On The Horizon: GASB issues new leasing guidance

Contents FASB    Proposed ASUs would eliminate certain irrelevant and outdated guidance
   Actions from June 28 meeting posted

SEC expands non-public review of certain draft registration statements to all issuers AICPA    New framework proposed for valuation of financial instruments
   FinREC releases revenue recognition implementation working drafts

PCAOB issues Staff Inspection Brief on 2016 broker-dealer inspections GASB issues Statement 87 on lease accounting CAQ issues highlights from its March SEC Regulations Committee meeting Comment letter issued

FASB Proposed ASUs would eliminate certain irrelevant and outdated guidance The Board issued two proposed ASUs, Elimination of Topic 995 and Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans, which are intended to supersede existing guidance that is either no longer relevant or is outdated.

The first proposal would supersede the guidance in ASC 995, U.S. Steamship Entities, on unrecognized deferred tax liabilities related to deposits in statutory reserves that were made on or before 1992, which have now reached the 25-year limit for deferral. Instead, entities would be required to recognize any remaining amounts of these unrecognized deferred tax liabilities using the guidance in ASC 740, Income Taxes. Entities would also be required to disclose the type of temporary difference for which a deferred tax liability was not previously recognized.

The second proposal would eliminate the transition guidance in ASC 942-740, Financial Services – Depository and Lending: Income Taxes, for bad debt reserves of certain financial institutions that arose after December 31, 1987. It would also delete the guidance in ASC 942-740 related to the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges.

The proposed ASUs would be effective upon issuance, and the effective dates will be determined by the Board after it considers stakeholder feedback on the proposals.

Comments on the proposals are due August 28.

Actions from June 28 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on June 28 to discuss comments received on the proposed ASU, Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent), but no decisions were made.

The Board directed the staff to continue its additional outreach and research so that the results of these efforts, along with an analysis of issues identified, can be redeliberated at a future meeting.

SEC expands non-public review of certain draft registration statements to all issuers On June 29, the SEC announced that beginning on July 10, the staff of the Division of Corporation Finance (CorpFin) will accept voluntary draft registration statement submissions for non-public review from all issuers relating to

  • Initial public offerings (IPOs) and initial registrations under the Securities Act
  • Initial registration of a class of securities under Section 12(b) of the Exchange Act
  • Initial submissions related to offerings within one year of an IPO or Exchange Act Section 12(b) registration
  • Foreign private issuers

The expanded non-public review process to all issuers is part of CorpFin’s ongoing efforts to facilitate capital formation.

Prior to these changes, only an emerging growth company (EGC) had the benefit of submitting a draft registration statement relating to an IPO for confidential review. The expanded review procedures do not limit the process by which an EGC submits draft registration statements for confidential review. Consistent with the current EGC confidential review process, draft registration statements are expected to be substantially complete; but, similar to the relief provided to EGCs under the Fixing America’s Surface Transportation (FAST) Act, issuers may omit certain financial information from a draft registration statement submitted for non-public review that they reasonably believe will not be required at the time the registration statement is publicly filed. The registration statement must be publicly filed 15 days in advance of a road show in the case of initial offerings or, in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement.

On June 30, CorpFin released FAQs, Voluntary Submission of Draft Registration Statements to address preliminary questions about these expanded procedures.

AICPA New framework proposed for valuation of financial instruments The AICPA issued two exposure drafts proposing a new disclosure framework for the valuation of financial instruments and their underlying components. The framework is intended to bring clarity, consistency, and transparency to valuations by defining the level of documentation necessary to demonstrate the valuation was performed. The guidance relies on the principals of independence, objectivity, and consistency.

Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (CVFI) Credential provides guidance on how to explain the characteristics of financial instruments and discloses how the securities have been valued in a way that is understandable, consistent, and transparent. It establishes the parameters of documentation requirements, sets the definition of terms, and includes a list of accounting, audit, and valuation standards and references to applicable technical literature.

Application of the Disclosure Framework for the Valuation of Financial Instruments
explains how the framework would be applied in areas where valuations are either misapplied or insufficiently supported or documented for financial reporting. It identifies the most common components where greater consistency in the application of the approaches and methodology is needed in order to provide a conclusion on value. It also provides support for matters that require professional judgment, as well as documentation of inputs and results.

Comments on the proposals are due by September 26.

FinREC releases revenue recognition implementation working drafts The AICPA Financial Reporting Executive Committee (FinREC) released working drafts of four revenue recognition implementation issues for comment. This latest set of working drafts discusses considerations about, and provides illustrative examples for, airline, gaming, health care, and telecommunications entities implementing the new revenue standard.

These implementation issues will be added to the AICPA audit and accounting guide on revenue recognition after the review of public comments and finalization of the issues.

The comment period for these working drafts ends September 1.

PCAOB issues Staff Inspection Brief on 2016 broker-dealer inspections The PCAOB issued a Staff Inspection Brief, “Preview of Observations from 2016 Inspections of Auditors of Brokers and Dealers,” previewing the results of the 2016 inspection of auditors of brokers and dealers. Inspection staff continued to observe the following;

  • Impaired auditor independence
  • Deficiencies in financial statement audit areas, including revenue recognition, financial statement presentation and disclosures, and assessment of risks of material misstatements due to fraud
  • Insufficient assessment of relationships and transactions with related parties
  • Deficiencies in audit procedures on the supporting schedules to the financial statements, procedures for attestation engagements (examination of compliance reports and review of exemption reports), and engagement quality reviews

PCAOB staff inspected 75 firms in 2016 covering 115 audit and attestation engagements for fiscal years that ended during the period June 30, 2015 through June 30, 2016. Observations will be detailed in the next “Annual Report on the Interim Inspection Program Related to the Audits of Brokers and Dealers,” scheduled to be issued in August.

