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On The Horizon -- Proposed ASU targets related party VIE guidance

RFP
Contents

FASB    
     Proposed ASU targets related party VIE guidance    
     Board meets with TRG for credit losses    
     Tentative decisions posted from recent Board meetings
          June 14 meeting summary
          June 21 meeting summary
CAQ issues tool to assist audit committee with Form AP disclosures    
AICPA updates Revenue Recognition guide    
IFAC’s IPSASB issues Q&A on materiality





Proposed ASU targets related party VIE guidance

The Board issued the proposed ASU, Targeted Improvements to Related Party Guidance for Variable Interest Entities, which is intended to improve financial reporting related to consolidation of variable interest entities (VIEs). The proposal is being issued in response to stakeholders’ observations that ASC 810, Consolidation, could be improved when an entity applies the VIE guidance to private entities under common control and to other situations where related parties are involved. The main provisions of the proposal are summarized below.

Private company accounting alternative

Under the existing guidance codified from ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council), a reporting entity that is a private company can elect to apply an accounting alternative exempting it from being required to apply the VIE guidance to certain common control leasing arrangements. Under the proposed amendments, a reporting entity that is a private company could also elect an accounting alternative to not be required to apply VIE guidance to all legal entities under common control if both the parent and the legal entity being evaluated for consideration are not public business entities.

This alternative accounting policy election would apply to all of the current and future legal entities under common control, so an entity would not be permitted to apply this election to select common control arrangements. If an entity elects the alternative accounting policy, it would still be required to follow other consolidation guidance (such as the voting interest entity guidance) unless another scope exception applies.

Further, if an entity elects the alternative accounting policy, it would be required to provide certain disclosures about its involvement with and its exposure to the legal entity that is under common control.

Decision-making fees

Under the existing guidance related to determining whether fees paid to decision makers and to service providers are variable interests, indirect interests held through related parties in common control arrangements are considered as a direct interest in their entirety. Under the proposal, these indirect interests would only be considered on a proportional basis, consistent with how indirect interests held through related parties not under common control are considered when determining whether a reporting entity must consolidate a VIE.

Under the proposal, if, for example, a decision maker or a service provider owns a 20% interest in a related party under common control and that related party owns a 40% interest in the legal entity being evaluated, the direct interest in the VIE held through the related party under common control would be considered only an 8% direct interest (instead of a 40% direct interest under the existing guidance) for determining whether its fees are variable interests.

VIE related party guidance

Existing guidance requires that when power is shared among related parties or when related parties under common control, as a group, have the characteristics of a controlling financial interest (but no reporting entity individually has a controlling financial interest), the party within the related party group that is most closely associated with the VIE is the primary beneficiary of the VIE.

The proposal would instead require that if substantially all of the VIE’s activities either involve or are conducted on behalf of one party within the related party group, that party would be the primary beneficiary of the VIE. However, when substantially all of the activities of the VIE do not involve and are not performed on behalf of any single entity in the related party group, the proposal would require the reporting entity to consider whether it has a controlling financial interest in the VIE by considering certain factors (none of which are individually determinative) that indicate whether the reporting entity should attribute decision making to itself.

The proposed guidance also states that after considering those factors, situations may exist in which no single party in a shared power arrangement or within a related party group may conclude that it has a controlling financial interest in the VIE. When related parties under common control, as a group, have a controlling financial interest in a VIE, the parent entity would consolidate the VIE unless a scope exception applies, regardless of the conclusions reached by the individual related parties that are under the parent’s control.

Effective date, transition and comment period

The Board will set the effective date for the proposed amendments when it considers feedback on the proposal. Early adoption would be permitted.

Entities that have not adopted the amendments in ASU 2015-02, Amendments to the Consolidation Analysis, would be required to adopt the amendments in the proposal at the same time they adopt ASU 2015-02, and would apply the same transition method elected for ASU 2015-02.

Entities that have already adopted ASU 2015-02 would be required to apply the amendments in the proposal retrospectively by restating all prior periods presented.

Comments on the proposal are due Sept. 5.




Board meets with TRG for credit losses

The Board met with the Transition Resource Group for Credit Losses (TRG) on June 12 to discuss implementation issues related to the FASB’s standard on credit losses, ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

The TRG discussed the following topics:


  • Discounting expected cash flows at the effective interest rate
  • Scope of purchased financial assets with credit deterioration (PCD assets) for beneficial interests
  • Transition guidance for PCD assets
  • Accounting for troubled debt restructurings
  • Determining the estimated life of a credit card receivable

The meeting materials are currently available on the FASB’s website. Future meetings will be announced on the FASB’s website.





