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On The Horizon: FASB issues improvements to leasing guidance

RFP
Contents FASB Board makes targeted improvements to new leasing guidance
Highlights from July 25 meeting posted
Q3 2018 FASB Outlook e-newsletter published

SEC Amendments proposed to disclosures about guarantors and collateralizations
Small Entity Compliance Guide updated

CAQ launches resource on critical audit matters IFAC updates guidance for auditing small businesses


FASB Board makes targeted improvements to new leasing guidance The FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, in response to stakeholder feedback about the following requirements of the new leasing guidance:

  • Adopting ASC 842 in comparative periods presented upon adoption of the new leasing guidance
  • Separating lease and nonlease components in a contract by lessors

To address stakeholders’ concerns about adopting ASC 842 in comparative periods presented upon adoption of the new leasing guidance, the amendments provide an optional transition method that allows an entity to apply the transition requirements in ASC 842 on its effective date instead of at the beginning of the earliest period presented.

As originally issued, ASC 842 requires entities to record a transition adjustment at the beginning of the earliest period presented in the period of adoption, and to recast the comparative financial statements, including disclosures, based on specific transition requirements. Entities using the new optional transition method should record a transition adjustment at the effective date of ASC 842, without recasting the comparative financial statements, including disclosures. In other words, lessors should continue to present prior-period financial statements and disclosures based on the guidance in ASC 840. For a detailed discussion of the original and the newly issued transition method, refer to Grant Thornton’s New Developments Summary 2018-07, “Leases in transition.”

To address lessors’ concerns about separating lease and nonlease components in a contract and allocating consideration to the separate components, the amendments provide an expedient whereby a lessor may elect to combine lease components with associated nonlease components by class of underlying asset, provided that the nonlease component(s) would otherwise be accounted for under the new revenue guidance in ASC 606 and both of the following conditions are met:

  • The timing and pattern of transfer for the lease component and the associated nonlease component are the same.
  • The lease component would be classified as an operating lease under ASC 842 if it were accounted for separately.

In addition, a lessor that elects this expedient must determine whether the nonlease component is the “predominant” component of the combined component, which means that the lessor reasonably expects the lessee to ascribe more value to the nonlease component(s) than to the lease component.

If the nonlease component is predominant, the combined component is accounted for as a single performance obligation under ASC 606. Otherwise, the combined component is accounted for as an operating lease under ASC 842.

For entities that have not yet adopted ASC 842, the amendments are effective upon adoption of ASC 842.

For entities that have early adopted ASC 842, the amendments for the lessor practical expedient may be elected at either the first reporting period after the issuance of ASU 2018-11 or at the entity’s original effective date of ASC 842. The amendments may be applied either prospectively or retrospectively.

See New Developments Summary 2018-10, “Lessor practical expedient: ASU 2018-11 allows lessors to combine qualifying lease and nonlease components,” for a detailed discussion of the new lessor practical expedient.

Highlights from July 25 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on July 25 to discuss proposed amendments impacting lessor accounting and the measurement of credit losses on financial instruments, along with comments received from stakeholders on its proposal related to collaborative arrangements. The Board’s actions are summarized below.

Lessor narrow scope improvements

The Board discussed certain issues related to how lessors apply the guidance in ASC 842 and made the following tentative decisions:

  • Lessors would be required to provide certain disclosures when electing an accounting policy to exclude certain sales taxes and other similar taxes collected from lessees from the consideration derived from a lease contract and from variable payments.
  • The Board would amend the scope and scope exceptions guidance in ASC 842-10-15-40 to clarify its intent related to the allocation and recognition requirements for variable lease payments with both lease and nonlease components. The Board instructed the staff to include questions in a forthcoming proposed ASU to determine whether the proposed amendments would be operable and whether other clarifications would make the guidance easier to apply.
  • Entities that have not yet applied the guidance in ASC 842 would apply these proposed amendments using the same effective date and transition requirements as those for ASC 842. The Board will determine the effective date and transition requirements for entities that have already applied ASC 842 after it receives stakeholder feedback on the proposal.

The Board directed the staff to draft a proposed ASU for vote by written ballot, with a comment period of 30 days.

Financial instruments – credit losses implementation

The Board discussed proposed amendments to the guidance in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which would clarify the Board’s original intent to

  • Provide separate and staggered effective date requirements for public business entities (PBEs) filing with the SEC, PBEs not filing with the SEC, and all other entities, by requiring that all other entities adopt the proposed amendments in fiscal years beginning after December 15, 2021 and in interim periods within those fiscal years. As originally issued, ASU 2016-13 requires all other entities to adopt this new guidance in fiscal years beginning after December 15, 2020 and in interim periods within fiscal years beginning after December 15, 2021.
  • Exclude operating lease receivables from the scope of the guidance related to credit losses on financial instruments measured at cost in ASC 326-20.

The Board directed the staff to draft a proposed ASU for vote by written ballot, with a comment period of 30 days.

