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On the Horizon: ASUs amend certain disclosure requirements

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Contents FASB

ASUs amend certain disclosure requirements
ASU addresses accounting for implementation costs of cloud computing services
Board makes changes to the conceptual framework
Taxonomy implementation guide and taxonomy improvements proposed
Highlights from August 29 meeting posted

CAQ issues alerts on audits of broker-dealers

FASB
ASUs amend certain disclosure requirements The FASB issued ASUs amending the disclosure requirements for fair value measurement and defined benefit pension and other postretirement plans. The amendments are part of the Board’s disclosure framework project, and are summarized below.

Fair value measurement

The Board issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair value measurements.

The amendments in the ASU require public business entities to include new disclosure requirements related to:

  • Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
  • Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain financial instruments, an entity may disclose other quantitative information, such as the median or arithmetic average instead of the weighted average, if the entity determines that this other information would be a more reasonable and rational method to reflect the distribution of these inputs.

ASU 2018-13 makes the following changes to the disclosure requirements in the existing guidance:

  • A nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities, instead of including a reconciliation from the opening balances to the closing balances for Level 3 fair value measurements.
  • An entity is required to disclose the period of time over which it expects an investee that calculates net asset value per share to liquidate its assets, and when any restriction from redemption might lapse only if the investee has communicated the timing to the entity, or it has announced the timing publicly. Existing guidance requires an entity to disclose its estimate of the period of time over which the investee’s assets are expected to be liquidated, and its estimate of when the restriction might lapse.
  • For recurring fair value measurements under Level 3 of the fair value hierarchy, an entity is required to provide a narrative description of the uncertainty (instead of the sensitivity) of the measurements from using significant unobservable inputs if those inputs reasonably could have been different at the reporting date. The ASU clarifies that this disclosure is intended to provide information about the uncertainty in measurement as of the reporting date instead of any other date.

The amendments in the ASU remove the following disclosure requirements from ASC 820:

  • The amounts of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
  • The entity’s policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred
  • A description of the valuation processes used by the entity to determine recurring and nonrecurring fair value measurements within Level 3 of the fair value hierarchy
  • For a nonpublic entity, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements

These amendments are effective for all entities for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Early adoption is permitted for all entities in any annual or interim period for which the financial statements have not been issued or made available for issuance, however, entities are permitted to early adopt any removed or modified disclosures, but can delay adoption of the new disclosures until their effective date.

Entities should apply the amendments retrospectively to all periods presented, except for certain amendments, which should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

Defined benefit plans

The Board issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the disclosure requirements in ASC 715-20 by adding, clarifying, or removing certain disclosures. The ASU applies to all employer entities that sponsor defined benefit pension or other postretirement plans.

ASU 2018-14 requires all entities to disclose (1) the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The ASU also clarifies the disclosure requirements for public and nonpublic entities with two or more plans by amending the existing disclosure guidance in ASC 715-20-50-3 to state that if aggregate disclosures are presented, entities should disclose the following information for defined benefit pension plans:

  • The projected benefit obligation (PBO) and the fair value of plan assets for plans with PBOs in excess of plan assets (entities are also required to disclose this information for other defined benefit postretirement plans)
  • The accumulated benefit obligation (ABO) and the fair value of plan assets for ABOs in excess of plan assets

The amendments remove other disclosures from the existing guidance, such as the requirement for nonpublic entities to provide a reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy, and the requirement for public entities to disclose the effects of a one-percentage-point change in the assumed health care cost trend rates.

The amendments are effective for public business entities for fiscal years ending after December 15, 2020. All other entities should apply the amendments for fiscal years ending after December 15, 2021. Early adoption is permitted for all entities in any annual period for which the financial statements have not been issued or made available for issuance.

All entities should apply the amendments retrospectively to all periods presented.

ASU addresses accounting for implementation costs of cloud computing services The FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which addresses how a customer should account for the costs of implementing a cloud computing service arrangement (also referred to as a “hosting arrangement”). Existing guidance does not specifically address how customers should account for these costs.

Under ASU 2018-15, entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract in the same way as implementation costs associated with a software license, as prescribed in ASC 350 40. Therefore, implementation costs incurred in the preliminary project and post-implementation stages of a project should be expensed as incurred, along with data conversion and training costs. Implementation costs incurred in the application development stage, such as costs for the cloud computing arrangement’s integration with on-premise software, coding, and configuration or customization, should be capitalized.