GASB issues Statement 87 on lease accounting The GASB issued Statement 87, Leases, which provides accounting and reporting guidance for lease contracts involving nonfinancial assets, such as vehicles, equipment, and buildings. The new guidance will require state and local government lessees and lessors to account for and report most leases based on the principle that leases are financings of the right to use an underlying asset.

The new guidance will not apply to nonexchange transactions, including donated assets, or to leases of intangible assets, such as patents and software licenses. Certain types of financing arrangements are also excluded from the scope of the new guidance, such as short-term leases (12 months or less), financed purchases, and supply contracts.

Under existing guidance, leases are classified as either capital or operating depending on whether the lease meets one of four tests, which often results in reporting lease transactions differently than similar nonlease transactions.

The key provisions of Statement 87 are summarized below.

Accounting by a lessee Under the new guidance, a lessee should apply the following guidance for leases other than short-term leases and arrangements where the lessor transfers ownership of the underlying asset to the lessee:

  • Recognize a lease liability and a lease asset at the commencement of the lease term.
  • Reduce the lease liability as payments are made and recognize an outflow of resources (interest) on the liability.
  • Amortize the lease asset in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset.
  • Disclose certain information related to leasing arrangements in the notes to the financial statements, including a description of the arrangements, the amount of lease assets recognized, and a schedule of future lease payments.

Accounting by a lessor Under Statement 87, a lessor should apply the following guidance except for leases involving assets held as investments or certain regulated assets, short-term leases, or arrangements where the lessor transfers ownership of the underlying asset to the lessee:

  • Recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term. However, the lessor should not derecognize the asset underlying the lease, but instead continue to apply other applicable guidance to the underlying asset.
  • Recognize interest revenue on the lease receivable and an inflow of resources (revenue), by reducing the deferred inflow of resources that was recognized at lease commencement in a systematic and rational manner over the lease term.
  • Disclose certain information related to its leasing arrangements in the notes to the financial statements, including a description of the arrangements and the total amount of inflows of resources recognized from leases.
Other provisions Statement 87 also provides new guidance in several areas that lessees and lessors might encounter when they are a party to arrangements that are a lease or that possess some of the characteristics of a lease, including the accounting for

  • When a lessee or lessor should remeasure the lease liability or the lease receivable, respectively
  • The presence of certain impairment indicators (which are described in other guidance) for a lease asset
  • Initial direct costs incurred by a lessee and by a lessor
  • The discount rate that a lessee and lessor should use in measuring (or remeasuring) the present value of the lease liability and lease receivable, respectively
  • Lease incentives by the lessee and by the lessor
  • Contracts that contain multiple components or a lease that contains more than one underlying asset
  • Lease modifications and terminations
  • Subleases
  • Sale-leaseback and lease-leaseback transactions
  • Intra-entity leases
  • Leases between related parties

Effective date and transition Statement 87 is effective for reporting periods beginning after December 15, 2019. Earlier application is encouraged.

State and local governments should apply the provisions of the new guidance retroactively by restating prior periods. If restatement is not practicable, the cumulative effect, if any, of applying Statement 87 should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest period restated.

Statement 87 also includes transition guidance related to how a state and local government should recognize and measure leases at the beginning of the period of adoption.

CAQ issues highlights from its March SEC Regulations Committee meeting The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the SEC staff to discuss emerging financial reporting issues relating to SEC rules and regulations. The highlights summarize matters discussed at the meetings and do not represent official positions of the AICPA or the CAQ, nor are they authoritative positions or interpretations issued by the SEC or its staff.

The CAQ recently issued highlights of the March 23 joint meeting between its SEC Regulations Committee and the SEC staff. Discussions at the meeting included the following topics:

  • Observations on current trends in SAB 74 disclosures about newly issued accounting standards (for example, revenue recognition, leases, and credit losses). The SEC staff is monitoring these disclosures and will comment on those appearing deficient.
  • Observations by the SEC staff on non-GAAP financial measure disclosures and the improvement they have noted in compliance with their interpretive guidance
  • Confirmation by the SEC staff that the issuance of ASU 2017-01, Clarifying the Definition of a Business, does not affect the definition of a business pursuant to Regulation S-X, Article 11
  • Effects of accounting changes by a successor entity on the predecessor-period financial statements when a different basis of accounting is used. The specific scenario discussed was the adoption of a new accounting principle by a successor entity that is using the full retrospective transition method and whether the successor entity would be required to apply the new accounting principle to the predecessor entity’s financial statements. This matter continues to be under consideration by the SEC staff.

The SEC staff also indicated that electronic submission of interpretive requests, waiver requests, and similar pre-filing correspondence (via an email to CorpFin’s Office of Chief Accountant at is sufficient and that supplemental submission of paper documents is not necessary.

Comment letter issued On July 6, the firm issued a comment letter in response to the U.S. Government Accountability Office in response to the 2017 Exposure Draft of Government Auditing Standards.

© 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.