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On the Horizon -- FASB continues discussion on accounting for down-round features

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FASB posts highlights from April 19 meeting
  • Accounting for instruments with down-round features
  • Revenue recognition of grants and contracts by NFPs
SEC
  • Deadline extended on request for comment on Industry Guide 3
  • Small Entity Compliance Guides and new C&DI released
AICPA issues proposal on reporting on ERISA financial statements
CAQ and Audit Committee Collaboration update assessment tool
International Federation of Accountants
  • IAASB proposes revisions to standard on auditing estimates



FASB posts highlights from April 19 meeting

All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on April 19 to discuss the accounting for instruments with down-round features and revenue recognition issues related to not-for-profit (NFP) entities. The Board’s actions are summarized below.

Accounting for instruments with down-round features

The Board tentatively decided that the existence of a down-round feature in a financial instrument would not require an entity to classify that instrument as a liability, or to recognize the effect of the trigger of the down-round feature in either the balance sheet or the income statement.

A public business entity would instead reflect the effect of the trigger of a down-round feature as an adjustment to earnings per share (EPS). The Board asked the staff to perform additional research to develop this adjustment to EPS, along with any related disclosures.

Revenue recognition of grants and contracts by NFPs

The Board continued to deliberate how NFPs would recognize grants and contracts, focusing on issues related to accounting, disclosure, effective date (including early adoption), and transition.

The Board made the following tentative decisions: 


  • The proposed clarifying guidance about distinguishing conditional contributions and unconditional contributions would apply to both a resource provider and to a recipient.
  • In order to meet the definition of a “donor-imposed condition,” the notion of either a right of return, or a release of the promisor from its obligation to transfer assets, should be present in the agreement or in another document referenced in the agreement. Further, the agreement should indicate that a recipient is entitled to the transferred asset (or to a future transfer of assets) only if it has met the stipulations in the agreement.
  • No additional recurring disclosures would be required for either a resource provider or a recipient.

The effective date would be the same as that for the new revenue guidance in ASC 606, Revenue from Contracts with Customers:

  • For public entities (public business entities, certain NFPs, and certain employee benefit plans): Annual periods, including interim periods therein, beginning after December 15, 2017
  • For all other entities: Annual periods beginning after December 15, 2018 and interim periods in annual periods beginning after December 15, 2019.

Early adoption would be permitted.

An entity would apply the forthcoming guidance using a modified transition approach, whereby revenue or expense not yet recognized prior to the year of adoption would be recognized in the year of adoption in accordance with the forthcoming guidance. Under this approach, an entity would not make a cumulative-effect adjustment to opening net assets. If an entity chooses this approach, it would also be required to make certain disclosures related to the reasons for, and the quantitative impact of, this change in accounting principle.

An entity would be permitted to apply the forthcoming guidance retrospectively.



SEC

Deadline extended on request for comment on Industry Guide 3

The SEC recently extended the comment period to July 7 for its Request for Comment on the disclosures required by Industry Guide 3, Statistical Disclosure by Bank Holding Companies.

For more information on the Request for Comment, please refer to the March 9, 2017 On the Horizon.

Small Entity Compliance Guides and new C&DI released

Small Entity Compliance Guides summarize and explain rules adopted by the SEC, but they are not a substitute for SEC rules. Only an SEC rule provides complete and definitive information regarding its requirements. 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.

The staff of the SEC’s Division of Trading and Markets recently issued a Small Entity Compliance Guide to summarize key provisions of the Commission’s Final Rule, Amendment to Securities Transaction Settlement Cycle, which shortened the standard settlement cycle, from three to two business days after the trade date, for most broker-dealer transactions.

The staff of the SEC’s Division of Corporation Finance (CorpFin) also recently issued a Small Entity Compliance Guide to summarize key provisions of Securities Act Rules 147 and 147A that were respectively amended and added by the Commission’s Final Rule, Exemptions to Facilitate Intrastate and Regional Securities Offerings.

In addition, CorpFin added Question 141.06 to its Securities Act Rules Compliance & Disclosure Interpretations (C&DIs) related to that Final Rule.

For more information on the Final Rule, refer to the November 3, 2016 On the Horizon.



AICPA issues proposal on reporting on ERISA financial statements

The AICPA’s Auditing Standards Board (ASB) issued an exposure draft, Proposed Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. The proposed SAS addresses auditor reporting for ERISA plan audits, including:

  • The form and content of the auditor’s report for an unmodified opinion
  • A new form of opinion when management provides an ERISA-permitted scope limitation
  • Reporting requirements on findings from procedures performed on specific plan provisions relating to the financial statements (either included in the auditor’s report on the ERISA plan financial statements or issued as a separate report)

The proposed SAS would apply to audits of single employer, multiple employer, and multiemployer plans subject to ERISA and would be effective for audits of financial statements for periods ending on or after December 15, 2018.

Comments on the proposed SAS are due by August 21, 2017.



CAQ and Audit Committee Collaboration update assessment tool

The Center for Audit Quality (CAQ), in partnership with the Audit Committee Collaboration, released an updated version of the External Auditor Assessment Tool. The tool can be used by audit committees or those charged with governance to assist in their evaluation of the external auditor, in the selection or recommendation for retention of an audit firm, and in the determination of external auditor compensation.

Updates to this version of the tool relate to coming changes in accounting rules and standards and other potential risk areas, including:

  • Revenue recognition, leasing, and credit losses standards, which take effect over the next few years
  • New and proposed PCAOB standards, including Form AP and proposed updates to the auditor’s reporting model

The tool contains sample questions designed to help audit committees in three specific areas:

  • Quality of services and sufficiency of resources provided by the auditor
  • Quality of communication and interaction with the auditor
  • Auditor independence, objectivity, and professional skepticism

The tool includes a sample form and rating scale, which can used to provide input on the external auditor, as well as a listing of additional resources beneficial to audit committees and those charged with governance. The tool also contains a detailed appendix highlighting relevant U.S. requirements and standards.



International Federation of Accountants

IAASB proposes revisions to standard on auditing estimates

The International Auditing and Assurance Standards Board (IAASB) has issued proposed International Standard (ISA) on Auditing 540 (Revised), Auditing Accounting Estimates and Related Disclosures. The proposed standard includes significant changes in how auditors evaluate accounting estimates and related disclosures, by requiring auditors to increase the focus on the risks of material misstatements arising from accounting estimates and to respond to those risks with more granular audit requirements.

The proposed standard

  • Enhances requirements for risk assessment procedures to include specific factors relating to accounting estimates, such as complexity, judgment, and estimation uncertainty
  • Sets a more detailed expectation for the auditor’s response to identified risks, including augmenting the auditor’s application of professional skepticism
  • Is scalable regardless of the size or sector of the business or audit firm

Comments on the proposed ISA are due by August 1, 2017.



© 2017 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.