Quarterly Accounting Update – Q3 2016

October 3, 2016

Welcome to the Third Quarter issue of our Quarterly Accounting Update. Each quarter, we will provide you with up-to-date information for consideration in your financial reporting and disclosures. Our goal is for you to have current, relevant information available prior to finalizing your financial reporting deliverables. This update is organized as follows:

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Selected Highlights

This section includes an executive summary of selected items and hot topics covered in this update.

FASB Update

This section includes an overview of selected Accounting Standards Updates (ASUs) issued during the period.

Regulatory Update

This section includes an overview of selected updates, releases, rules and actions during the period that might impact financial information, operations and/or governance.

Other Developments

This section includes an overview of other developments, actions, and projects of the FASB, PCC, EITF and/or other rulemaking organizations.

On the Horizon

This section includes an overview of selected projects and exposure drafts of the FASB.

Appendices

  • A – Important Implementation Dates
  • B – Illustrative Disclosures for Recently Issued Accounting Pronouncements
  • C – Related Party Considerations
  • D – North Carolina Tax Rate Disclosure Example

Quarterly Accounting Update: Selected Highlights

Not-for-Profit Financial Statements Get a Makeover

In August, the FASB issued final guidance intended to improve financial statement presentation by not-for-profit (NFP) organizations—a model that has existed for more than 20 years. The new guidance will affect substantially all NFPs, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, among others.

Find out more about this new standard in the FASB Update section.

Additional Focus on Related Party Disclosures

Studies have indicated that related party disclosure issues are present in approximately 20 percent of all of the enforcement and private litigation accounting cases brought by the Securities and Exchange Commission’s Division of Enforcement. As a result, regulatory bodies will potentially put great emphasis on related party disclosures.

Read more about these issues in the Regulatory Update section.

Proposed Standard for Hedge Accounting Issued

The FASB’s project on hedging addresses issues related to hedge accounting for financial instruments and non-financial items. The objective of this project is to make targeted improvements to the hedge accounting model based on the feedback received from preparers, auditors, users and other stakeholders.

More information on this proposal can be found in the On the Horizon section.

Quarterly Accounting Update: FASB Update

The following selected Accounting Standards Updates (ASUs) were issued by the Financial Accounting Standards Board (FASB) during the third quarter. A complete list of all ASUs issued or effective in 2016 is included in Appendix A.

FASB Issues New Standard on Not-for-Profit Financial Statements

Affects: All not-for-profit entities

On August 18, 2016, the FASB issued final guidance intended to improve financial statement presentation by not-for-profit (NFP) organizations. ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, requires NFPs to improve their presentation and disclosures to provide more relevant information about their resources (and the changes in those resources) to their donors, grantors, creditors and other users. There are qualitative and quantitative requirements in a number of areas, including net asset classes, investment return, expenses, liquidity and availability of resources, and presentation of operating cash flows.

The following are some of the key points of the ASU:

  • The existing three-category classification of net assets (i.e., unrestricted, temporarily restricted, and permanently restricted) will be replaced with a simplified model that combines temporarily restricted and permanently restricted into a single category called “net assets with donor restrictions.”
  • New disclosures will highlight restrictions on the use of resources that make otherwise liquid assets unavailable for meeting near-term financial requirements. NFPs will be required to disclose (on the face of the statement or in notes) the extent to which the balance sheet comprises financial assets, the extent to which those assets can be converted to cash within one year, and any limitations that would preclude their current use.
  • In addition to reporting expenses by functional classifications (i.e., programs and supporting activities) as is required today, NFPs will be required to provide information about expenses by their nature.
  • Investment return will continue to be presented net of investment expenses. However, the expenses that can be netted will be limited to “external investment expenses and direct internal investment expenses,” which is narrower than what is permitted today. Disclosure of netted expenses is no longer required.

For a more detailed discussion of ASU 2016-14, see our Accounting Alert, FASB Announces Extreme Makeover for Not-for-Profit Financial Statement Presentation and Disclosures at: http://www.elliottdavis.com/articles

Effective Dates

The amendments are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early application is permitted.

FASB Clarifies Classification of Cash Receipts and Cash Payments

Affects: All entities

On August 26, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows under FASB Accounting Standards Codification (ASC) 230, Statement of Cash Flows. This ASU addresses eight cash flow issues with the objective of reducing the existing diversity in practice. Specifically, the amendments provide guidance on the following cash flow issues:

  • Debt prepayment or debt extinguishment costs—penalties paid by borrowers to settle a debt ahead of time—should be classified as cash outflows for financing activities.
  • The cash payment attributable to accreted interest on zero-coupon bonds, a type of debt security that is issued or traded at significant discounts, should be classified as a cash outflow for operating activities. The portion of the cash payment attributable to principal should be classified as a cash outflow for financing activities.
  • Cash payments for the settlement of a contingent consideration liability made by a business after it buys another business should be separated and classified as cash outflows for financing activities and operating activities. Contingent consideration is typically an obligation to transfer additional assets or equity interests to the former owners of the acquired businesses if certain conditions are met.
  • The proceeds from the settlement of insurance claims should be classified based on the type of insurance coverage and the type of loss. For example, a claim to cover destruction of a building would be classified in investing activities while a claim to cover loss of inventory would be classified in operating activities.
  • Proceeds businesses receive from corporate-owned life insurance—life insurance on employees’ lives—should be classified as cash inflows from investing activities. Cash payments for premiums on these policies may be classified as cash outflows for investing activities, operating activities, or a combination of the two.
  • Distributions received from equity method investees should be presumed to be returns on the investment and classified as cash inflows from operating activities, unless the investor’s distributions received less distributions received in prior periods that were determined to be returns of investment, exceed cumulative equity in earnings recognized by the investor.
  • Beneficial interests in securitization transactions, which are common transactions for financial companies, large retailers, and credit card companies, should be disclosed as a noncash activity, and cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables should be classified as inflows from investing activities.
  • Finally, the ASU covers what is considered one of the most complicated parts of cash flow presentation, a concept known as the “predominance principle.” ASC 230 acknowledges that it’s not always clear how cash flows should be classified, especially when cash receipts and payments have characteristics of more than one type of activity. In these situations, the ASU indicates that the reporting entity should look at the activity that is likely to be the “predominant” source of cash flows for the item. The ASU includes more guidance on how to make the determination and states that the use of judgment will be required.

Effective Dates

The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.

The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable.

Quarterly Accounting Update: Regulatory Update

Related Party Disclosures Receiving Additional Focus

Studies have indicated that related party disclosure issues are present in approximately 20 percent of all of the enforcement and private litigation accounting cases brought by the Securities and Exchange Commission’s (SEC’s) Division of Enforcement. The Public Company Accounting Oversight Board (PCAOB) has stated that related party transactions were contributing factors in numerous high profile financial reporting frauds including Enron, Tyco, WorldCom, Adelphia, and Rite Aid. With the PCAOB’s Auditing Standard No. 18, Related Parties, recently becoming effective, there will be an even greater focus on these disclosures by the PCAOB and SEC (and potentially other regulatory bodies as well). See Appendix C for additional information and resources to consider when evaluating the related party transactions that should be disclosed by your organization.

Investor Groups Support Crackdown on Non-GAAP Measures

As reported in our Quarterly Accounting Update for the 2nd Quarter, the SEC has stepped up efforts to restrict the practice of non-GAAP measures in company press releases and other statements. In April 2016, the SEC issued Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K, as part of the Disclosure Effectiveness project. Release No. 33-10064 is a preliminary rulemaking document to seek comments about Regulation S-K, the set of rules that cover information outside the financial statements that companies must provide in their annual and quarterly reports.

In response to Release No. 33-10064, some large investor groups have asked the SEC to change certain rules due to their concern about the increasing use of non-GAAP measures in quarterly earnings releases. The Council of Institutional Investors, which represents pension funds, foundations and endowments, is in favor of rule changes, but is concerned because non-GAAP metrics are not scrutinized by independent auditors, a concern echoed by the Center for Audit Quality, an affiliate of the AICPA. According to the California State Teachers’ Retirement System, non-GAAP information can be misleading without any consistent standard to ensure comparability from one company to another.