Tentative decisions posted from recent Board meetings

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

June 14 meeting summary

The FASB met on June 14 to discuss the results of staff outreach to stakeholders on a potential new project related to distinguishing liabilities from equity (including convertible debt). The Board made no decisions and directed the staff to perform further research on this potential new project.

June 21 meeting summary

The FASB met on June 21 to discuss the following topics:

  • Leases implementation
  • Financial instrument recognition and measurement implementation
  • Consolidation reorganization and improvements
  • Revenue recognition implementation
  • Inventory disclosures

The Board’s actions related to these topics are summarized below.

Leases implementation

The Board tentatively decided to make certain proposed technical corrections and improvements to the amendments in ASU 2016-02, Leases.

For entities that have early adopted ASU 2016-02, these proposed amendments would be effective upon issuance of a forthcoming ASU, and for entities that have not early adopted, the effective date and transition requirements for these proposed amendments would be the same as the effective date and transition requirements in ASU 2016-02.

The Board directed the staff to draft a joint proposed ASU, for vote by written ballot, that would include the proposed technical corrections and improvements to ASU 2016-02, along with other technical corrections and improvements (see below) to ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The proposed ASU would have a comment period of 45 days.

Financial instrument recognition and measurement implementation

The Board tentatively decided to also make certain proposed technical corrections and improvements to ASU 2016-01.
For entities that have early adopted the guidance in ASU 2016-01 on the presentation change related to liabilities for which the fair value option has been elected, the proposed amendments to ASU 2016-01 would be effective upon issuance of a forthcoming ASU, and would follow the transition guidance in ASU 2016-01. For all of the other proposed amendments, the effective date and transition requirements would be the same as the effective date and transition requirements in ASU 2016-01.

The Board directed the staff to draft a joint proposed ASU, as discussed above.

Consolidation reorganization and improvements

The Board discussed comments received from external reviewers on a draft proposed ASU on the reorganization of consolidation guidance. The Board affirmed its previous tentative decision related to transition requirements and tentatively decided that the comment period for a forthcoming proposed ASU would be 75 days.

The Board directed the staff to draft a proposed ASU for vote by written ballot.

Revenue recognition implementation

The Board discussed an implementation question related to the adoption of ASU 2014-09, Revenue from Contracts with Customers, and ASU 2016-02, but made no decisions.

However, the Board clarified that it did not intend for an entity to revisit the allocation of contract consideration to lease components that are within the scope of ASC 840, Leases, when adopting ASU 2014-09. The Board tentatively decided that no further standard-setting was needed and directed the staff to include the meeting minutes on the FASB’s revenue recognition webpage.

Inventory disclosures

The Board discussed comments received on the proposed ASU, Changes to the Disclosure Requirements for Inventory, but made no decisions.

The Board directed the staff to:

  • Conduct additional outreach and research on the proposed disclosure requirements related to changes in inventory balances
  • Consider (1) the application of those proposed disclosures to entities within certain industries, and (2) the needs of financial statement users in those industries
  • Present a plan for redeliberations on both the proposed ASU and on other disclosure framework projects



CAQ issues tool to assist audit committee with Form AP disclosures

The Center for Audit Quality (CAQ) issued a tool, “Form AP – Auditor Reporting of Certain Audit Participants: A Tool for Audit Committees,” to assist audit committees in their understanding of the new PCAOB auditor disclosure requirements regarding audit participants. The tool can assist audit committees in their discussions on the role of audit participants with the engagement partner and company management and help audit committee members anticipate potential questions that may arise as a result of the disclosure requirements. The tool also provides a summary of Form AP disclosure requirements and suggested questions regarding disclosure of the engagement partner and participation of other accounting firms.




AICPA updates Revenue Recognition guide

The AICPA issued an updated version of their “Audit and Accounting Guide on Revenue Recognition.” This edition adds implementation issues for the following industries:

  • Airlines (Chapter 10)
  • Engineering and Construction Contractors (Chapter 11)
  • Telecommunication Entities (Chapter 13)

Additional implementation issues are also included in the following chapters:

  • Chapter 5, Brokers and Dealers in Securities
  • Chapter 6, Gaming Entities
  • Chapter 7, Health Care Entities
  • Chapter 9, Software Entities



IFAC’s IPSASB issues Q&A on materiality

IFAC’s International Public Sector Accounting Standards Board (IPSASB) released a Questions and Answers (Q&A) publication to highlight the IPSASB provisions related to the application of the concept of materiality to the preparation of financial statements.

The Q&A publication, which accompanied a recent IPSASB staff podcast summarizing the IPSASB accounting requirements on materiality, is a non-authoritative document.




© 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.