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On The Horizon--FASB proposes amendments to recently issued standards

RFP
ContentsCurrent reporting issue        Timing of acquiree’s ASC 606 adoption for consolidated reporting  
 
FASB        ASU addresses SEC Staff Announcement made at the July 20 EITF meeting    
       Board proposes clarifying scope of ASC 842 and providing land easement transition
       expedient
       Proposals would amend financial asset and leasing standards  

SEC announces regulatory relief and assistance for hurricane victims AICPA issues audit risk alert on government auditing standards PCAOB issues supplement request for comment on use of other auditors IASB      September 2017 IFRIC update issued

Comment letter issued

Current reporting issue Timing of acquiree’s ASC 606 adoption for consolidated reporting Questions have arisen about when a public business entity acquirer of a nonpublic acquiree should present the acquiree’s results in accordance with ASC 606 in the consolidated financial statements, specifically when a public business entity acquirer adopts ASC 606 on January 1, 2018 and subsequently acquires the nonpublic acquiree in, for example, June 2018, before the acquiree is required to adopt ASC 606 in its stand-alone financial statements. In light of the SEC Staff Announcement discussed below, questions have arisen about whether the acquiree may continue to apply ASC 605 after the acquisition and whether the parent acquirer may simply consolidate and report the acquiree’s ASC 605 results with the parent’s other results under ASC 606 until January 1, 2019—the date the acquiree otherwise would have had to adopt ASC 606.

These questions stem from consideration of the impact of an SEC Staff Announcement made at the July 2017 EITF meeting (codified in ASU 2017-13, discussed below), which states, in part, that

     [T]he SEC Staff would not object to a public business entity that otherwise would not meet the      definition of a public business entity except for a requirement to include or the inclusion of its      financial statements or financial information in another entity’s filing with the SEC adopting      ASC Topic 606 for annual reporting periods beginning after December 15, 2018.

This announcement narrowly focuses on an entity being considered a public business entity solely because its separate financial statements or financial information must be included in another company’s SEC filing, and on whether the statements or information should reflect accounting standards effective for public business entities. A common example is an acquired business whose financial statements for period(s) prior to acquisition are required to be included in its acquirer’s Form 8-K.

In the example fact pattern discussed above, a public business entity that has adopted ASC 606 acquires in June 2018 a nonpublic business that has not yet adopted ASC 606. In light of the announcement, if the acquired business’s historic financial statements reflecting ASC 605 for periods prior to acquisition are included in an SEC filing by the acquirer, those financial statements would not have to be revised to reflect the adoption of ASC 606, even though the public business entity effective date of January 1, 2018 has passed.

The announcement, however, does not allow the acquirer to continue applying ASC 605 to the acquiree’s revenue transactions in ongoing consolidated financial reporting after acquisition. That is, upon acquisition, the acquirer cannot delay the acquiree’s adoption of ASC 606 in consolidated financial statements. Therefore, the acquirer in the fact pattern must apply ASC 606 to the acquiree’s revenue transactions from the date of the acquisition forward for the purposes of consolidated financial statements.



FASBASU addresses SEC Staff Announcement made at the July 20 EITF meetingThe Board recently issued ASU 2017-13, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which amends the Codification by
  • Adding SEC paragraphs to ASC 606, Revenue from Contracts with Customers, and to ASC 842, Leases, pursuant to the SEC Staff Announcement, “Transition Related to Accounting Standards Updates No. 2014-09 and 2016-02,” which was made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting
  • Deleting SEC paragraphs related to a previous SEC Staff Announcement, “Accounting for Management Fees Based on a Formula,” from ASC 605-20, Revenue Recognition: Services, pursuant to the initial adoption of ASC 606
  • Deleting SEC paragraphs related to a previous SEC Staff Announcement and to three previous SEC Observer Comments from ASC 840-30, Leases: Capital Leases, and from ASC 840-40, Leases: Sale-Leaseback Transactions, pursuant to the initial adoption of ASC 842
  • Moving SEC paragraphs related to a previous SEC Observer Comment, “Effect of a Change in Tax Law or Rates on Leverage Leases,” from ASC 840 to ASC 842, pursuant to the initial adoption of ASC 842

See the July 27 On the Horizon for discussion of the SEC Staff Announcement made at the July 20 EITF meeting.
The amendments in the ASU have the same effective date and transition requirements as those for either ASC 606 or ASC 842, as applicable. Entities that have early adopted either ASC 606 or ASC 842 should apply the related amendments upon issuance of ASU 2017-13.

Board proposes clarifying scope of ASC 842 and providing land easement transition expedientThe FASB has issued a proposed ASU, Land Easement Practical Expedient for Transition to Topic 842, to clarify the application of the new guidance in ASC 842, Leases, to land easements. The Board issued the proposal in response to stakeholders’ concerns about the cost, complexity, and limited benefits of the requirement to evaluate all existing land easements in connection with the adoption of ASC 842.