Petition to Further Revise Regulation A

In June 2016, OTC Markets Group Inc. issued a petition asking the SEC to expand the scope of Regulation A to include all small companies that file with the SEC. The petition was in response to Release No. 33-9741, Amendments to Regulation A, which was adopted in March 2015. In Release No. 33-9741, the SEC revised Regulation A to raise the threshold from $5 million to $50 million for unregistered offerings. Regulation A provides for a lighter accounting and disclosure load than a full-fledged registered offering, and it was one of the reforms from the 2012 Jumpstart Our Business Startups (JOBS) Act intended to make it easier for new, start-up companies to solicit funds from investors.

The petition from OTC Markets, which owns several stock markets for small companies, indicated that the JOBS Act does not limit the types of companies that may be afforded access to the streamlined process. The petition said that other issuers that want to take advantage of Regulation A either have to deregister as a reporting company and then file Form 1-A and stop more frequent and detailed periodic reporting or choose other available options, such as Form S-1 or S-3 registration or a private placement under Regulation D. Small businesses and securities lawyers have indicated in comment letters to the SEC that they strongly support the petition.

Quarterly Accounting Update: Other Developments

North Carolina Tax Reform Law Impacts Deferred Tax Assets and Liabilities

On July 23, 2013, North Carolina Governor Pat McCrory signed a major tax reform bill into law that lowered the North Carolina corporate income tax rate among other things.  Specifically, the corporate income tax rate was reduced from 6.9% to 6% in 2014, to 5% in 2015, and to 4% in 2016. The rate will be further reduced to 3% for post-2016 tax years provided that specified revenue growth targets are reached.

On August 4, 2016, the North Carolina Department of Revenue issued a notice confirming that the targeted amount of $20,975,000,000 of net General Fund tax collections for fiscal year 2015-2016 was exceeded and the corporate income tax rate will be reduced from 4 percent to 3 percent for tax years beginning on or after January 1, 2017.

These collection targets that trigger additional rate decreases must be considered in determining the amount of deferred tax assets/liabilities. For accounting purposes,  when it is considered to be more likely than not the tax rate changes will be implemented, the  enacted changes in tax laws and rates that become effective for a particular future year(s) are to be considered in determining the tax rate to apply to temporary differences reversing in that year(s). The effect on deferred tax assets and liabilities from an enacted change in tax laws or rates is recognized in income from continuing operations in the period of enactment (date tax legislation signed into law) regardless of whether the tax legislation is retroactive or prospective.

The excerpt of the rate reduction trigger criteria from the final enacted legislation can be accessed at: http://www.ncleg.net/EnactedLegislation/Statutes/PDF/BySection/Chapter_105/GS_105-130.3C.pdf

See Appendix D for an illustrative note disclosure for the North Carolina tax rate change.

Allowance for Uncollectible Trade Receivables

As reported in our Quarterly Accounting Update for the 2nd Quarter, the FASB issued final guidance in June that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. ASU 2016-13, Measurement of Credit Losses on Financial Instruments, introduced a Current Expected Credit Loss (CECL) model that will impact both financial services and non-financial services entities, including trade receivables.

The conditions under which trade receivables exist usually involve some degree of uncertainty about their collectibility, in which case a contingency exists. The loss contingency guidance in FASB Accounting Standards Codification (ASC) 450, Contingencies, requires recognition of a loss when both of the following conditions are met:

  • Information available before the financial statements are issued indicates that it is probable that an asset has been impaired at the date of the financial statements.
  • The amount of the loss can be reasonably estimated.

As a result, losses for uncollectible receivables should be accrued when both of the preceding conditions are met. Historically, one of two bases was used to determine the amount of this loss: (1) percentage of sales or (2) percentage of receivables.

In the percentage-of-sales approach, management estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy. The company applies this percentage to either total credit sales or net credit sales of the current year. The amount of bad debt expense and the related credit to the allowance account are unaffected by any balance currently existing in the allowance account; any balance in the allowance is ignored. Therefore, the percentage-of-sales method achieves a proper matching of cost and revenues. This method is frequently referred to as the “income statement approach.” In other words, the focus is on the uncollectible accounts expense, not on the net realizable value of the trade receivables.

On the other hand, using past experience, a company can estimate the percentage of its outstanding receivables that will become uncollectible. This procedure provides a reasonably accurate estimate of the receivables’ realizable value. Hence, this method is referred to as the percentage-of-receivables (or balance sheet) approach. In other words, the focus on the net realizable value of the trade receivables, not on the uncollectible accounts expense.

Historically, both of these methods (percentage-of-sales and percentage-of-receivables) have been used because neither method was endorsed nor prohibited by the authoritative accounting guidance within U.S. GAAP. However, with the issuance of ASU 2016-13, the FASB has indicated a clear requirement to use an approach that focuses on the net realizable value of the trade receivables (e.g., the percentage-of-receivables approach). In fact, in a recent discussion with members of the FASB staff, we were informed that the percentage-of-sales method would be incompatible with the CECL model. As a result, entities that currently use a percentage-of-sales method should determine when and how to transition to a method that would comply with the CECL model. The example below, which is reproduced from ASU 2016-13, illustrates how an entity could apply the CECL model to trade receivables by using a provision matrix.

Trade Receivable Example

ABC Company manufactures and sells products to a broad range of customers, primarily retail stores. Customers typically are provided with payment terms of 90 days with a 2 percent discount if payments are received within 60 days. ABC Company has tracked historical loss information for its trade receivables and compiled the following historical credit loss percentages:

  1. 3 percent for receivables that are current
  2. 8 percent for receivables that are 1–30 days past due
  3. 26 percent for receivables that are 31–60 days past due
  4. 58 percent for receivables that are 61–90 days past due
  5. 82 percent for receivables that are more than 90 days past due.

ABC Company believes that this historical loss information is a reasonable base on which to determine expected credit losses for trade receivables held at the reporting date because the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages (that is, the similar risk characteristics of its customers and its lending practices have not changed significantly over time). However, ABC Company has determined that the current and reasonable and supportable forecasted economic conditions have improved as compared with the economic conditions included in the historical information. Specifically, ABC Company has observed that unemployment has decreased as of the current reporting date, and ABC Company expects there will be an additional decrease in unemployment over the next year. To adjust the historical loss rates to reflect the effects of those differences in current conditions and forecasted changes, ABC Company estimates the loss rate to decrease by approximately 10 percent in each age bucket. ABC Company developed this estimate based on its knowledge of past experience for which there were similar improvements in the economy.

At the reporting date, ABC Company develops the following aging schedule to estimate expected credit losses.

Past-Due Status Amortized Cost

Basis

Credit Loss

Rate

Expected Credit Loss

Estimate

Current $ 5,984,698 0.27% $ 16,159
1–30 days past due 8,272 7.2% 596
31–60 days past due 2,882 23.4% 674
61–90 days past due 842 52.2% 440
More than 90 days past due             1,100 73.8%          812
  $ 5,997,794   $ 18,681

This example highlights that an entity’s application of the CECL model to trade receivables through the use of a provision matrix may not differ significantly from the entity’s current methods for determining the allowance for doubtful accounts. However, the example illustrates that when an entity uses a provision matrix to estimate credit losses on trade receivables, it would be required to do the following when moving to an expected loss model:

  • Under the CECL model, the entity would be required to consider whether expected credit losses should be recognized for trade receivables that are considered “current” (i.e., not past due). In the example above, a historical loss rate of 0.3 percent is applied to the trade receivables that are classified as current.
  • When using historical loss rates in a provision matrix, the entity would be required to consider whether and, if so, how the historical loss rates differ from what is currently expected over the life of the trade receivables (on the basis of current conditions and reasonable and supportable forecasts about the future).

