Bringing Things into Focus: FASB Update

The following selected Accounting Standards Updates (ASUs) were issued by the FASB during the quarter. A complete list of ASUs issued in 2019 is included in Appendix C.

FASB Clarifies Guidance Related to Financial Instruments

Affects: All entities that hold financial instruments

On April 25, 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.

ASU 2019-04 addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The changes will not significantly impact current accounting practice or impose extra costs.

The updates that were made in relation to ASU 2016-01 clarify:

  • the scope of certain guidance in relation to health and welfare plans
  • held-to-maturity debt securities fair value disclosures
  • applicability of ASC 820, Fair Value Measurement, to the measurement alternative
  • remeasurement of equity securities at historical exchange rates

During implementation of ASU 2016-13, companies raised questions, for example, about the measurement of the allowance for credit losses on accrued interest. ASU 2019-04 clarifies that accrued interest receivable balances should be measured separately from other components of the amortized costs basis of associated financial assets so that companies would not incur unintended costs. Other issues clarified include:

  • transfers between classifications or categories for loans and debt securities
  • recoveries of financial assets and trade receivables previously written off
  • vintage disclosures—line-of-credit arrangements converted to term loans
  • contractual extensions and renewals

In relation to ASU 2017-12, which improves the hedge accounting model, questions were raised about whether the ability to measure the change in fair value of a hedged item in a partial-term fair value hedge using its assumed term applies only to interest rate risk hedges, or whether it can also be measured using the hedged item’s assumed term. ASU 2019-04 clarifies that a company may measure it using an assumed term only for changes attributable to interest rate risk. Other updates were made related to:

  • multiple partial-term fair value hedging
  • amortization of fair value hedge basis adjustments
  • disclosure of fair value hedge basis adjustments
  • consideration of the hedged contractually specified interest rate under the hypothetical derivative method
  • hedge accounting provisions applicable to certain private companies and not-for-profit entities
  • application of a first-payment received cash flow hedging technique to overall cash flows on a group of variable interest payments
  • transition guidance

Effective Dates

The effective date of each of the amendments depends on the effective date and adoption of ASU 2016-01, ASU 2016-13, and ASU 2017-12.

FASB Extends Private Company Accounting Alternatives to NFP Entities

Affects: Not-for-profit entities

On May 30, 2019, the FASB issued an ASU 2019-06, Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, that reduces the cost of accounting for goodwill and measuring certain identifiable intangible assets for not-for-profit organizations.

The amendments in this ASU extend the private company alternatives from ASC 350, Intangibles—Goodwill and Other(ASU 2014-02, Accounting for Goodwill) and ASC 805, Business Combinations(ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination) to not-for-profit entities. Under the amendments to the accounting alternative in ASC 350, a not-for-profit entity should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the not-for-profit entity demonstrates that a shorter useful life is more appropriate. A not-for-profit entity that elects this accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. A not-for-profit entity is required to test goodwill for impairment when a triggering event occurs that indicates that the fair value of the entity (or a reporting unit) may be below its carrying amount. Under the amendments to the accounting alternative in ASC 805, for transactions occurring after adoption of the alternative, a not-for-profit entity should subsume into goodwill and amortize customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business and all noncompetition agreements acquired.

A not-for-profit entity that elects the accounting alternative in ASC 805 is required to adopt the alternative in ASC 350 to amortize goodwill. However, a not-for-profit entity that elects the accounting alternative in ASC 350 is not required to adopt the accounting alternative in ASC 805.

Effective Dates

The amendments are effective upon issuance. Consistent with the existing private company alternatives for goodwill and certain intangible assets, not-for-profit entities electing to adopt these alternatives do not have to demonstrate preferability and should follow the transition guidance the first time they elect to adopt the alternatives. Not-for-profit entities have the same open-ended effective date and unconditional one-time election that private companies have.

The transition methods for the guidance on each accounting alternative are the same for not-for-profit entities as the previous transition methods for private companies. A not-for-profit entity should apply the accounting alternative in ASC 350, if elected, prospectively for all existing goodwill and for all new goodwill generated in acquisitions by not-for-profit entities. A not-for-profit entity should apply the accounting alternative in ASC 805, if elected, prospectively upon the occurrence of the first transaction within the scope of the alternative.