On The Horizon: Proposed ASU addresses acquired revenue contracts

On the Horizon newsletter Contents FASB

Comments sought for proposals on revenue contracts acquired in business combinations

Highlights from Feb. 13 meeting posted

SEC staff releases Small Entity Compliance Guide AICPA

PEEC proposes interpretation on state and local government client affiliates

IASB publishes February Update

FASB Comments sought for proposals on revenue contracts acquired in business combinations The FASB issued the proposed ASU, Business Combinations (Topic 805): Revenue from Contracts with Customers – Recognizing an Assumed Liability (a consensus of the FASB Emerging Issues Task Force), which addresses when an entity should recognize a contract liability from a revenue contract that is assumed in a business combination. The Board also published an Invitation to Comment, Measurement and Other Topics Related to Revenue Contracts with Customers under Topic 805, to solicit stakeholder feedback on certain issues identified by the EITF during its consideration of Issue 18A, “Recognition under Topic 805 for an Assumed Liability in a Revenue Contract.”

ASC 805, Business Combinations, does not provide specific guidance on when an entity should recognize, and how it should measure, liabilities from revenue contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers. The proposed amendments would apply to all entities that enter into business combinations within the scope of ASC 805 after the entity has adopted ASC 606.

Under the proposed ASU, the acquirer in a business combination transaction would recognize an assumed liability from a contract with a customer if that liability meets the definition of an unsatisfied performance obligation for which either the acquiree has received consideration or consideration is due from the customer.

Under ASC 606, a performance obligation is a promise in a contract with a customer to transfer to the customer either (1) a distinct good or service (or a bundle of distinct goods or distinct services), or (2) a series of distinct goods or services that are substantially the same and share the same pattern of transfer to the customer.

The Board will determine the effective date of the proposed amendments and whether entities can early adopt the proposed guidance after it considers stakeholder feedback. Entities would apply the proposed amendments prospectively to business combinations that occur after the effective date of a final standard.

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

The Invitation to Comment includes a summary of the following financial reporting issues:

  • Payment terms and their effect on subsequent revenue recognized
  • Costs to fulfill a performance obligation in measuring the fair value of a contract liability for a revenue contract under ASC 805

It also contains several examples demonstrating the potential effect of including explicit guidance in the Codification for the different approaches that the Board or the Task Force might consider in responding to these issues. However, the Invitation to Comment does not include the Board’s or the Task Force’s preliminary views about how an entity might respond to each issue.

Comments on the proposed ASU, the related proposed taxonomy improvements, and the Invitation to Comment are due April 30.

Highlights from Feb. 13 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on Feb. 13 to redeliberate the proposed ASU, Leases (Topic 842): Codification Improvements for Lessors, and to review stakeholders’ comments on the proposal (see the Jan. 10 On the Horizon for a summary of the proposal).

The Board also discussed disclosures for convertible instruments, improvements to the derivatives scope exception, and improvements to earnings per share related to these areas, as well as an analysis of options that would improve how the management approach applies to segment disclosure requirements.

The Board’s actions related to these topics are summarized in the FASB’s Tentative Board Decisions.

SEC staff releases Small Entity Compliance Guide 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 SEC’s Division of Corporation Finance recently issued a Small Entity Compliance Guide to summarize key provisions of the Final Rule, Disclosure of Hedging by Employees, Officers and Directors. Among other things, this guide explains which registrants are affected by the Final Rule and provides an overview of the new disclosure requirements and related compliance dates.

For more information on the Final Rule, refer to the Jan. 10 On the Horizon.

AICPA PEEC proposes interpretation on state and local government client affiliates The AICPA’s Professional Ethics and Executive Committee (PEEC) issued a second Proposed Interpretation, State and Local Government Client Affiliates, proposing changes to the initial Exposure Draft issued July 7, 2017. The second proposal includes the following changes:

  1. Provides examples of circumstances or relationships that a state and local government financial statement attest client may encounter with nonaffiliates that create threats to independence, which could result in the audit firm consulting the AICPA’s “Conceptual Framework for Independence.”
  2. Requires the audit firm to expend best efforts to obtain information to identify all affiliates consistent with the “Client Affiliates” interpretation.
  3. Presumes only the financial statement attest client has more than minimal influence over funds and blended component units and that a case-by-case evaluation needs to be made for discretely presented component units.

Comments on the proposal are due by March 11.

IASB publishes February Update All decisions reached at IASB meetings are tentative and may be changed or modified at future meetings. Board decisions become final only after completion of a formal ballot to issue a new Standard or Interpretation or to publish an Exposure Draft.

The IASB issued an Update summarizing the tentative decisions reached at its February public meetings during which the Board discussed the following topics:

  • Amendments to IFRS 17, Insurance Contracts
  • IFRS for SMEs standard
  • Interbank offered rate reform and the effects on financial reporting
  • Management commentary
  • Primary financial statements

© 2019 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.