The New Going Concern Self-Assessment

In 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, that provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an organization’s ability to continue as a going concern and about related note disclosures. Although the presumption that an organization will continue to operate as a going concern is fundamental to the preparation of financial statements, there was no guidance in U.S. GAAP related to the concept. Due to the lack of guidance in U.S. GAAP and the differing views about when there is substantial doubt about an organization’s ability to continue as a going concern, there was diversity in whether, when, and how an organization discloses the relevant information in its notes. As a result, the FASB issued this guidance to require management evaluation and potential financial statement disclosures.

The Self-Assessment

In connection with preparing financial statements, you will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about your organization’s ability to continue as a going concern within one year after the date that the financial statements are issued.

OBSERVATION: Be sure to document this evaluation, including what factors, conditions, and events were considered and the potential impact these items may have on your organization.

That evaluation should be based on relevant information that is known and reasonably knowable[1] at the date that the financial statements are issued and would include assessment of factors such as:

  • Current financial condition, including available liquid funds and available access to credit;
  • Obligations due or anticipated within one year;
  • The funds necessary to maintain operations considering its current financial condition, obligations, and other expected cash flows;
  • Other adverse conditions or events such as the following:
    • Recurring operating losses, working capital deficiencies, or negative cash flows.
    • Defaults on loans or similar agreements, denial of usual trade credit from suppliers, or a need to restructure debt to avoid default.
    • External matters, such as legal proceedings, legislation, or similar matters that might jeopardize the organization’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; or an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.

OBSERVATION: In many cases, a detailed analysis is probably not necessary. This would be the case where your organization has a history of profitable operations, ready access to financial resources, and no significant near-term obligations in excess of available liquid funds. On the other hand, when potentially negative events or conditions exist, a more detailed analysis may be required, including development of forecasts and projections.

Substantial doubt would exist when relevant conditions and events, considered in the aggregate, indicate that it’s probable that your organization will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.

If, after performing the evaluation, you do not identify any conditions or events that indicate that it’s probable that your organization would be unable to meet its obligations as they become due within one year after the date that the financial statements are issued, no further action or disclosures would be necessary. Just be sure to document the evaluation and your conclusion.

Based on the self-assessment, if do you identify conditions or events that raise substantial doubt about your organization’s ability to continue as a going concern, you will need to consider whether any plans you have developed will alleviate the substantial doubt. You will need to consider (1) whether it’s probable that the plans can be effectively implemented and, if so, (2) whether it’s probable that the plans will mitigate the conditions or events that raise substantial doubt.

If the substantial doubt is alleviated as a result of consideration of your plans, the following would need to be disclosed in the notes to the financial statements:

  • Conditions or events that raised substantial doubt (before consideration of your plans).
  • Your evaluation of the significance of those conditions or events in relation to your organization’s ability to meet its obligations.
  • Your plans that alleviated the substantial doubt.

If substantial doubt is not alleviated after consideration of your plans, the following would need to be disclosed in the notes to the financial statements:

  • A statement that there is substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued.
  • Conditions or events that raise substantial doubt.
  • Your evaluation of the significance of those conditions or events in relation to your organization’s ability to meet its obligations.
  • Your plans that are intended to mitigate the conditions or events that raise the substantial doubt.

The first self-assessments will be made for the annual period ending after December 15, 2016 (calendar year-end 2016), and for annual periods and interim periods thereafter.

For a more detailed discussion of ASU 2014-15, see our Accounting Alert, Coming Soon to Your Financial Statements: The Going Concern Self-Assessment at: http://www.elliottdavis.com/articles

Quarterly Accounting Update: On the Horizon

The following selected FASB exposure drafts and projects are outstanding as of September 30, 2016.

FASB Simplification Initiative

The FASB’s Simplification Initiative is a tightly-focused initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. The projects included in the initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing cost and complexity in financial reporting. In addition to the Simplification Initiative, the FASB recently completed several projects, and currently is working on several projects, that are intended to reduce cost and complexity in financial reporting. The FASB launched the initiative in 2015 to reduce the cost and complexity of financial reporting by making targeted changes to U.S. GAAP while maintaining or improving the usefulness of information for investors.

Balance Sheet Classification of Debt

This project is expected to reduce cost and complexity by replacing the existing fact-pattern specific guidance with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an organization’s current compliance with debt covenants. An exposure draft is expected in the fourth quarter of 2016.

Accounting for Income Taxes, Intra-Entity Asset Transfers

In January 2015, the FASB issued a proposal which is expected to simplify accounting for income taxes by eliminating the prohibition on the recognition of income taxes for transfers of assets from one jurisdiction to another. A final ASU is expected in the fourth quarter of 2016.

Nonemployee Share-Based Payment Accounting Improvements

The objective of this project is to reduce cost and complexity and improve the accounting for nonemployee share-based payment awards issued by public and private companies.

Financial Instruments – Hedging Activities

The FASB continues to work on its financial instruments project, which has three primary areas that are being individually addressed: (1) recognition and measurement, (2), impairment and (3) hedging. On January 5, 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. On June 16, 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.

The final part of the project, related to hedge accounting, was exposed for public comment in September, 2016. Many companies use derivative financial instruments to hedge their exposure to certain risks. Today, hedge accounting is an elective approach that minimizes the accounting volatility created when derivatives, which are otherwise accounted for at fair value through net income, are used to hedge revenue or expenses that are not yet reported (e.g., forecasted sales or purchases) or to hedge assets or liabilities that are not measured at fair value through net income (e.g., inventory or debt). Qualifying criteria must be met in order to apply hedge accounting. The proposed ASU, Targeted Improvements to Accounting for Hedging Activities, contains proposals for improving how the economic results of an entity’s risk management activities are portrayed by:

  • Expanding the use of component hedging for both nonfinancial and financial risks
  • Refining the measurement techniques for hedged items in fair value hedges of benchmark interest rate risk
  • Eliminating the separate measurement and reporting of hedge ineffectiveness
  • Requiring for cash flow and net investment hedges that all changes in fair value of the hedging instrument included in the hedging relationship be deferred in other comprehensive income and released to the income statement in the period(s) when the hedged item affects earnings
  • Requiring that changes in the fair value of hedging instruments be recorded in the same income statement line item as the earnings effect of the hedged item
  • Requiring enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items

In addition, the proposal simplifies the application of hedge accounting by:

  • Providing more time for the completion of initial quantitative assessments of hedge effectiveness
  • Allowing subsequent assessments of hedge effectiveness to be performed on a qualitative basis when an initial quantitative test is required
  • Clarifying the application of the critical terms match method for a group of forecasted transactions
  • Allowing an entity that elects the shortcut method to continue hedge accounting by using a “long-haul” method to assess hedge effectiveness if use of the shortcut method was not or no longer is appropriate after hedge inception

The FASB will determine an effective date for the ASU after redeliberating all comments received during the comment period and from the public round table meetings. Early application of the proposed amendments would be permitted at the beginning of any fiscal year before the effective date.

Disclosure Framework

The objective and primary focus of this project is to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements. Although reducing the volume of the notes to financial statements is not the primary focus, the FASB hopes that a sharper focus on important information will result in reduced volume in most cases. In March 2014, the FASB issued an Exposure Draft, Conceptual Framework for Financial Reporting: Chapter 8 Notes to Financial Statements, intended to improve its process for evaluating existing and future disclosure requirements in notes to financial statements. Specifically, it addresses the FASB’s process for identifying relevant information and the limits on information that should be included in notes to financial statements. If approved, it would become part of the FASB’s Conceptual Framework, which provides the foundation for making standard-setting decisions.

In September 2015, the FASB issued two proposals—one about the use of materiality by reporting entities, Assessing Whether Disclosures Are Material, and the other amending the Conceptual Framework’s definition of materiality, Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information. These two proposals were issued to help entities decide what information should be included in their footnotes without bogging them down with extra details.

