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On the Horizon: FASB deliberates leasing implementation issues

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Contents FASB posts highlights from March 28 meeting SEC staff updates FAQs on IFRS Taxonomy IASB       Revisions issued to Conceptual Framework
      Board proposes amendments to IAS 8 for public comment

Comment letter issued

FASB posts highlights from March 28 meeting All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on March 28 to discuss the following matters:

  • Targeted improvements to the new leasing guidance
  • Implementation activities related to the new hedging guidance
  • Prioritization of potential new agenda projects
  • Disaggregation of performance information

These discussions are summarized below.

Targeted improvements to ASC 842 The Board discussed feedback received on the proposed practical expedient related to the separation and allocation requirements of lease and nonlease components for lessors included in the proposed ASU, Leases (Topic 842): Targeted Improvements, along with other implementation issues arising from ASU 2016-02, Leases.

Under the proposed practical expedient, a lessor would be permitted to choose, by class of underlying asset, not to separate nonlease components from lease components, and instead to account for each separate lease component and related nonlease component as a single lease component, if both of the following conditions are met:

  • The timing and pattern of revenue recognition for the lease component and the nonlease component associated with that lease component are the same (referred to as Criterion A).
  • The combined single lease component is classified as an operating lease under ASC 842 (referred to as Criterion B).

The Board made the following tentative decisions related to the proposed practical expedient:

  • To amend Criterion A to replace the term revenue recognition with the term transfer
  • To amend Criterion B to require the lease component (instead of the combined single lease component), if accounted for separately, to be classified as an operating lease under ASC 842
  • To allow a lessor to account for the combined component of an arrangement qualifying for the practical expedient as a single performance obligation under ASC 606, Revenue from Contracts with Customers, when the nonlease component(s) associated with the lease component is the predominant component of the combined component. Otherwise, the lessor would account for the combined component as an operating lease under ASC 842.

The Board directed the staff to clarify in a final ASU that a lessor would be permitted to apply the practical expedient to combine the lease component and nonlease component(s) qualifying for the practical expedient even when there are nonlease components that are not eligible for the practical expedient within a contract.

The Board also made the following tentative decisions related to transition guidance and the effective date for the proposed leasing improvements:

  • A lessor would be required to apply the practical expedient to all existing lease transactions that qualify for the expedient at the date elected.
  • The effective date and transition requirements for a final ASU would be the same as those under ASC 842 unless the lessor has already adopted ASC 842, in which case, it would elect the practical expedient either (1) in the first reporting period following the issuance of a final ASU containing the practical expedient, or (2) at the original effective date of ASC 842. Lessors that early adopt the leasing guidance would apply the practical expedient either retrospectively or prospectively.

The Board directed the staff to draft a final ASU related to the proposed practical expedient and the proposed additional (and optional) transition method for adoption of ASC 842 for vote by written ballot.

See the March 15 On the Horizon for a summary of the Board’s tentative decisions related to the proposed additional (and optional) transition method.

The Board also discussed additional implementation issues raised by stakeholders related to how a lessor should account for certain lessor costs, such as sales taxes and property taxes and insurance, and agreed with the staff’s recommendation to allow lessors to analogize to certain guidance in ASC 606 when accounting for these costs. The Board tentatively decided to add a separate project to its technical agenda to address these issues.

Hedging guidance implementation The Board discussed implementation activities related to the new hedging guidance in ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, and the FASB staff responded to technical inquiries related to the following matters:

  • Designating the hedged risk as the variability of a contractually specified component in the forecasted purchase or sale of a nonfinancial asset in a cash flow hedge – The staff presented its interpretation of the guidance in ASU 2017-12 related to the “contractually specified components” model for designating the variability in a contractually specified component as the hedged risk in a cash flow hedge, and the Board agreed with the staff’s conclusions. The staff will form a project resource group to monitor implementation in this area, and in other areas if needed.
  • Multiple partial-term hedges of a single financial instrument – The staff presented its interpretation of the amendments in ASU 2017-12 related to the partial-term hedging election, which would be applied to simultaneous multiple partial-term hedging relationships for a single debt instrument, and the Board agreed with the staff’s conclusions.
  • Accounting for basis adjustments and hedging multiple layers under the last-of-layer method – The Board tentatively decided to add a narrow-scope project to its agenda to address issues related to accounting for basis adjustments and multiple-layer hedging strategies; however, it also tentatively decided that the project would not include an expansion of the last-of-layer method to include prepayable liabilities and nonprepayable financial instruments.
  • Change in hedged risk concept in ASC 815-30-35-37A – The staff presented feedback from technical inquiries and potential Codification improvements related to this guidance, which allows an entity to retain hedge accounting when the hedged risk in a cash flow hedge changes and the derivative designated as the hedging instrument remains highly effective. The Board directed the staff to obtain external review feedback on these potential Codification improvements.