Entities should amortize these capitalized implementation costs over the term of the cloud computing arrangement, which includes the noncancellable period of the arrangement plus periods covered by an option to:

  • Extend the arrangement if the customer is reasonably certain to exercise that option
  • Terminate the arrangement if the customer is reasonably certain not to exercise the termination option
  • Extend (or not terminate) the arrangement in which exercise of the option is in control of the vendor

Entities should also periodically reassess the estimated term of the arrangement and account for any change in this term as a change in accounting estimate.

The amendments require entities to evaluate the unamortized portion of these capitalized implementation costs for impairment under the amended subsequent measurement guidance in ASC 350-40-35, which states that impairment should be measured and recognized under the existing subsequent measurement guidance in ASC 360-10-35, Property, Plant, and Equipment: Subsequent Measurement, as if these capitalized implementation costs were long-lived assets. The ASU also provides examples of events and changes in circumstances related to the hosting arrangement indicating that the carrying amount of the related implementation costs may not be recoverable.

The amendments also clarify that the unit of accounting for determining whether a capitalized implementation cost ceases to be used (and should be accounted for as abandoned) under the existing abandonment guidance in ASC 360-10-35, is the capitalized implementation costs related to each module or component of the hosting arrangement.

Entities should present capitalized implementation costs in the same line item in the balance sheet as they present a prepayment for the fees related to the hosting (service) element of the hosting arrangement. An expense related to the amortization of capitalized implementation costs should be reflected in the same line item within the income statement as the expense related to periodic payments for the hosting service. Payments for capitalized implementation costs should be presented in the statement of cash flows in the same manner as the cash flows for the fees related to the hosting (service) element of the hosting arrangement.

ASU 2018-15 requires entities to disclose the nature of their hosting arrangements that are service contracts, and to provide certain additional disclosures similar to those required in ASC 360, and in other Codification topics. Entities should make the disclosures in ASC 360 as if the capitalized implementation costs were a separate major class of asset.

Public business entities should apply the amendments for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. All other entities should apply the amendments for fiscal years beginning after December 15, 2020 including interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for all entities in any annual or interim period for which the financial statements have not been issued or made available for issuance.

Entities should apply the amendments either (1) retrospectively to all hosting arrangements, with the cumulative effect of applying the amendments to hosting arrangements entered into before the beginning of the earliest period presented in the financial statements recognized in the opening retained earnings of the earliest period presented, or (2) prospectively to costs for activities performed on or after the adoption date of the ASU.

Board makes changes to the conceptual framework The Board issued changes to the conceptual framework by adding a new chapter on disclosures in the notes to financial statements, and by amending an existing chapter for its definition of materiality. These changes are summarized below.

Notes to financial statements

The Board issued Concepts Statement 8, Conceptual Framework for Financial Reporting—Chapter 8, Notes to Financial Statements, which discusses the information that the Board should consider when determining items to include in the notes to financial statements. This chapter describes the purpose of the notes to financial statements, limitations on the information in the notes to financial statements, and the general types of information to be included in the notes to financial statements. It also considers disclosures in financial statements for interim periods, as well as disclosures in annual financial statements.

Definition of materiality

The Board issued an amendment to Concepts Statement 8, Conceptual Framework for Financial Reporting—Chapter 3, Qualitative Characteristics of Useful Financial Information, which reinstates the definition of materiality that was in Concepts Statement 2, Qualitative Characteristics of Accounting Information, and adds language similar to that in Concepts Statement 2 discussing

  • How materiality differs from relevance
  • That materiality assessments can be properly made only by those with an understanding of the reporting entity’s pertinent facts and circumstances

Taxonomy implementation guide and taxonomy improvements proposed
The FASB staff issued a proposed GAAP Financial Reporting Taxonomy Implementation Guide, Insurance, Long-Duration Contracts. The proposed guide provides examples that would help users of the Taxonomy understand how the modeling for disclosures of long-duration insurance contracts in ASC 944, Financial Services—Insurance, is structured within the Taxonomy. The examples are based on the assumption that an entity meets the criteria for reporting disclosures of long-duration insurance contracts under U.S. GAAP and/or SEC authoritative literature.

Comments on the proposed Implementation Guide are due October 16.

The FASB staff issued proposed taxonomy improvements related to ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. Comments on these proposed taxonomy improvements are due September 27.

The FASB staff also proposed taxonomy improvements related to the proposed ASU, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. Comments on these proposed taxonomy improvements are due September 19.

The proposed Implementation Guide and the proposed taxonomy improvements can be found on the FASB’s website.

Highlights from August 29 meeting postedAll decisions reached at Board meetings are tentative and may be changed at future meetings.

