Each year, the Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to communicate changes to the FASB Codification, which if you’re not already aware by now, is the sole source of authoritative generally accepted accounting principles (GAAP). Keep in mind that these ASUs are not authoritative standards, but they do aid in explaining how and why the FASB has changed US GAAP, background information related to the change, and a timeline of when the changes will be effective.
In 2016, there have been a number of updates released, varying from changes in revenue recognition to proper classification of complex accounts. Outlined below is a summary of some of the more significant changes that may affect your for-profit business. The purpose of these summaries is to provide some quick insight, which will hopefully enable you to identify the ASUs that impact your business.
FASB ASU No. 2016-13: Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. For non-public organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.
FASB ASU No. 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
This update addresses issues such as collectability from noncash payments and contract modifications as they relate to the new revenue recognition standard. The amendment also allows the exclusion of sales tax from the reported amount for the transaction price.
FASB ASU No. 2016-09: Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
The ASU is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.
FASB ASU No. 2016-08: Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. It helps clarify how an entity determines whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). A number of clarification points are discussed in the ASU and are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations.
FASB ASU No. 2016-07: Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.
The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments both eliminate and add certain requirements, which are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.
FASB ASU No. 2016-06: Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.
The updates apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The update simplifies the analysis of embedded derivatives for debt instruments that contain contingent put or call options. Applying a retrospective transition method, entities are expected to apply this rule to existing debt instruments as of their adoption period.
FASB ASU No. 2016-04: Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.
The ASU requires issuers of prepaid stored-value products redeemable for goods or services at retailers or merchants to derecognize liabilities for brokerage. Brokerage signifies the value of prepaid stored-value products that is not directly redeemed by consumers for goods and services at the place of the purchase. For example, this applies towards gift cards, traveler’s checks, and prepaid telecommunication cards.
FASB ASU No. 2016-02: Leases (Topic 842)
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
- A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
- A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Lessor accounting is largely unchanged under the new update. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic business entities upon issuance.
The FASB’s main objective with these ASUs, is to enhance the current regulations and make them more effective and easier. The ultimate goal is to improve the helpfulness of financial statement information to its users, while also keeping the costs of obtaining the information lower.
The specific updates outlined above only begin to scratch the surface. We urge anyone reading, who thinks a specific ASU may impact their business, to read the complete ASU and all relevant guidance on the Financial Accounting Standards Board website (www.fasb.org). In addition, please don’t hesitate to contact the experts at Cerini & Associates should you require any additional guidance or clarification.
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