The main provisions would draw attention to the role materiality plays in making decisions about disclosures. More specifically, the proposed ASU explains that: (a) materiality would be applied to quantitative and qualitative disclosures individually and in the aggregate in the context of the financial statements as a whole; therefore, some, all, or none of the requirements in a disclosure Section may be material; (b) materiality would be identified as a legal concept; and (c) omitting a disclosure of immaterial information would not be an accounting error.

Clarifying the Definition of a Business

This project is intended to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.

Restricted Cash

In April 2014, the FASB decided to add a statement of cash flows project to the FASB’s technical agenda. The project, Clarifying Certain Existing Principles on Statement of Cash Flows, was intended to reduce diversity in practice in financial reporting by clarifying certain existing principles in Accounting Standards Codification (ASC) 230, Statement of Cash Flows.

At its April 1, 2015 meeting, the FASB decided to have the Emerging Issues Task Force (EITF) consider nine specific cash flow classification issues with the goal of reducing the existing diversity in practice on those issues on a timely basis. Eight of those issues are being addressed in EITF Issue 15-F, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The ninth issue, which relates to restricted cash and restricted cash equivalents, was previously included in Issue 15-F and is now being addressed in Issue 16-A.

On April 28, 2016, the FASB issued proposed ASU, Restricted Cash, which would require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

Defined Benefit Pension Plans

In January 2016, the FASB issued two proposals that would amend the requirements in ASC 715, Compensation—Retirement Benefits, related to (1) the income statement presentation of the components of net periodic benefit cost for the defined benefit pension and other postretirement plans an entity sponsors and (2) disclosures about those defined benefit plans.

The income statement presentation project is part of the FASB’s simplification initiative. Under the proposed guidance, entities would present current service cost with other current employee compensation costs and present the remaining components of net benefit cost elsewhere in the income statement.

The proposed changes related to disclosures are part of the FASB’s disclosure framework project, which was launched in 2014 to improve the effectiveness of disclosures in notes to financial statements. Under the proposed guidance, an entity would consider materiality in determining the extent of its defined benefit plan footnote disclosures. The proposal also contains a number of disclosure requirements that would be added to or deleted from U.S. GAAP.

Proposed Changes to Inventory Disclosure Rules Expected to be Published in the Fall

The FASB plans to release a proposal to require businesses to provide more details in their financial statement footnotes about their inventories. Specifically, the proposed disclosures are intended to provide financial statement users better insight into the value of companies’ inventory.  The proposal would require businesses to provide a detailed breakdown of their inventory. Businesses would have to disclose inventory by segment and then break that down further by component, if the business’s decision makers use that information to determine how the business operates.  Private companies would only be required to disclose inventory by component in total. They also would have to disclose their inventory based on how they measure it.

Accounting for Interest Income Associated with the Purchase of Callable Debt Securities

When a debt security or loan is purchased at a premium, the premium is typically amortized to the maturity date despite the possibility that the borrower may prepay the debt instrument earlier than the maturity date. The FASB has received feedback that this interest income model may result in the recognition of too much interest income before the borrower prepays the debt instrument, and the possibility of a delayed recognition of a loss for the unamortized premium. At its meeting on March 18, 2015, the FASB voted to add a project to its agenda to require disclosures about interest income on purchased debt securities and loans. The FASB subsequently voted to amend the scope of the project to include amortization period considerations. At the July 27, 2016 meeting, the FASB voted to remove interest income disclosures on purchased debt securities and loans from the scope of the project and place the that topic in pre-agenda research. The scope of the project was amended to only include amortization period considerations. The FASB also directed the staff to draft a proposed ASU on the amortization change of premiums on callable debt securities, which is expected to be issued in the fourth quarter of 2016.

Accounting for Goodwill Impairment

On May 12, 2016, the FASB proposed eliminating Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure impairment loss. Under the proposal, goodwill impairment loss would instead be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. All other goodwill impairment guidance would remain unchanged. The proposal would apply to all entities except for private companies that have adopted the Private Company Council goodwill accounting alternative (ASU 2014-02). Under the proposal, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss would be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit. An entity would still have the option to perform a qualitative assessment before proceeding to the quantitative goodwill impairment test. Further, the proposal would not change the timing of goodwill impairment (i.e., annual or more frequently if there are triggering events), or the unit of account to which the test is applied (i.e., reporting units).

The FASB is considering whether to make additional changes to the subsequent accounting for goodwill in a related project, Subsequent Accounting for Goodwill for Public Business Entities and Not-for-Profit Entities.

AICPA Issues Proposed Cybersecurity Guidance

On September 19, 2016, the AICPA issued two proposals dealing with accountants’ handling of cybersecurity.   Proposed Description Criteria for Management’s Description of an Entity’s Cybersecurity Risk Management Program, represents proposed guidance for companies when designing and describing their cybersecurity risk management programs and for accounting firms when they report on management’s description of its cybersecurity.  The second, Proposed Revision of Trust Services Criteria for Security, Availability, Processing Integrity, Confidentiality, and Privacy, includes revisions to Trust Services Principles (TSP) Section 100, “Trust Services Principles and Criteria for Security, Availability, Processing Integrity, Confidentiality, and Privacy.” The revisions are intended for accounting firms that provide advisory or attestation services to evaluate the controls for an entity’s cyber risk management. The controls are also referred to as the Service Organization Control (SOC) 2 controls that deal a business’s internal controls for nonfinancial information.

EITF Agenda Items

At its September 2016 meeting, the FASB’s Emerging Issues Task Force (EITF) discussed two issues and reached a final consensus on the presentation of restricted cash in the statement of cash flows. The EITF also reached a consensus-for-exposure relating to the determination of the customer within a service concession arrangement. In addition, the SEC Observer made an announcement at the meeting related to disclosures the SEC expects registrants to provide regarding the potential impact and the status of their adoption of the new revenue, leasing, and credit loss standards.

Final Consensus

Issue 16-A: Statement of Cash Flows: Restricted Cash—this issue addresses the presentation of restricted cash and restricted cash equivalents (or amounts generally described as such) within the statement of cash flows under Accounting Standards Codification (ASC) 230, Statement of Cash Flows, with the intent to reduce diversity in practice. The EITF reached a final consensus that restricted cash and restricted cash equivalents should be presented with cash and cash equivalents on the statement of cash flows. Entities are required to disclose how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. Entities must also disclose information about the nature of the restrictions. Entities are required to adopt the guidance on a retrospective basis

Consensus-for-Exposure

Issue 16-C: Accounting for Service Concession Arrangements—this issue addresses the determination of the customer for transactions within the scope of ASC 853, Service Concession Arrangements, with the intent to reduce diversity in practice. The EITF reached a consensus-for-exposure that the grantor (government or public sector entity) should be considered the customer of the operating entity in a service concession arrangement. Entities would adopt the proposed guidance on a full or modified retrospective basis, similar to the transition requirements included in ASC 606, Revenue from Contracts with Customers.

SEC Staff Announcement

The SEC Observer made an announcement during the EITF meeting related to the application of Staff Accounting Bulletin (SAB) 74 related to ASU 2014-09, Revenue from Contracts with Customers; ASU 2016-02, Leases; and ASU 2016-13, Measurement of Credit Losses on Financial Instruments. Consistent with SAB 74, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced above is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The additional qualitative disclosures should include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The SEC Observer commented that this announcement was focused on the upcoming year end filings but could also be considered for any upcoming interim filings.

PCC Activities

The Private Company Council (PCC) met on July 19, 2016, and discussed the following issues:

PCC Recommendations on FASB Projects

The PCC discussed the following FASB projects and made subsequent recommendations on:

  • Liabilities and Equity Short-Term Improvements. A majority of the PCC expressed an interest toward recommending that the FASB consider a disclosure-only private company alternative for equity-classified instruments with “down round” features (strike price adjusts down based on the pricing of future equity offerings).
  • Balance Sheet Classification of Debt. A majority of the PCC expressed an interest toward recommending that the FASB retain the current accounting for refinances in classifying debt as current or noncurrent.

