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On The Horizon: FASB allows private companies to opt out of VIE guidance

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On the Horizon newsletterContents FASB       ASU allows private companies to elect out of VIE guidance
      Board makes improvements to collaborative arrangements guidance
      Highlights from Oct. 31 meeting posted
      Board meets with TRG for credit losses
      Q4 2018 FASB Outlook e-newsletter published

SEC       Statement on certain provisions of business conduct standards issued
      Final Rule modernizing mining registrants’ property disclosures adopted

CAQ and Audit Analytics report on disclosure trends in auditor oversight IASB clarifies the definition of ‘material’


FASB ASU allows private companies to elect out of VIE guidance The Board issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which allows private companies to elect not to apply the variable interest entity (VIE) guidance when assessing whether a legal entity should be consolidated if certain criteria are met.

The guidance in ASU 2018-17 also amends the guidance on how all reporting entities evaluate indirect interests held through related parties in common control arrangements when determining whether those indirect interests are variable interests.

Refer to our New Developments Summary, “Private companies can elect out of VIE guidance,” for additional information about ASU 2018-17.

Board makes improvements to collaborative arrangements guidance The FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, to clarify the interaction between the guidance for certain collaborative arrangements in ASC 808 and in ASC 606, Revenue from Contracts with Customers. Specifically, the ASU provides guidance for determining whether certain transactions between the collaborative arrangement participants should be accounted for under the revenue recognition guidance in ASC 606.

The existing guidance in ASC 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements, causing entities to account for those arrangements by applying either (1) the revenue guidance in ASC 606 directly or by analogy to all or part of their arrangements, or (2) a different accounting method as an accounting policy. These different methods of accounting have resulted in diversity in practice on how entities present collaborative arrangement transactions in their financial statements.

Under the existing guidance in 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 the existing guidance in 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 amendments in the ASU:
  • Clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 if the collaborative arrangement participant is a customer with respect to the “unit of account” (identified as a promised good or service, or a bundle of goods or services, that is distinct within the collaborative arrangement under the related guidance in ASC 606). 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.
  • 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 whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606.
  • Require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, an entity should not present the transaction together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer.
  • Revise the existing implementation guidance and illustrations in ASC 808 to incorporate the amendments.

The amendments are effective for public business entities in fiscal years, and in interim periods within those fiscal years, beginning after Dec. 15, 2019. All other entities should apply the amendments in fiscal years beginning after Dec. 15, 2020, and in interim periods in fiscal years beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period, for (1) public business entities in periods for which financial statements have not yet been issued, and (2) all other entities in periods for which financial statements have not yet been made available for issuance. Entities may not adopt the amendments prior to adopting ASC 606.

Entities should apply the amendments in ASU 2018-18 retrospectively to the date when they initially apply ASC 606 by recognizing the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of (1) the earliest annual period presented, and (2) the annual period that includes the date of the initial application of ASC 606. Entities may elect to apply the amendments retrospectively either to all contracts or only to contracts that are not completed at the date of the initial application of ASC 606, as long as this election is disclosed.

Further, entities can apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in ASC 606. This practical expedient applies when contracts were modified before the beginning of the earliest reporting period presented, and does not require an entity to retrospectively restate the contracts for those modifications. Instead, an entity should reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented.

Highlights from Oct. 31 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The Board met on Oct. 31 to redeliberate the proposed ASU, Leases (Topic 842): Narrow-Scope Improvements for Lessors, and took the actions summarized below.

The Board reaffirmed its previous decisions related to the following proposed amendments:
  • Sales taxes and other similar taxes collected from lessees – This amendment would allow lessors to elect not to account for sales and other similar taxes as lessor costs. The Board tentatively decided that a lessor who makes this election should apply it to all existing and new leases.
  • Recognition of variable payments for contracts with lease and nonlease components – This amendment would clarify the scope and scope exceptions under ASC 842-10-15-40, subject to additional amendments that would further clarify how and when a lessor should allocate variable components only to a lease component.

The Board also tentatively decided to require lessors to exclude from variable payments all costs paid by a lessee directly to a third party. This proposal would replace the proposed amendment that would have required lessors to exclude certain lessor costs paid by lessees directly to third parties on behalf of the lessor from variable payments (and from variable lease revenue) if the lessor cannot readily determine the amount of those costs. In addition, a lessor would account for costs that are not part of the contractual consideration paid by a lessor directly to a third party and that are reimbursed by a lessee as variable payments.

The Board tentatively decided that entities that have not adopted the amendments in ASU 2016-02, Leases (Topic 842), would apply the same transition and effective date guidance in ASU 2016-02 to a final ASU resulting from these proposed amendments.