Land easements, or rights of way, are the right to use, access, or cross another entity’s land for a specified purpose. In accounting for land easements, some entities currently apply the existing guidance in ASC 840, Leases, while others apply the existing guidance in either ASC 350, Intangibles – Goodwill and Other, or ASC 360, Property, Plant and Equipment.

To address the current diversity in the accounting guidance for land easements, the amendments in the proposal would require a land easement to be assessed under ASC 842 to determine whether the arrangement is or contains a lease.

The proposal includes a practical transition expedient for land easements existing on, or expiring before, the effective date of ASC 842 that were not previously accounted for under ASC 840. Under this practical expedient, an entity could elect not to apply ASC 842 to these existing or expired land easements; however, if it makes this election, the entity would be required to apply the practical expedient to all of these existing or expired land easements.

After it adopts ASC 842, the entity would continue to apply its current policy for accounting for these existing or expired land easements. An entity would apply ASC 842 prospectively to all new or modified land easements to determine whether the arrangement should be accounted for as a lease.

The proposal would also amend an example in the implementation and illustration guidance of ASC 350-30, General Intangibles Other Than Goodwill, to clarify that an entity should determine whether land easements are leases under ASC 842 before it applies the guidance in the example.

The effective date and transition requirements for the proposed amendments would be the same as those for ASC 842.  

Comments on the proposal are due October 25.

Proposals would amend financial asset and leasing standardsThe FASB has issued a proposed ASU, Technical Corrections and Improvements to Recently Issued Standards: I. Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and II. Accounting Standards Update No. 2016-02, Leases (Topic 842), to address items brought to the Board’s attention by stakeholders after these ASUs were issued. The proposed amendments in each of the proposals are summarized below.

Comments on both of the proposals are due November 13.

Recognition and measurement of financial assets and financial liabilities

The proposed amendments would clarify the following aspects of the guidance issued in ASU 2016-01:
  • Equity securities without a readily determinable fair value – discontinuation: When an entity applies the new measurement alternative in ASC 321-10-35-2, Investments – Equity Securities: Subsequent Measurement, to an equity security, it may elect to change its measurement approach for this equity security to a fair value method under ASC 820, Fair Value Measurement; however, if an entity makes this election, it would be required to apply this election to all other securities of the same type.
  • Equity securities without a readily determinable fair value – adjustments: Adjustments made to an equity security under the new measurement alternative should reflect the fair value of the security as of the date when the observable transaction for a similar security took place.
  • Equity securities without a readily determinable fair value – forward contracts and purchased options: An entity would be required to remeasure the entire value of forward contracts and purchased options when observable transactions occur on the underlying equity securities.
  • Equity securities without a readily determinable fair value – transition: An entity would apply the transition approach in ASU 2016-01 for equity securities without a readily determinable fair value only to those equity securities for which the new measurement alternative has been applied.
  • Fair value option liabilities – presentation: When an entity elects the fair value option to measure a financial liability, the guidance in ASC 825-10-45-5, Financial Instruments: Other Presentation Matters, should be applied, regardless of whether the fair value option was elected under either ASC 825-10 or ASC 815-15, Derivatives and Hedging: Embedded Derivatives.
  • Fair value option liabilities – denominated in a foreign currency: For financial liabilities for which the fair value option is elected, the change in fair value that relates to the instrument-specific credit risk should first be measured in the currency in which the instrument is denominated. An entity would then remeasure both of the components of the change in fair value using the entity’s functional currency by applying end-of-period spot rates.

If an entity has already adopted the guidance on the presentation change related to fair value option liabilities in ASU 2016-01, the amendments in the proposal that apply to fair value option liabilities would be effective upon issuance of a final ASU. The effective date and transition requirements for the remaining proposed amendments would be the same as those for ASU 2016-01.

Leases

The amendments in the proposal address 16 issues that would affect narrow aspects of the guidance issued in ASU 2016-02. Several of the proposed amendments clarify how an entity should apply the guidance in ASU 2016-02 to certain aspects of leasing arrangements. The other proposed amendments primarily include technical corrections that address inconsistent language in the ASU.  

For entities that have not yet adopted the guidance in ASU 2016-02, the effective date and transition requirements for the proposed amendments would be the same as those for ASU 2016-02. For entities that have already adopted ASU 2016-02, the proposed amendments would be effective upon issuance of a final ASU, and the transition requirements would be the same as those in ASU 2016-02.



SEC announces regulatory relief and assistance for hurricane victimsOn September 28, the SEC issued an Order to provide regulatory relief and assistance to a broad class of companies and others affected by Hurricanes Harvey, Irma, and Maria (collectively, the Hurricanes). The Order conditionally exempts affected companies and others from certain requirements of the federal securities laws for periods of time following the Hurricanes related to Exchange Act filing requirements; proxy and information statement delivery requirements; Investment Company Act of 1940 delivery requirements for annual and semi-annual reports of registered investment companies; transfer agent compliance with certain Exchange Act sections and rules; Exchange Act filing requirements for registered municipal advisors’ annual update to Form MA; and certain limited auditor independence requirements.

Those affected by the Hurricanes that require additional or different assistance in their efforts to comply with the requirements of the federal securities laws are encouraged to contact the Commission staff directly for individual relief or interpretive guidance.