Other Items

PCC members brought to the FASB’s attention the following matters:

  • Practical difficulties caused by amendments in ASU 2015-10, Technical Corrections and Improvements, concerning what constitutes “readily determinable fair value.”
  • The need to eliminate (for private companies) the fair value disclosures for held-to-maturity debt securities, similar to the elimination of that requirement for other financial instruments in ASU 2016-01, Financial Instruments, Recognition and Measurement of Financial Assets and Financial Liabilities.

APPENDIX A

Important Implementation Dates

The following table contains significant implementation dates and deadlines for FASB/EITF/PCC and GASB standards.

FASB/EITF/PCC Implementation Dates

Pronouncement Affects Effective Date and Transition
ASU 2016-15, Classification of Certain Cash Receipts and

Cash Payments (a consensus of the Emerging Issues Task Force)

All entities. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.

The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable.

ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities All not-for-profit entities. The amendments are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments is permitted.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments All entities that hold financial assets and net investment in leases that are not accounted for at fair value through net income. For public business entities (PBE) that are Securities and Exchange Commission (SEC) filers, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (for a calendar-year entity, it would be effective January 1, 2020).

For PBEs that are not SEC filers, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

For all other organizations, the new standard is effective for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021.

Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

ASU 2016-12, Narrow-Scope Improvements and Practical Expedients All entities See the Effective Date and Transition of ASU 2014-09, below.
ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) None. None.
ASU 2016-10, Identifying Performance Obligations and Licensing All entities See the Effective Date and Transition of ASU 2014-09, below.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting All entities that issue share-based payment awards to their employees. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

Early adoption is permitted for any organization in any interim or annual period.

ASU 2016-08, Principal versus Agent Considerations

(Reporting Revenue Gross versus Net)

All entities. See the Effective Date and Transition of ASU 2014-09, below.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting 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 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.
ASU 2016-06, Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) 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. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.

For entities other than public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.

An entity should apply the amendments on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective.

Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force) Entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.

For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.

An entity has an option to apply the amendments on either a prospective basis or a modified retrospective basis.

Early adoption is permitted, including adoption in an interim period.

ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) Entities that offer certain prepaid stored-value products. For public business entities, NFPs that have issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an OTC market, or an employee benefit plan that files financial statements with the SEC, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.

For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

The amendments should be applied either using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective or retrospectively to each period presented.

Earlier application is permitted, including adoption in an interim period.

ASU 2016-03, Effective Date and Transition Guidance (a consensus of the Private Company Council) All entities except public business entities, as defined in the Master Glossary of the FASB Accounting Standards Codification, not-for-profit entities, and employee benefit plans. The amendments are effective immediately.
ASU 2016-02, Leases All lessee and lessor entities. For public business entities, NFPs that have issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an OTC market, or an employee benefit plan that files financial statements with the SEC, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early application of the amendments is permitted for all entities.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities Entities that hold financial assets or owe financial liabilities. For public companies the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

For private companies, not-for-profit organizations, and employee benefit plans, the standard becomes effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019.

ASU 2015-17, Balance Sheet Classification of Deferred Taxes Entities that have deferred tax assets and/or deferred tax liabilities. For public business entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

For all other entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments Entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. All other entities are required to apply the new requirements for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date, with earlier application permitted for financial statements that have not been issued.

ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements: Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting SEC Registrants. Effective upon issuance (August 16, 2015).
ASU 2015-14, Revenue From Contracts With Customers (ASC 606): Deferral of the Effective Date All entities. See the Effective Date and Transition of ASU 2014-09, below.
ASU 2015-13, Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts Within Nodal Energy Markets—a consensus of the FASB Emerging Issues Task Force Entities that enter into contracts for the purchase or sale of electricity on a forward basis. The amendments were effective upon issuance (August 10, 2015) and should be applied prospectively. Therefore, an entity will have the ability to designate on or after the date of issuance any qualifying contracts as normal purchases or normal sales.
ASU 2015-12, (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient Defined Contribution Pension Plans, Defined Benefit Pension Plans, and Health and Welfare Benefit Plans The amendments in all three are effective for fiscal years beginning after December 15, 2015; early adoption is permitted. An entity should apply the amendments in parts I and II retrospectively to all financial statements presented, while the amendments in part III should be applied prospectively.
ASU 2015-11, Simplifying the Measurement of Inventory Entities that have inventory. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
ASU 2015-10, Technical Corrections and Improvements All entities. Effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance: effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
ASU 2015-09, Disclosures about Short-Duration Contracts Insurance entities that issue short-duration contracts as defined in FASB ASC 944, Financial Services—Insurance. For public business entities, the amendments are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017.
ASU 2015-08, Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115  (SEC Update) None. None.
ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Entities that elect to use the NAV practical expedient. For public business entities the amendments are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier application is permitted.
ASU 2015-06, Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions Master limited partnerships. Effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted.
ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement All entities. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.
ASU 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets All entities. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted.
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs All entities. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued.
ASU 2015-02, Amendments to the Consolidation Analysis All entities. Effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively.

ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items All entities. Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.
ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination—a consensus of the Private Company Council All entities except public business entities, as defined in the Master Glossary of the FASB Accounting Standards Codification, not-for-profit entities, and employee benefit plans. Effective prospectively to the first in-scope transaction after the adoption of the accounting alternative.
ASU 2014-17, Pushdown Accounting All entities. Effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be treated as a change in accounting principle.
ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity All entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. Effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

Entities should apply the guidance on a modified retrospective basis (cumulative-effect retained earnings adjustment as of the beginning of the year of adoption) to existing hybrid instruments issued in the form of a share as of the beginning of the fiscal year for which this ASU is effective. Retrospective application is permitted to all relevant prior periods.

ASU 2014-15, Disclosure of Uncertainties About and an Entity’s Ability to Continue as a Going Concern All entities. Effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure Creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. Effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the amendments are effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015.

An entity should adopt the amendments using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments to foreclosures that occur after the date of adoption. For modified retrospective transition, an entity should apply the amendments by means of a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU 2014-04. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted ASU 2014-04.

ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Entities that issue share-based payments when the terms of an award stipulate that a performance target could be achieved after an employee completes the requisite service period. Effective for all entities for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted.

Entities may apply the amendments either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date.

ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures Entities that enter into repurchase agreements, securities lending transactions, and repo-to-maturity transactions. Effective for public business entities for the first interim or annual period beginning after December 15, 2014. For all other entities, the accounting changes are effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited; however, all other entities may elect to apply the requirements for interim periods beginning after December 15, 2014.

For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. For all other entities, both new disclosures are required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015.

ASU 2014-10, Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation All entities. Except for the amendments to ASC 810, the guidance is effective for public business entities for reporting periods (including interim periods) beginning after December 15, 2014. For other entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. The amendments to ASC 810 are effective one year later for public business entities and two years later for other entities. The guidance should be applied retrospectively, except for the clarification to ASC 275, which applied prospectively.

Early adoption of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued.

ASU 2014-09, Revenue from Contracts with Customers All entities. For public business entities, certain not-for-profit entities, and certain employee benefit plans, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early application is permitted only as of annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016.

For all other entities, the ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the ASU early as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in the ASU early as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in the ASU.

An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying guidance at the date of initial application.

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Dispos­als of Components of an Entity All entities. Effective for public business entities (and not-for-profit entities that issue securities or are conduit bond obligors) in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. For all other entities, the guidance is effective in annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015. The guidance is applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.

All entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.

ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements—a consensus of the Private Company Council All entities except public business entities, as defined in the Master Glossary of the FASB Accounting Standards Codification, not-for-profit entities, and employee benefit plans. Upon adoption of the accounting alternative, the guidance is applied retrospectively as of the beginning of the first fiscal year in which the accounting alternative is elected and to all periods presented.
ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach—a consensus of the Private Company Council All entities except public business entities, as defined in the Master Glossary of the FASB Accounting Standards Codification, not-for-profit entities, employee benefit plans, and financial institutions. Upon adoption of the simplified hedge accounting approach, that is applied as of the beginning of the first fiscal year in which the approach is elected. Private companies have the option of applying the amendments in this ASU by using either a modified retrospective approach or a full retrospective approach.
ASU 2014-02, Accounting for Goodwill—a consensus of the Private Company Council All entities except public business entities, as defined in the Master Glossary of the FASB Accounting Standards Codification, not-for-profit entities, and employee benefit plans. Upon adoption of the accounting alternative, the guidance is effective prospectively for new goodwill recognized after the adoption of that guidance. For existing goodwill, the guidance is effective as of the beginning of the first fiscal year in which the accounting alternative is adopted.
ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects—a consensus of the FASB Emerging Issues Task Force For reporting entities that meet the conditions, and that elect to use the proportional-amortization method, to account for investments in qualified affordable housing projects, all amendments in this ASU apply. For reporting entities that do not meet the conditions or that do not elect the proportional-amortization method, only the disclosure-related amendments in this ASU apply. Effective for public business entities for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in this ASU should be applied retrospectively to all periods presented.

GASB Implementation Dates

Pronouncement Affects Effective Date and Transition
Statement 80, Blending Requirements for Certain Component Units—an amendment of GASB Statement No. 14 Governmental entities. Effective for reporting periods beginning after June 15, 2016. Earlier application is encouraged.
Statement 79, Certain External Investment Pools and Pool Participants Governmental entities. Effective for reporting periods beginning after June 15, 2015, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing. Those provisions are effective for reporting periods beginning after December 15, 2015. Earlier application is encouraged.
Statement 78, Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans Governmental entities. Effective for reporting periods beginning after December 15, 2015. Earlier application is encouraged.
Statement 77, Tax Abatement Disclosures Governmental entities. Effective for reporting periods beginning after December 15, 2015. Earlier application is encouraged.
Statement 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Governmental entities. Effective for reporting periods beginning after June 15, 2015. Earlier application is encouraged.
Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions Governmental entities. Effective for fiscal years beginning after June 15, 2017. Early adoption is encouraged.
Statement 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Governmental entities. Effective for financial statements for periods beginning after June 15, 2016. Early adoption is encouraged.
Statement 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 Governmental entities. Effective for fiscal years beginning after June 15, 2015—except those provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of Statement 68, which are effective for financial statements for fiscal years beginning after June 15, 2016. Early adoption is encouraged.
Statement 72, Fair Value Measurement and Application Governmental entities. Effective for financial statements for periods beginning after June 15, 2015. Early adoption is encouraged.
Statement 71, Pension Transition for Contributions Made Subsequent to the Measurement Date Governmental entities Effective for fiscal years beginning after June 15, 2014.
Statement 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27 Governmental entities Effective for financial statements for fiscal years beginning after June 15, 2014. Early application is encouraged.

APPENDIX B

Illustrative Disclosures for Recently Issued Accounting Pronouncements

For the Quarter Ended September 30, 2016

The illustrative disclosures below are presented in plain English.  Please review each disclosure for its applicability to your organization and the need for disclosure in your organization’s financial statements.

Applicable to companies that have investments in qualified affordable housing projects:

In January 2014, the FASB amended the Equity Method and Joint Ventures topic of the Accounting Standards Codification. The amendments provide criteria that must be met in order to apply a proportional amortization method to Low-Income Housing Tax Credit investments and provide guidance on the method used to amortize the investment, the impairment approach, and the eligibility criteria for entities that have other arrangements (e.g., loans) with the limited liability entity. The amendments [were/will be] effective for the Company for new investments in qualified affordable housing projects for [interim and annual periods beginning after December 15, 2014-public companies][ annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015-private companies]. [For existing investments in qualified affordable housing projects, the Company will apply the proportional amortization method retrospectively.] [The Company intends to continue using the effective yield method for existing investments in qualified affordable housing projects.] [These amendments did not][The Company does not expect these amendments to] have a material effect on its financial statements.

Applicable to private companies that elect to amortize goodwill:

In January 2014, the FASB amended the Intangibles –Goodwill and Other topic of the Accounting Standards Codification. Under the amended guidance, a nonpublic entity may elect to amortize goodwill on a straight-line basis over a period of ten years or over a shorter period if the company demonstrates that another useful life is more appropriate. Goodwill would be subject to impairment testing only upon the occurrence of a triggering event. The amendments were effective for the Company for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. The alternative is applied on a prospective basis, with amortization of existing goodwill commencing at the beginning of the period of adoption. These amendments did not have a material effect on the Company’s financial statements.

Applicable to private companies, other than financial institutions, that elect to use the simplified hedge accounting approach:

In January 2014, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification. Under the amended guidance, a nonpublic entity may elect to use a simplified hedge accounting approach for its receive-variable, pay-fixed interest rate swaps. Under this approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and an interest rate swap. Furthermore, the simplified hedge accounting approach al­lows the swap to be measured at its settlement value, which measures the swap without non-performance risk, instead of fair value.  The amendments were effective for the Company for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. The Company applied the simplified hedge accounting approach [retrospectively] [using a modified retrospective approach]. These amendments did not have a material effect on the Company’s financial statements.

Applicable to private companies that elect to not apply VIE guidance:

In March 2014, the FASB amended the Consolidation topic of the Accounting Standards Codification. Under the amended guidance, a nonpublic entity has the option to exempt itself from applying the VIE consolidation model to a qualifying common control leasing arrangement. The amendments were effective for the Company for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. The Company applied a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented were adjusted to reflect the period-specific effects of applying the amendments.

Applicable to companies that have new disposals and new classifications of disposal groups as held for sale:

In April 2014, the FASB issued guidance to change the criteria for reporting a discontinued operation. Under the new guidance, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. The amendments were effective for the Company for [annual periods, and interim periods within those annual period beginning after December 15, 2014-public companies and not-for-profit entities that issue securities or are conduit bond obligors] [annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015-all other entities], with early implementation of the guidance permitted. These amendments did not have a material effect on the Company’s financial statements.

Applicable to all:

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for [reporting periods beginning after December 15, 2017-public business entities] [annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019-all other entities]. The Company will apply the guidance using a [full retrospective approach] [modified retrospective approach]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to development stage entities:

In June 2014, the FASB issued guidance which eliminates the concept of a development stage entity. Accordingly, the incremental reporting requirements for a development stage entity, including inception-to-date information, will no longer apply.  The amendments were effective for the Company for [reporting periods beginning after December 15, 2014, except for certain consolidation requirements which are effective one year later-public business entities] [annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015, except for certain consolidation requirements which are effective two years later-all other entities], with early implementation of the amendments permitted. The Company applied the guidance using a retrospective approach, except for certain disclosure requirements which will be applied prospectively. These amendments did not have a material effect on its financial statements.

Applicable to companies with repurchase agreements:

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments were effective for the Company for [the first interim or annual period beginning after December 15, 2014-public business entities] [annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015-all other entities]. The Company applied the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. These amendments did not have a material effect on the Company’s financial statements.

