On The Horizon: FASB clarifies reclassifying stranded tax effects

Contents Current reporting issue Presentation of reclassified stranded tax effects in the statement of comprehensive income

FASB Board proposes improvements to collaborative arrangements guidance

PCC posts recap of April 20 meeting

SEC staff updates Investment Company Reporting Modernization FAQs AICPA Audit Risk Alerts

Current reporting issue Presentation of reclassified stranded tax effects in the statement of comprehensive income The FASB’s amendment to existing guidance in ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to Retained Earnings, provides an option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings.

The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018 and for all interim periods within those fiscal years. Early adoption is permitted for public business entities that did not issue financial statements and for all other entities that did not make the financial statements available for issuance.

Public business entities that did not adopt ASU 2018-02 in their fourth quarter ended December 31, 2017 may elect to adopt the guidance in the first quarter ended March 31, 2018. Questions have arisen on whether the amount reclassified should be presented as a component of other comprehensive income in the statement of comprehensive income.

The guidance in ASC 220-10-45, Income Statement – Reporting Comprehensive Income, requires entities to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Comprehensive income for the reporting period is determined by adding to, or subtracting from, net income the components of other comprehensive income.

We believe that the reclassification of stranded tax effects should not be presented as a component of other comprehensive income in the statement of comprehensive income because they are not items within other comprehensive income under ASC 220-10-45-10A. Entities should reflect the reclassification as a change in the components of accumulated other comprehensive income within the statement of changes in stockholders’ equity.

FASB Board proposes improvements to collaborative arrangements guidance The FASB issued a proposed ASU, Collaborative Arrangements (Topic 808): Targeted Improvements, to clarify the interaction between the guidance in ASC 808 and ASC 606, Revenue from Contracts with Customers, for entities that are parties to collaborative arrangements. Specifically, the proposed ASU would provide guidance for determining whether certain transactions between the collaborative participants should be accounted for under the revenue recognition guidance in ASC 606.

Under ASC 808, a “collaborative arrangement” is defined as a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. Under ASC 606, a “customer” is defined as a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

The proposal would

  • Amend the existing scope of, and scope exceptions in, ASC 606 to clarify that an entity’s collaborative partner is not precluded from being its customer.
  • Add unit-of-account guidance to ASC 808 that aligns with the unit-of-account guidance related to a distinct good or service in ASC 606, which should be applied when an entity determines how to separate and initially measure components of a collaborative arrangement that are wholly or partially within the scope of ASC 606.
  • Amend the existing guidance in ASC 808 to clarify that certain transactions between collaborative participants should be accounted for as revenue under ASC 606 if the collaborative participant is a customer with respect to the unit of account. An entity that accounts for this type of transaction under ASC 606 should apply all of the guidance in ASC 606, including the recognition, measurement, presentation, and disclosure requirements.
  • Change the existing guidance in ASC 808 to indicate that an entity should not present a transaction that is not directly related to sales to third parties as revenue if the collaborative-participant counterparty is not a customer.
  • Revise the existing implementation guidance and illustrations in ASC 808 to incorporate the proposed amendments.
The Board will determine the effective date and transition requirements after it considers stakeholders’ feedback on the proposal.

The FASB staff also issued proposed taxonomy improvements related to the proposed ASU.

Comments on the proposed ASU and on the related proposed taxonomy improvements are due June 11.

PCC posts recap of April 20 meeting During the Private Company Council (PCC) meeting on April 20, the PCC members provided input on the following FASB projects:

  • Collaborative arrangements: PCC members generally supported a proposed ASU that would clarify the interaction between the guidance in ASC 808 and ASC 606, and noted that differences do not exist between public and private entities in this area. The proposed ASU was issued after this meeting (see the preceding article).
  • ConsolidationsTargeted improvements to related party guidance for variable interest entities: PCC members supported the private company accounting alternative included in the proposed ASU, Targeted Improvements to Related Party Guidance for Variable Interest Entities, and stated that progress on this alternative should not be delayed by further research on the other amendments in the proposed ASU.
  • Cloud computing (EITF Issue 17-A): The PCC discussed the proposed ASU, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements (a consensus of the FASB Emerging Issues Task Force), and expressed their support for the proposal.
  • Share-based payments: PCC members discussed potential private company accounting alternatives for recognizing and measuring equity-classified share-based payment awards, and directed the FASB staff to conduct outreach related to this issue.
  • Revenue recognition: The PCC provided input on two revenue recognition issues specific to private companies included in a comment letter submitted by the AICPA Technical Issues Committee and the Center for Plain English Accounting. As a result, the PCC requested that the FASB staff conduct outreach related to the cost and complexity of applying the new revenue guidance to out-of-pocket costs. It also discussed potential changes to the pattern of revenue recognition in some short-term manufacturing contracts with the FASB staff.
The next PCC meeting will be held on June 26.

SEC staff updates Investment Company Reporting Modernization FAQs Responses to FAQs were prepared by and represent the views of the SEC staff. They are not rules, regulations, or statements of the Commission. The Commission has neither approved nor disapproved these FAQs or the interpretive answers to these FAQs.

The staff of the SEC’s Division of Investment Management recently updated its Investment Company Reporting Modernization Frequently Asked Questions to clarify that when a fund’s fiscal year falls on October 31 or November 30, 2018 (and its mid-year falls on April 30 or May 31, 2018), the fund would not be expected to file a separate report for mid-year on Form N-SAR since the due date falls after Form N-SAR is scheduled to be rescinded (June 1, 2018). Furthermore, Form N-CEN will encompass the mid-year period ending on April 30 or May 31, 2018.

AICPA Audit Risk Alerts The AICPA recently issued the following Audit Risk Alerts to provide an overview of recent industry, technical, regulatory, and professional developments, as well as information and guidance, on emerging practice issues and developments:

  • Not-for-Profit Entities Industry Developments – 2018
  • Employee Benefit Plans Industry Developments – 2018

© 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.