Agenda prioritization The Board discussed the results of staff research on certain potential projects and took the following actions:

  • Misalignment of collections definition – The Board tentatively decided to add a project to its agenda to update the definition of collections in ASC 958, Not-for-Profit Entities, and to add the concept of direct care to this definition. This change would be applied prospectively. The Board directed the staff to draft a proposed ASU reflecting this change, with a comment period of 45 days.
  • Cost capitalization for episodic television series – The Board tentatively decided to add a project to its agenda to amend the cost capitalization, amortization, impairment, and disclosure guidance for episodic television series in ASC 926-20, Entertainment – Films: Other Assets – Film Costs, to align the accounting guidance considering the change in business environment in the media industry. This project will be addressed by the Emerging Issues Task Force (EITF).
  • Recognition under Topic 805 for an assumed liability in a revenue contract – The Board tentatively decided to add a project to its agenda on the recognition of an assumed liability in a revenue contract acquired in a business combination under ASC 805, Business Combinations, after the effective date of ASC 606, Revenue from Contracts with Customers. This project will also be addressed by the EITF.

Financial performance reporting – disaggregation of performance information The Board discussed the staff’s suggested terminology to describe which lines from the income statement should focus on disaggregation, and tentatively decided to focus on lines including those representing the cost of revenue and selling, general, and administrative expenses. The Board directed the staff to develop a principles-based approach to describing these lines.

The Board also directed the staff to perform additional outreach with public business entities to understand which lines on their income statements represent certain activities associated with the cost of revenue or fulfillment of performance obligations, as well as with marketing, selling, and general and administrative expenses.



SEC staff updates FAQs on IFRS Taxonomy On March 30, the staff of the SEC’s Office of Structured Disclosure updated its FAQs on the IFRS Taxonomy to address, among other things, the use of the recently accepted SEC Reporting Taxonomy and to add a link to financial statement and notes data sets prepared using the IFRS Taxonomy.



IASB Revisions issued to Conceptual Framework The IASB issued a revised version of Conceptual Framework for Financial Reporting, which includes a new chapter on measurement, guidance on reporting financial performance, improved definitions (including the definition of a liability) and guidance, and clarifications in other areas.

The Conceptual Framework guides the Board in developing IFRS Standards, and it assists entities in developing accounting policies when no IFRS Standard applies to a particular transaction. The Board will apply this new guidance immediately; entities are required to apply it in 2020.

The Board also issued Amendments to References to the Conceptual Framework in IFRS Standards to update references in IFRS Standards that currently apply to previous versions of the Conceptual Framework.

Board proposes amendments to IAS 8 for public comment The IASB issued an Exposure Draft, Accounting Policy Changes (Proposed amendments to IAS 8), which includes narrow-scope amendments to IAS 8, Accounting Policy Changes, Changes in Accounting Estimates and Errors.

An “agenda decision” is a decision published by the IFRS Interpretations Committee (IFRIC) explaining its rationale for not adding a particular matter to its standard-setting agenda. Entities may voluntarily change an accounting policy to reflect explanatory material included in agenda decisions. The existing guidance in IAS 8 requires entities to apply these voluntary changes in accounting policy retrospectively, unless it is impracticable to do so.

The proposed amendments would add a new threshold for voluntary changes in accounting policy that result from an IFRIC agenda decision. The proposed threshold would also include consideration of how applying the new accounting policy retrospectively benefits financial statement users, as well as the cost to the entity of determining the effects of retrospective application.

Comments on the proposed amendments are due July 27.



Comment letter issued On March 29, the firm issued a comment letter in response to the FASB’s proposed ASU, Inclusion of the Overnight Index Swap Rate Based on the Secured Overnight Financing Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.



© 2018 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.