The Board met on August 29 to discuss (1) comments received on the proposed amendments to the derivatives and hedging guidance, and (2) issues from the June 11 meeting of the Transition Resource Group for Credit Losses (the Credit Losses TRG). The Board’s actions are summarized below.

Proposal to expand list of interest rates permitted for hedge accounting purposes

The Board discussed comments received on the proposed ASU, Derivatives and Hedging (Topic 815): Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes, and tentatively decided to:

  • Confirm the proposed amendments to add the OIS rate based on SOFR as a U.S. benchmark interest rate
  • Confirm that the proposed amendments in the final ASU would be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption
  • Require that the effective date of the proposed Update coincide with the effective date of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Accordingly, entities that have not adopted ASU 2017-12 would apply the proposed amendments using the same effective date as ASU 2017-12. Public business entities that have already adopted ASU 2017-12 would apply the proposed amendments in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. All other entities that have already adopted ASU 2017-12 would apply the proposed amendment in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Additionally, entities that have already adopted ASU 2017-12 may also early adopt the proposed amendments.
  • Add a separate project to the Board’s agenda addressing transition relief for existing hedging relationships referencing LIBOR that will transition to SOFR

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

Financial instruments – credit losses implementation

The Board discussed issues from the June 11 meeting of the Credit Losses TRG and made the following tentative decisions related to these issues:

  • Topic 1A: Capitalized interest, and Topic 1B: Refinancing and loan prepayments – No amendments to ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, are necessary for these issues. The Board concluded that the FASB staff views articulated in the June 11 TRG meeting materials are sufficient.
  • Topic 2A: Inclusion of accrued interest in defining amortized cost basis – amend the guidance in ASU 2016-13 to allow entities to (1) measure the allowance for credit losses on accrued interest receivable separately from other components of the amortized cost basis of the associated assets, (2) make an accounting policy election to present accrued interest receivable balances and the related allowance for credit losses separately from the associated assets on the balance sheet, but if this election is not made, entities would be required to disclose where these balances are presented on the balance sheet, and (3) elect a practical expedient to meet the disclosure requirements for certain disclosures.
  • Topic 2B: Reversal of accrued interest on nonaccrual loans – Amend the guidance in ASU 2016-13 to allow entities to (1) make an accounting policy election to reverse accrued interest either by an adjustment to interest income or by writing off accrued interest amounts as a deduction from the allowance for credit losses, and (2) make a separate policy election to exclude accrued interest receivable balances from the calculation of the allowance for credit losses if the entity already has an accounting policy in place that results in reversing or writing off any unpaid accrued interest balances timely.
  • Topic 3: Transfers of loans and debt securities between categories – Amend the guidance in ASU 2016-13 to require that entities (1) reverse an existing valuation allowance or allowance for credit losses for loans and debt securities prior to transferring these financial assets between categories (entities would also be required to establish either an appropriate valuation allowance or an allowance for credit losses after transferring these financial assets), (2) apply existing write-off guidance to all transfers of financial assets between categories, and (3) present all transfers between categories on a gross basis in the income statement.
  • Topic 4: Recoveries – Amend the guidance in ASU 2016-13 to require entities to consider expected recoveries when measuring the allowance for credit losses, but to limit the scope of these recoveries to only include amounts collected from the borrower. Further, an entity should not include fair value amounts greater than the amortized cost basis of financial assets when measuring the allowance for credit losses at the reporting date for collateral dependent financial assets. However, the Board directed the staff to include a question in the forthcoming proposed ASU about whether an entity should include payments from the sale of delinquent financial assets or underlying collateral as part of the recoverable amounts when measuring this allowance.

See NDS 2018-08 for a summary of the implementation issues discussed by the TRG at the June 11 meeting.



CAQ issues alerts on audits of broker-dealers
The Center for Audit Quality (CAQ) released two alerts related to audits and attestation engagements of broker-dealers. Alert 2018-04, “Broker’s and Dealer’s Use of a Service Organization,” is designed to help auditors develop their audit approach, as the use of service organizations is an area that can require significant auditor judgment. The alert includes a decision tree to assist auditors in understanding the broker’s and dealer’s use of a service organization and in designing related auditing and attestation procedures.

Alert 2018-03, “PCAOB Report on 2017 Inspections of Brokers and Dealers,” highlights the release of the Public Company Accounting Oversight Board’s (PCAOB) “Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers.” The PCAOB report identifies common areas of inspection findings. The CAQ alert summarizes these findings and highlights the PCAOB’s new “Executive Highlights.”



© 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.