Exchange Act filing deadlines

For registrants subject to the reporting requirements of Exchange Act Section 13(a) or 15(d) that are affected by the Hurricanes, deadlines for materials filed or furnished under certain sections and rules of the Exchange Act have been extended, as follows:
  • Hurricane Harvey: For the period from and including August 25, 2017 to October 6, 2017, all reports, schedules, or forms must be filed on or before October 10, 2017.
  • Hurricane Irma: For the period from and including September 6, 2017 to October 18, 2017, all reports, schedules, or forms must be filed on or before October 19, 2017.
  • Hurricane Maria: For the period from and including September 20, 2017 to November 1, 2017, all reports, schedules, or forms must be filed on or before November 2, 2017.

Each such report, schedule, or form must be filed on or before the specified date; include disclosure of reliance on the Order; and specify the reasons why, in good faith, the filing is delayed.

Auditor independence

In addition, the SEC provided a limited exemption from the auditor independence requirements of Exchange Act Section 10A(g)(1) and Regulation S-X Rule 2-01(c)(4)(i) in connection with bookkeeping or other services relating to the accounting records of an audit client. The Order allows an auditor to assist its audit clients in the reconstruction of previously existing accounting records that were lost or destroyed as a result of the Hurricanes, provided that such services are pre-approved by the Audit Committee and cease as soon as
  • The lost or destroyed records are reconstructed;
  • The financial systems are fully operational; and
  • The client effects an orderly and efficient transition to management or other service provider.

Other reporting requirements

In connection with the relief discussed above, the Commission announced positions that its staff will take under the Exchange Act, the Securities Act, and the Investment Advisers Act for purposes of determining whether a reporting company has satisfied certain reporting requirements. Among those positions are the following:
  • For purposes of eligibility to use Forms S-3 and S-8, well-known seasoned issuer status, and eligibility requirements of Rule 144(c), a company relying on the Order will be considered current and timely in its Exchange Act reports during the applicable relief period if it was current and timely as of the first day of the applicable relief period. After the applicable relief period, a company will continue to be considered current and timely if it files any required report for which it relies on the Order on or before the respective dates noted above.
  • Companies that receive an extension pursuant to the Order on filing quarterly or annual Exchange Act reports will be considered to have due dates consistent with the respective dates noted above, and companies are permitted to rely on Exchange Act Rule 12b-25 when they are unable to file the required reports on or before the applicable due date.
In addition, the Commission staff will take the following positions when certain conditions and timelines are met:
  •  A registered open-end investment company and a registered unit investment trust will have satisfied its prospectus delivery requirements.
  • A registered investment adviser will have satisfied Form ADV filing requirements.
  • A registered investment adviser will have satisfied the requirement to deliver written disclosure statements to its advisory client.

Regulation Crowdfunding and Regulation A relief

The SEC has also adopted Interim Final Temporary Rule, Regulation Crowdfunding and Regulation A Relief and Assistance for Victims of Hurricane Harvey, Hurricane Irma, and Hurricane Maria. The Rule specifies the time period for relief for specified reports and forms due pursuant to Regulation Crowdfunding and Regulation A for companies affected by the Hurricanes, provided that such report or form is filed on or before the specified date noted below, includes disclosure that the company is relying on the Interim Final Temporary Rule, and includes the reasons why, in good faith, the filing is delayed. The time periods for relief are as follows:
  • Hurricane Harvey: For the period from and including August 25, 2017 to and including October 26, 2017, the report or form must be filed on or before October 27, 2017.
  • Hurricane Irma: For the period from and including September 6, 2017 to and including November 7, 2017, the report or form must be filed on or before November 8, 2017.
  • Hurricane Maria: For the period from and including September 20, 2017 to and including November 21, 2017, the report or form must be filed on or before November 22, 2017.



AICPA issues audit risk alert on government auditing standardsThe AICPA issued Audit Risk Alert, Government Auditing Standards and Single Audit Developments – 2017/18. The alert provides an overview of recent industry, technical, regulatory, and professional developments as well as future and emerging issues for auditors to consider.



PCAOB issues supplement request for comment on use of other auditorsThe PCAOB issued a supplemental request for comment on its April 12, 2016 “Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors.” The supplemental request for comment seeks views on certain revisions to the proposed amendments and proposed standard being considered for adoption in response to stakeholder comments requesting clarification of some provisions and modifications to others. The Board is also reopening the comment period for additional comments on any other aspect of the proposal.

Comments are due by November 15.



IASBSeptember 2017 IFRIC update issuedThe IASB’s IFRS Interpretations Committee (IFRIC) has issued the September 2017 Update summarizing the decisions reached by the Committee during its September 12 public meeting.

Decisions on an IFRIC Interpretation become final only after the Committee has formally voted on the Interpretation, which is then sent to the IASB for ratification.



Comment letter issuedOn September 26, the firm issued a comment letter in response to the AICPA’s exposure drafts, Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential and Application of the Disclosure Framework for the Valuation of Financial Instruments and the CVFI Credential.



© 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.