Targeted improvements to collaborative arrangements

The Board discussed comments received from stakeholders on the proposed ASU, Collaborative Arrangements (Topic 808): Targeted Improvements, and reaffirmed several aspects of the proposal. The Board also tentatively decided to

  • Clarify how entities would apply the proposed unit-of-account guidance to collaborative arrangements when only part of that arrangement is with a customer. Under the proposal, an entity would use the distinct goods or services unit-of-account guidance in ASC 606 when determining whether a separate unit of account in a collaborative arrangement should be accounted for under ASC 606. The Board tentatively decided that when only part of a collaborative arrangement is with a customer, an entity would be required, for each distinct good or service identified, to account for a unit of account under ASC 606 when that entire unit is with a customer.
  • Move the examples of transactions directly related to sales to third-parties from the Basis for Conclusions section of the proposed ASU into the Amendments section, and clarify that the list of examples is not all-inclusive.
  • Clarify that entities should not present transactions outside the scope of ASC 606 together with revenue recognized from contracts with customers in the financial statements.
  • Clarify that the definition of collaborative arrangements that are not complete in ASC 808-10-65-2(c) would be arrangements with one or more unperformed units of account.
  • Require that PBEs adopt the amendments in fiscal years beginning after December 15, 2019 and in interim periods within those fiscal years. Entities that are not PBEs would adopt the amendments in fiscal years beginning after December 15, 2020 and in interim periods within fiscal years beginning after December 15, 2021.
  • Permit all entities to early adopt the amendments as of the later of the date when a final ASU is issued and the date when an entity adopts ASC 606.

See the May 3 On the Horizon for a summary of the proposed ASU.

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

Q3 2018 FASB Outlook e-newsletter published The FASB issued the Q3 2018 edition of the FASB Outlook e-newsletter, which includes articles that discuss

  • Cooperative relationships with other standard-setters, including the International Accounting Standards Board
  • Forthcoming standards on long-duration insurance contracts and cloud computing
  • A summary of upcoming meetings

The newsletter also includes a link to a video that discusses the benefits of the new standard on hedging for investors and other financial statement users.



SEC Amendments proposed to disclosures about guarantors and collateralizations On July 24, the SEC issued a Proposed Rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, that would amend the financial disclosures in Regulation S-X, Rules 3-10 and 3-16, required in certain registered debt offerings and subsequent periodic filings. The amendments are intended to simplify and streamline the disclosure obligations of registrants and to better align those requirements with the needs of investors.

S-X Rule 3-10 currently requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered. However, the rule also includes exceptions that permit the omission of separate subsidiary issuer or guarantor financial statements when certain conditions are met. Among other things, the amendments to S-X Rule 3-10 as proposed would

  • Replace the condition that a subsidiary issuer or guarantor be 100 percent owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements
  • Replace consolidating financial information with (1) summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented, and (2) certain non-financial disclosures
  • Permit the proposed alternative disclosures to be provided outside the footnotes to the parent company’s financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, as well as in certain Exchange Act reports filed shortly thereafter
  • Require that the proposed alternative disclosures be included in the footnotes to the parent company’s consolidated financial statements for annual and quarterly reports beginning with the annual report for the fiscal year during which the first bona fide sale of the subject securities is completed, and require such proposed alternative disclosures only for as long as there is an Exchange Act reporting obligation for the issuers and guarantors with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding

S-X Rule 3-16 currently requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of collateral for any class of registered securities or securities being registered, as if the affiliate were a separate registrant. Among other things, the amendments to S-X Rule 3-16 as proposed would

  • Replace the existing requirement that a registrant provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement that a registrant provide financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the registrant’s consolidated financial statements
  • Replace the requirement to provide disclosure only when the pledged securities meet or exceed a specified numerical threshold with a requirement to always provide the proposed disclosures unless they are immaterial to holders of the collateralized security

Additionally, the proposal would relocate a portion of S-X Rule 3-10 and all of S-X Rule 3-16 to a new article in Regulation S-X, Article 13, Financial and Non-Financial Disclosures for Certain Securities Registered or Being Registered.

The comment period ends 60 days after the proposed rule is published in the Federal Register.

Small Entity Compliance Guide updated Small Entity Compliance Guides summarize and explain rules adopted by the SEC, but they are not a substitute for SEC rules. Only an SEC rule provides complete and definitive information regarding its requirements.

The staff of the SEC’s Division of Investment Management recently updated a Small Entity Compliance Guide to summarize the key provisions of the Interim Final Rule, Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, and the Final Rule, Investment Company Liquidity Disclosure. The Interim Final Rule extends the compliance date for certain aspects of the 2016 Final Rule, Investment Company Liquidity Risk Management Programs, while the Final Rule adds, amends, and rescinds certain disclosure requirements for registered open-end investment companies, including certain disclosures on Form N-PORT adopted in the 2016 Final Rule.

For more information on the Interim Final Rule and the Final Rule, refer to On the Horizon dated March 1 and July 12, respectively.



CAQ launches resource on critical audit matters The Center for Audit Quality (CAQ) released a new publication designed to help audit committees and investors understand changes under the new auditor’s reporting model. The publication, “Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements,” focuses on the auditor’s responsibility to determine and communicate critical audit matters (CAMs) and includes basic information on auditor requirements related to CAMs and a list of frequently asked questions.

The effective dates for determining and communicating CAMs are as follows:

  • For audits of large accelerated filers: fiscal years ending on or after June 30, 2019
  • For audits of all other companies to which CAM requirements apply: fiscal years ending on or after December 15, 2020



IFAC updates guidance for auditing small businesses The International Federation of Accountants (IFAC) has updated its guidance for auditing small businesses, Guide to Using ISAs in the Audits of SMEs – Fourth Edition. The guide incorporates recent changes to the International Standards on Auditing (ISAs), including International Auditing and Assurance Standards Board projects on

  • Auditor reporting
  • Disclosures
  • Auditor responsibilities relating to other information
  • Use of the work of internal auditors



© 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.