Entities that have already adopted ASU 2016-02 would apply these proposed amendments using the original effective dates of ASU 2016-02 that apply for those entities. Alternatively, these entities would be permitted to adopt the proposed amendments either in the first reporting period ending after a final ASU is issued, or in the first reporting period following the reporting period during which a final ASU is issued. Entities that have already adopted ASU 2016-02 would also be permitted to apply the proposed amendments either prospectively or retrospectively.

See the Aug. 16 On the Horizon for a summary of the proposal.

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

Board meets with TRG for credit losses The Board met with the Transition Resource Group for Credit Losses (TRG) on Nov. 1 to discuss implementation issues related to ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In addition, the FASB staff presented a summary of technical inquiries that may be of general interest to entities applying the new guidance.

The meeting materials are currently available on the FASB’s website. The Board will post a summary of the issues discussed by the TRG at some future date. Future meetings will be announced on the FASB’s website.

Q4 2018 FASB Outlook e-newsletter published The FASB issued the Q4 2018 edition of the FASB Outlook e-newsletter, which includes articles that discuss:
  • The potential benefits and costs of future technological advances
  • Accounting standards that are effective on Jan. 1, 2019
  • Forthcoming standard-setting activities related to classifying debt, amending the recently issued financial instruments guidance, and accounting for production costs for episodic television series
  • The Board’s agenda project to consider potential changes to U.S. GAAP resulting from the market-wide transition to a new benchmark interest rate
  • A summary of upcoming meetings

The newsletter also includes a link to a video that discusses revenue recognition resources for private companies.



SEC Statement on certain provisions of business conduct standards issued On Oct. 31, the SEC issued a Commission Statement setting forth its position regarding certain requirements in its 2016 Final Rule, Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants. The Final Rule was mandated by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Statement details certain actions related to the Commission’s business conduct standards that will not provide a basis for an enforcement action from the SEC. The Commission’s position applies for five years after the compliance date for security-based swap dealer and major security-based swap registration rules.

Final Rule modernizing mining registrants’ property disclosures adopted On Oct. 31, pursuant to its Disclosure Effectiveness Initiative, the SEC adopted the Final Rule, Modernization of Property Disclosures for Mining Registrants. The revised disclosure requirements and policies under the Final Rule are now more consistent with current industry and global regulatory practices and standards. The Final Rule also establishes a single location for guidance regarding property disclosures for mining registrants by removing Industry Guide 7, amending Item 102 of Regulation S-K, and consolidating the disclosure requirements in new Subpart 1300 of Regulation S-K.

Among other things, the Final Rule requires registrants with material mining operations to:
  • Disclose in certain Commission filings specified information on their exploration results and mineral resources in addition to the current requirement to disclose information on mineral reserves. Disclosures are required to be based on information and supporting documentation provided by a mining expert.
  • Obtain a technical report summary from the mining expert identifying and summarizing certain information about mineral resources or mineral reserves for each material property. This technical report summary must be filed as an exhibit to Commission filings that include the initial disclosure of mineral reserves or mineral resources or that include disclosure of a material change in the mineral reserves or mineral resources from the last technical report summary filed for the property.

The Final Rule provides a registrant engaged in mining operations with a two-year transition period to comply with the amendments. A registrant must comply with the amendments for the first fiscal year beginning on or after Jan. 1, 2021, and may voluntarily comply with the amendments prior to this date, subject to the Commission’s completion of necessary EDGAR reprogramming changes.

CAQ and Audit Analytics report on disclosure trends in auditor oversight The Center for Audit Quality (CAQ) and Audit Analytics issued their fifth annual report, “Audit Committee Transparency Barometer.” The 2018 report identified the following positive trends in key audit committee disclosures:
  • Forty percent of S&P 500 companies, 27% of mid-cap companies, and 19% of small-cap companies disclose considerations in appointing the audit firm; such disclosure is up 13%, 10%, and 8%, respectively, from 2014.
  • Forty-six percent of S&P 500 companies, 36% of mid-cap companies, and 32% of small-cap companies discuss criteria considered when evaluating the audit firm; such disclosure is up 8%, 7%, and 15%, respectively, from 2014.
  • Twenty-six percent of S&P 500 companies, 17% of mid-cap companies, and 12% of small-cap companies disclose that the evaluation of the external auditor is at least an annual event; such disclosure is up 4%, 3%, and 4%, respectively, from 2014.

The report also provides audit committee disclosure examples illustrating enhanced information for investors and others.

IASB clarifies the definition of ‘material’ The IASB has issued Definition of Material (Amendments to IAS 1 and IAS 8), which amends IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of “material” that entities should apply when making judgments about materiality. These judgments are important because they help entities determine whether information should be included in their financial statements.

The amendments define “material” as follows:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

In contrast, existing guidance states that “Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.”

Entities should apply the amendments prospectively for annual periods beginning on or after Jan. 1, 2020. Earlier application is encouraged, but entities applying the amendments prior to the effective date are required to disclose that fact.


© 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.