Applicable to companies with stock compensation tied to performance targets:

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to [all stock awards granted or modified after the amendments are effective] [stock awards with performance targets that are outstanding at the start of the first fiscal year in the financial statements and to all stock awards that are granted or modified after the effective date]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to companies with hybrid financial instruments:

In November 2014, the FASB issued guidance for determining whether embedded features need to be accounted for separately from their host shares. The new guidance requires companies to consider all terms and features, including the embedded feature(s) being evaluated for separate recognition, when determining whether a host contract is more akin to debt or equity; no single term or feature should be considered determinative regarding the nature of the host contract. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016-all other entities], with early adoption, including adoption in an interim period, permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to companies that elect to apply pushdown accounting:

In November 2014, the FASB issued guidance that gives acquired entities the option to apply pushdown accounting in their separate financial statements when an acquirer obtains control of them. Pushdown accounting is the practice of adjusting an acquired company’s separate financial statements to reflect the new basis of accounting established by the buyer for the acquired company. The new guidance provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments were effective upon issuance. The Company will apply pushdown accounting as of the most recent change-in-control event.

Applicable to private companies that elect to not recognize certain intangible assets in a business combination:

In December 2014, the FASB amended the Business Combinations topic of the Accounting Standards Codification. Under the amended guidance, a nonpublic entity may elect to not recognize separately from goodwill (1) customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of the business and (2) noncompetition agreements. This alternative generally will result in recognizing fewer intangible assets in a business combination and, correspondingly, more goodwill. The alternative is applied on a prospective basis. In addition, when this alternative is elected, the Company also is required to adopt the alternative accounting related to goodwill which requires that goodwill be amortized on a straight-line basis over a period of ten years or over a shorter period if the Company demonstrates that another useful life is more appropriate. The amendments will be effective for the Company upon the occurrence of the first transaction within the scope of this accounting alternative in fiscal years beginning after December 15, 2015, and the effective date of adoption depends on the timing of that first in-scope transaction. If the first in-scope transaction occurs in the first fiscal year beginning after December 15, 2015, the elective adoption will be effective for that fiscal year’s annual financial reporting and all interim and annual periods thereafter. If the first in-scope transaction occurs in fiscal years beginning after December 15, 2016, the elective adoption will be effective in the interim period that includes the date of that first in-scope transaction and subsequent interim and annual periods thereafter. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance [prospectively] [retrospectively to all prior periods presented in the financial statements]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2017-all other entities], with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities with debt issuance costs:

In April 2015, the FASB issued guidance which changes the presentation of debt issuance costs. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016-all other entities], with early adoption permitted for financial statements that have not been previously issued. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities with defined benefit pension plans:

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2016, and interim periods beginning after December 15, 2017-all other entities], with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities with cloud computing arrangements:

In April 2015, the FASB issued guidance which provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016-all other entities], with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to master limited partnerships:

In April 2015, the FASB issued guidance which provides guidance to master limited partnerships that receive net assets through a dropdown transaction on the allocation of the earnings (losses) of the transferred business before the date of the dropdown transaction. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that elect to use the net asset value practical expedient:

In May 2015, the FASB issued guidance which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016-all other entities], with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to insurance entities that issue short-duration contracts:

In May 2015, the FASB issued guidance which requires insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments will be effective for [fiscal years beginning after December 15, 2015 and interim periods beginning after December 15, 2016-public business entities] [fiscal years beginning after December 15, 2016, and interim periods beginning after December 15, 2017-all other entities], with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that have inventory:

In July 2015, the FASB issued amendments to the Inventory topic of the Accounting Standards Codification to require inventory to be measured at the lower of cost and net realizable value. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory, there are no other substantive changes to the guidance on measurement of inventory. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016-public business entities] [fiscal years beginning after December 15, 2016, and interim periods beginning after December 15, 2017-all other entities], with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans:

In July 2015, the FASB issued amendments to (1) require a pension plan to use contract value as the only measure for fully benefit-responsive investment contracts, (2) simplify and increase the effectiveness of the investment disclosure requirements for employee benefit plans, and (3) provide benefit plans with a measurement-date practical expedient. The amendments will be effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Entity does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that purchase or sell electricity:

In August 2015, the FASB issued amendments to the Derivatives and Hedging topic of the Accounting Standards Codification to clarify the application of the normal purchases and normal sales scope exception to purchases or sales of electricity on a forward basis that are transmitted through, or delivered to a location within, a nodal energy market. The amendments were effective upon issuance and are applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for [reporting periods beginning after December 15, 2017-public business entities] [annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019-all other entities]. The Company will apply the guidance using a [full retrospective approach] [modified retrospective approach]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to SEC Registrants:

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete:

In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015-public business entities] [fiscal years beginning after December 15, 2016, and interim periods beginning after December 15, 2017-all other entities], with early adoption permitted for financial statements that have not been issued. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that have deferred tax assets and/or deferred tax liabilities:

In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for [financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.-public business entities] [financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.-all other entities], with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance [prospectively] [retrospectively].  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that hold financial assets or owe financial liabilities:

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for [fiscal years beginning after December 15, 2017, includ­ing interim periods within those fiscal years.-public companies] [fis­cal years beginning after Decem­ber 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.-all other entities, including not-for-profit or­ganizations and employee benefit plans] The Company will apply the guidance by means of a cu­mulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily deter­minable fair values will be applied prospectively to equity in­vestments that exist as of the date of adoption of the amendments.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to lessee and lessor entities:

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for [fiscal years beginning after December 15, 2018, includ­ing interim periods within those fiscal years.-public companies] [fis­cal years beginning after Decem­ber 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.-all other entities] The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

Applicable to private companies:

In March 2016, the FASB amended several topics of the Accounting Standards Codification to make the guidance in all private company accounting alternatives effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the private company accounting alternatives. The amendments were effective immediately.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that offer certain prepaid stored-value products:

In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for [financial statements issued for fiscal years beginning after December 15, 2017, includ­ing interim periods within those fiscal years.-public companies] [financial statements issued for fis­cal years beginning after Decem­ber 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.-all other entities] The Company will apply the guidance [using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective] [retrospectively] to each period presented.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument:

In March 2016, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments will be effective for [financial statements issued for fiscal years beginning after December 15, 2016, includ­ing interim periods within those fiscal years.-public companies] [financial statements issued for fis­cal years beginning after Decem­ber 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.-all other entities] The Company will apply the guidance [using a modified retrospective transition] [prospectively] to each period presented.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to 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:

In March 2016, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendments will be effective for [financial statements issued for fiscal years beginning after December 15, 2016, includ­ing interim periods within those fiscal years.-public companies] [financial statements issued for fis­cal years beginning after Decem­ber 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.-all other entities] The Company will apply the guidance using a modified retrospective transition  to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective.  The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to 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:

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company will apply the guidance prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.  The Company does not expect these amendments to have a material effect on its financial statements

Applicable to all:

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for [reporting periods beginning after December 15, 2017-public business entities] [annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019-all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows.  Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.  The amendments will be effective for the Company for [annual periods beginning after December 15, 2016 and interim periods within those annual periods-public business entities] [annual periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after December 15, 2018-all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for [reporting periods beginning after December 15, 2017-public business entities] [annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019-all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for [reporting periods beginning after December 15, 2017-public business entities] [annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019-all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to entities that hold financial assets and net investment in leases that are not accounted for at fair value through net income:

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for [reporting periods beginning after December 15, 2019-SEC filers] [reporting periods beginning after December 15, 2020-public business entities that are not SEC filers] [annual periods beginning after December 15, 2020, and interim periods within annual reporting periods beginning after December 15, 2021-all other entities]. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

Applicable to all not-for-profit entities:

In August 2016, the FASB issued guidance to make targeted improvements to the not-for-profit financial reporting model, including changes in how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. The amendments will be effective for the Organization for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. The Organization is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

Applicable to all:

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. – public business entities] [fis­cal years beginning after Decem­ber 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. – all other entities] The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

APPENDIX C

Related Party Considerations

As discussed in the Regulatory Update section, we expect there will be a greater focus on related party disclosures by the PCAOB and other regulators. The information below includes selected issues that should be considered in an analysis of related party activities; further, this information can be used to decide which transactions should be disclosed by your organization. However, this information represents only selected elements of the related party disclosure analysis. It does not purport to be, and is not, a complete listing of all criteria, situations or circumstances that might constitute a related party transaction that requires disclosure. Further, it should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor.

