On The Horizon: Remeasurement of foreign currency–denominated debt issuance costs

Contents Current reporting issue     Remeasurement of foreign currency–denominated debt issuance costs

FASB     Highlights from November 8 meeting posted

PCAOB issues Staff Inspection Brief on 2016 inspection results International Federation of Accountants     IPSASB amends reporting under cash basis of accounting

Current reporting issue Remeasurement of foreign currency–denominated debt issuance costs Questions have arisen in practice regarding the remeasurement of foreign currency–denominated debt issuance costs. In particular, stakeholders have questioned whether debt issuance costs denominated in a foreign currency should be remeasured into the functional currency using either historical exchange rates or current exchange rates.

Prior to adoption of the guidance in ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, an entity generally remeasured foreign-currency-denominated debt issuance costs into its functional currency using historical exchange rates because (1) debt issuance costs were presented in the balance sheet as a deferred charge under ASC 835-30, Interest: Imputation of Interest, and (2) a deferred charge is treated as a nonmonetary balance-sheet item that is remeasured using historical exchange rates under ASC 830-10-45-18(i), Foreign Currency Matters.

The guidance in ASU 2015-03 requires debt issuance costs to be presented in the same manner as debt discounts in the balance sheet—that is, as a deduction from the related debt liability rather than as a deferred charge. Therefore, the remeasurement of the net carrying amount of the debt liability into the reporting entity’s functional currency will also reflect any amounts related to debt issuance costs, along with debt discounts (or debt premiums). Under ASC 830-10-45-17, the net carrying amount of a monetary debt liability is remeasured into the entity’s functional currency using current exchange rates.

Therefore, an entity that previously presented debt issuance costs as a deferred charge and treated these costs as a nonmonetary item under ASC 830-10 before adopting the guidance in ASU 2015-03 should (1) retrospectively adjust, upon transition to the guidance in ASU 2015-03, its remeasurement of debt issuance costs under ASC 830-10 in accordance with ASC 835-30-65-1(c), and (2) subsequently remeasure its unamortized debt issuance costs as part of the net carrying amount of the related debt liability as of each subsequent reporting date using current exchange rates.

FASB Highlights from November 8 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on November 8 to discuss issues related to the definition of “materiality” in the FASB Conceptual Framework and in ASC 235, Notes to Financial Statements, and made the following tentative decisions:
  • To amend the current definition of materiality in Chapter 3, Qualitative Characteristics of Useful Financial Information, of Concepts Statement 8, Conceptual Framework for Financial Reporting, using language similar to that used in Concepts Statement 2, Qualitative Characteristics of Accounting Information, which has been superseded
  • To remove the reference to materiality as a legal term both in Concepts Statement 8 and in ASC 235
  • To exclude language in Concepts Statement 8 that this new definition of materiality may change

The staff will incorporate these and other changes in drafting Chapter 3 and Chapter 8, Notes to Financial Statements, of Concepts Statement 8.

The Board will redeliberate the definition of materiality within the context of the Codification at a future meeting.

PCAOB issues Staff Inspection Brief on 2016 inspection results The PCAOB issued Staff Inspection Brief, “Preview of Observations from 2016 Inspections of Auditors of Issuers,” providing a preview of observations from PCAOB inspections of issuer audits during the 2016 inspection cycle. Observations include three recurring areas where deficiencies were most frequently identified:
  • Assessing and responding to risks of material misstatements
  • Auditing internal control over financial reporting
  • Auditing accounting estimates, including fair value measurements
Other areas of focus include:
  • Areas affected by certain economic risk, such as mergers and acquisitions, the search for higher-yielding investment returns, and fluctuations in oil and natural gas prices and their varying effects on the financial reporting risks of different industries
  • Certain financial reporting areas, including debt, allowance for loan losses, inventory, business combinations, revenue, and impairment of long-lived assets
  • Multinational audits
  • Certain aspects of a firm’s system of quality control

International Federation of Accountants IPSASB amends reporting under cash basis of accounting IFAC’s International Public Sector Accounting Standards Board (IPSASB) issued a revised International Public Sector Accounting Standard (IPSAS), Amendments to Financial Reporting under the Cash Basis of Accounting. The new standard amends the existing 2007 guidance, Financial Reporting under the Cash Basis of Accounting, in the areas of consolidation, disclosure of certain assistance received and payments made by third parties on the entity’s behalf, and other matters, including some “housekeeping” type amendments.

Part 1 of the new standard includes requirements that an entity must adopt if it wishes to assert that its financial statements comply with this IPSAS. Part 2 includes certain disclosures that an entity is encouraged to make.

The IPSAS is effective January 1, 2019, with earlier application encouraged.

© 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.