The following selected Accounting Standards Updates (ASUs) were issued by the FASB during the fourth quarter. A complete list of all ASUs issued in 2014 is included in Appendix A.
FASB Eliminates the Concept of Extraordinary Items
Affects: All Entities
On January 7, 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The ASU eliminates the concept of extraordinary items from U.S. GAAP. Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless the event or transaction is both unusual in nature and infrequent in occurrence. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring.
The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or 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.
Accounting for Identifiable Intangible Assets in a Business Combination
Affects: All Entities Except for Public Business Entities, Not-for-Profit Entities and Employee Benefit Plans
On December 23, 2014, the FASB issued ASU No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination. The issues in this ASU were addressed by the Private Company Council (PCC) in response to feedback from some private company stakeholders indicating that the benefits of the current accounting for identifiable intangible assets acquired in a business combination may not justify the related costs. The guidance in the ASU is intended to reduce the cost and complexity associated with the measurement of certain identifiable intangible assets. An entity within the scope of the ASU that elects the accounting alternative to recognize or otherwise consider the fair value of intangible assets as a result of any in-scope transactions will no longer be required to separately recognize intangible assets associated with non-compete agreements or certain customer-related intangible assets in a business combination. An entity that elects the accounting alternative must also adopt the private company alternative to amortize goodwill as described in ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. However, an entity that elects the accounting alternative in ASU No. 2014-02 is not required to adopt the amendments in ASU No. 2014-18.
The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative in fiscal years beginning after December 15, 2015. If the first in-scope transaction occurs in the first fiscal year beginning after December 15, 2015, the ASU 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 ASU will be effective in the interim period that includes the date of that first in-scope transaction and subsequent interim and annual periods thereafter. Early application is permitted.
Pushdown Accounting Option
Affects: All Entities
On November 18, 2014, the FASB issued ASU 2014-17, Pushdown Accounting, that gives acquired entities the option to apply pushdown accounting in their separate financial statements when an acquirer obtains control of them. In a related move, the Securities and Exchange Commission (SEC) rescinded its guidance, which previously required or precluded pushdown accounting depending on the specific circumstances. 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. This commonly takes the form of “stepping up” net assets to fair value, which generally includes the recognition of goodwill and other intangibles assets. 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. If the acquired company doesn’t elect to apply pushdown accounting in the period of acquisition, it could do so in a later period through a retrospective adjustment, as long as the change is deemed to be “preferable” accounting. However, once pushdown is applied, it cannot subsequently be reversed.
Elliott Davis Decosimo Observation: An acquirer may be another entity or an individual. Therefore, individual partners in a partnership may be able to apply pushdown accounting if there has been a change-in-control event that occurs at the partnership.
The new guidance was effective upon issuance for current and future reporting periods and any open reporting periods for which financial statements have not yet been issued. Companies can elect to apply pushdown accounting as of the most recent change-in-control event. If the financial statements for the period in which the most recent change-in-control event occurred already have been issued, the application of this guidance would be treated as a change in accounting principle.
New Guidance for “Hybrid Instruments”
Affects: All Entities
Many companies have shares with embedded features—such as a conversion option embedded in a share of preferred stock. In order to provide more direction for determining whether embedded
features need to be accounted for separately from their host shares, on November 3, 2014, the FASB issued 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. Existing U.S. GAAP requires companies with instruments that have embedded derivatives (“hybrid instruments”) to assess whether the economic characteristics and risks of an embedded derivative are clearly and closely related to those of the host contract. If the embedded derivative is not clearly and closely related, then it may need to be accounted for separately as a derivative liability carried at fair value. To perform this assessment, companies first have to figure out if the host contract is more akin to equity or debt. 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. For example, if a preferred share has a redemption feature (a typical debt characteristic), that feature by itself would not be enough to determine that the preferred share is more akin to debt. Rather, all features would need to be assessed.
The new guidance is 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, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption, including adoption in an interim period, is permitted.