The information contained in this appendix is organized as follows:

  • Definition Abstracts
  • Comparison of Definitions
  • Identifying Related Parties and Related Party Transactions

Definition Abstracts

U.S. GAAP

The SEC refers to the FASB’s definition of related parties. Related parties (as defined in the Master Glossary of the FASB Accounting Standards Codification) include:

  • Affiliates of the entity (Affiliate is defined as a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.)
  • Entities for which investments in their equity securities would be required, absent the election of the fair value option under the fair value option, to be accounted for by the equity method by the investing entity
  • Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
  • Principal owners of the entity and members of their immediate families (Principal owner is defined as owners of record or known beneficial owners of more than 10 percent of the voting interests of the entity; immediate family is defined as family members who might control or influence a principal owner or a member of management, or who might be controlled or influenced by a principal owner or a member of management, because of the family relationship.)
  • Management of the entity and members of their immediate families (Management is defined as persons who are responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management normally includes members of the board of directors, the chief executive officer, chief operating officer, vice presidents in charge of principal business functions (such as sales, administration, or finance), and other persons who perform similar policy making functions. Persons without formal titles also may be members of management.)
  • Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
  • Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests

SEC Regulations

Generally, the SEC refers to the FASB’s definition (outlined above) of related party. However, the SEC does have certain additional definitions that serve to clarify the SEC’s interpretation of the components listed above.  Selected SEC requirements in addition to those prescribed by the FASB include:

  • Affiliates – defined as (A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting securities of such other person; (B) any person 5 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.
  • Control – defined as the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company.
  • Executive officer – defined as the president, any vice president in charge of a principal business unit, division or function (such as loans, investments, operations, administration or finance), and any other officer or person who performs similar policymaking functions.
  • Immediate family – defined as such person’s spouse; parents; children; siblings; mothers and fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law.
  • Ordinary course of business – means those loans which were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than the normal risk of collectibility or present other unfavorable features.

Comparison of Definitions

Definitional component Included in Definition?
U.S. GAAP SEC
Executive Officers/Management:
C-suite executives (CEO, CFO, etc.) X X
Other officers (President, Vice Presidents, etc.) X X
Cashier, Secretary, and Treasurer X X
Immediate family member(s) of C-suite executives, other officers, Cashier, Secretary and Treasurer above:
Spouse X X
Children (residing in the individual’s home) X X
Children (NOT residing in the individual’s home) X X
Parents X X
Siblings X X
Mothers and fathers-in-law X
Sons and daughters-in-law X
Brothers and sisters-in-law X
Related interest(s)/affiliate(s) (as defined) of C-suite executives, other officers, Cashier, Secretary and Treasurer above X X
Directors:
Director – compensated X X
Director – NOT compensated X X
Advisory director (as defined) X
Immediate family member(s) of directors above:
Spouse X X
Children (residing in the individual’s home) X X
Children (NOT residing in the individual’s home) X X
Parents X X
Siblings X X
Mothers and fathers-in-law X
Sons and daughters-in-law X
Brothers and sisters-in-law X
Related interest(s)/affiliate(s) (as defined) of directors above X X
Principal Shareholder(s)/Principal Owner(s):
Owner(s) of record that directly or indirectly, owns, controls, or has the power to vote more than the following percent of any class of voting securities of the entity:
Ten (10) percent X X
Five (5) percent X
Immediate family member(s) of owner(s) above:
Spouse X X
Children (residing in the individual’s home) X X
Children (NOT residing in the individual’s home) X X
Parents X X
Siblings X X
Mothers and fathers-in-law X
Sons and daughters-in-law X
Brothers and sisters-in-law X
Related interest(s)/affiliate(s) (as defined) of owner(s) above X X
Beneficial owner(s) of record that directly or indirectly, owns, controls, or has the power to vote more than the following percent of any class of voting securities of the entity:
Ten (10) percent X X
Five (5) percent X
Immediate family member(s) of beneficial owner(s) above:
Spouse X X
Children (residing in the individual’s home) X X
Children (NOT residing in the individual’s home) X X
Parents X X
Siblings X X
Mothers and fathers-in-law X
Sons and daughters-in-law X
Brothers and sisters-in-law X
Related interest(s)/affiliate(s) (as defined) of beneficial owner(s) above X X
Affiliates/Other Parties:
A party with which the entity may deal if one party has the ability to exercise significant influence over the other’s operating and financial policies. X X
Employee pension plan trust managed by or under the trusteeship of management. X X
Employee profit-sharing trusts managed by or under the trusteeship of management. X X
Other trusts for the benefit of employees managed by or under the trusteeship of management. X X
Equity method investments. X X
Investments that are not accounted for under the equity method that would be accounted for by the equity method had the fair value option not been elected. X X
Other parties X X

Identifying Related Parties and Related Party Transactions

PCAOB Auditing Standard (AS) No. 18, Related Parties, contains some examples to provide guidance to external auditors related to identifying related parties and related party transactions. The following information is extracted from AS 18:

The following are examples of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist:

  • Buying or selling goods or services at prices that differ significantly from prevailing market prices;
  • Sales transactions with unusual terms, including unusual rights of return or extended payment terms generally not offered;
  • “Bill and hold” type transactions;
  • Borrowing or lending on an interest-free basis or with no fixed repayment terms;
  • Occupying premises or receiving other assets or rendering or receiving management services when no consideration is exchanged;
  • Engaging in a nonmonetary transaction that lacks commercial substance;
  • Sales without economic substance (e.g., funding the other party to the transaction to facilitate collection of the sales price, or entering into a transaction shortly prior to period end and unwinding that transaction shortly after period end);
  • Loans to parties that, at the time of the loan transaction, do not have the ability to repay and possess insufficient or no collateral;
  • Loans made without prior consideration of the ability of the party to repay;
  • A subsequent repurchase of goods that indicates that at the time of sale an implicit obligation to repurchase may have existed that would have precluded revenue recognition or sales treatment;
  • Advancing company funds that are used directly or indirectly to pay what would otherwise be an uncollectible loan or receivable;
  • Sales at below market rates to an intermediary whose involvement serves no apparent business purpose and who, in turn, sells to the ultimate customer at a higher price, with the intermediary (and ultimately its principals) retaining the difference;
  • Guarantees and guarantor relationships outside the normal course of business; or
  • Transactions between two or more entities in which each party provides and receives the same or similar amounts of consideration (e.g., round-trip transactions).

APPENDIX D

North Carolina Tax Rate Disclosure Example

As noted in the Other Developments section of this Update, for entities subject to North Carolina income tax, the North Carolina Tax Reform Law will impact the determination of recorded deferred tax assets and liabilities. The illustrative disclosure below is an example for organizations subject to North Carolina income tax. This disclosure (or something similar) should be included in the notes if the adjustments recorded or to be recorded would be considered material to the financial statements.

Tax Rate Change Disclosure

On July 23, 2013, North Carolina Governor Pat McCrory signed a major tax reform bill into law that lowered the North Carolina corporate income tax rate among other things. Specifically, the corporate income tax rate was reduced from 6.9% to 6%, to 5% in 2015, and to 4% in 2016. The rate will be further reduced to 3% for post-2016 tax years provided that specified revenue growth targets are reached.

On August 4, 2016, the North Carolina Department of Revenue issued a notice confirming that the targeted amount of $20,975,000,000 of net General Fund tax collections for fiscal year 2015-2016 was exceeded and the corporate income tax rate will be reduced from 4 percent to 3 percent for tax years beginning on or after January 1, 2017. As of September 30, the Company estimates the rate reduction trigger will result in a $____ reduction in deferred income taxes. The Company has recorded the impact of this legislation as a reduction in deferred income taxes as of September 30, 2016.

[1] “Reasonably knowable” means you should make a reasonable effort to identify conditions and events not readily known, but those you are able to identify without undue cost and effort.