influence for an investment previously accounted for using another method. The ASU also provides guidance on accounting for previously recognized unrealized holdings’ gains or losses, but does not encompass all of the amendments in the 2015 proposed ASU, Simplifying the Equity Method of Accounting.

For instance, the proposed ASU would have also eliminated the requirement for an equity method investor to account for the difference between an investment’s cost and the investor’s proportionate share of the investee’s net assets, which is known as the basis difference, but ASU 2016-07 does not codify this proposal. Therefore, the existing guidance related to accounting and reporting for the basis difference still applies.

Final and proposed XBRL taxonomy guides issued The FASB recently issued a final U.S. GAAP Financial Reporting Taxonomy style guide, Balance Type, which provides guidance for modeling the balance type (debit or credit) of certain elements contained in the taxonomy.

The FASB also recently issued a proposed style guide, Dimension Uses, which would provide guidance for modeling dimensions contained in the taxonomy. Comments on the proposed guide are due July 11.

Taxonomy guides, which are not authoritative, communicate how the taxonomy is designed and provide other information to help users understand how elements and relationships are structured.

PCAOB SEC approves rules on naming engagement partner and participating firms The SEC has approved the PCAOB’s previously adopted new rules requiring audit firms to disclose the name of the audit engagement partner and the names of other audit firms that participated in an issuer audit engagement, subject to certain de minimus exceptions.

Under the new rules, auditors will be required to complete PCAOB Form AP, “Auditor Reporting of Certain Audit Participants,” for each issuer audit and to disclose the following information:

  • The name of the engagement partner and ID
  • The names, locations, and extent of participation of other accounting firms that took part in the audit if their work constitutes 5 percent or more of the total audit hours
  • The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours

The information included on Form AP will be available in a searchable database on the PCAOB’s website.

In lieu of the form, an audit firm may voluntarily provide the information about the engagement partner, other accounting firms, or both in the auditor’s report.

The deadline for filing Form AP will be 35 days after the date the auditor’s report is first included in a document filed with the SEC. For initial public offerings, the deadline for filing Form AP will be 10 days after the auditor’s report is first included in a document filed with the SEC.

The PCAOB issued a fact sheet on Form AP.

The rules apply to audits of public companies, including emerging growth companies as defined by the JOBS Act. Audits of broker-dealers are not covered by the new rules.

The disclosure requirement for the engagement partner will be effective for auditor’s reports issued on or after January 31, 2017. The disclosure requirement for other firms participating in the engagement will be effective for reports issued on or after June 30, 2017.

Revised proposed standard on auditor reporting issued The PCAOB has issued a revised proposal of the auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments to certain other PCAOB standards.

The main purpose of the revised proposal is to make the auditor’s report more informative to financial statement users by requiring auditors to provide information on critical audit matters. The revised proposal retains the pass/fail model in the existing auditor’s report, but would require additional information, such as the communication of critical audit matters and new elements related to auditor independence and auditor tenure.

The concept of critical audit matters from the original 2013 proposal is being refined in the revised proposal by

  • Limiting the source of potential critical matters to matters communicated or those required to be communicated to the audit committee
  • Adding a materiality component to the definition of a “critical audit matter”
  • Narrowing the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment
  • Revising the related documentation requirement
  • Expanding the communication requirement to require the auditor to describe how the critical audit matter was addressed in the audit

The proposed requirements regarding critical audit matters would not apply to audits of broker-dealer reporting under Rule 17a-5 of the Securities Exchange Act of 1934; investment companies other than business development companies; and employee stock purchase, savings, and similar plans filed on Form 11-K.

Comments on the proposed standard and related amendments are due by August 15. A fact sheet on the proposal is available on the PCAOB’s website.

© 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.