Governmental Accounting Developments
GASB Issues Concept Statement
- On April 14, 2014, the Governmental Accounting Standards Board (GASB) issued Concepts Statement No. 6, Measurement of Elements of Financial Statements, which will guide the GASB in establishing accounting and financial reporting standards for U.S. state and local governments regarding the measurement of assets and liabilities. Concepts Statement No. 6 establishes concepts that will inform the GASB’s decisions when setting future standards for how state and local governments determine the dollar amount at which to report assets and liabilities. It establishes two approaches to measuring assets and liabilities—initial amounts and remeasured amounts. Initial amounts are determined at the time an asset is acquired or a liability is incurred. Remeasured amounts are determined as of the date of each year’s financial statements.
Concepts Statement No. 6 also establishes four measurement attributes—the characteristics of an asset or liability that is being measured:
- Historical cost is the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
- Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
- Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.
GASB Issues Exposure Draft on Fair Value Measurement
- On May 15, 2014, the GASB issued for public comment a proposed statement addressing accounting and financial reporting issues related to fair value measurements. The Exposure Draft, Fair Value Measurement and Application, describes how fair value should be defined and measured, what assets and liabilities should be measured at fair value, and what information about fair value should be disclosed in the notes to the financial statements.
The GASB is proposing that fair value be defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Exposure Draft also proposes that investments would generally be measured at fair value. Investments would be defined as “a security or other asset that a government holds primarily for the purpose of income or profit and the present service capacity of which is based solely on its ability to generate cash or to be sold to generate cash.” Certain investments would continue to be excluded from measurement at fair value, such as investments in money market instruments with remaining maturities at time of purchase of one year or less.
Under current accounting standards, state and local governments are required to disclose how they arrived at their measures of fair value if they are not based on quoted market prices. In the Exposure Draft, the GASB is proposing to expand those disclosures to include the inputs a government uses to measure fair value and the judgments made to arrive at those inputs.
GASB Proposes Improvements for Reporting Health Insurance and other Retiree Benefits
- On June 16, 2014, the GASB published two proposed statements intended to improve financial reporting by state and local governments of other postemployment benefits (OPEB), such as retiree health insurance. The GASB also published a third Exposure Draft that would establish requirements for pensions and pension plans that are outside the scope of the pension standards the GASB released in 2012.
The first Exposure Draft related to OPEB, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, proposes guidance for reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other employers.
The second Exposure Draft related to OPEB, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, addresses the reporting by the OPEB plans that administer those benefits.
The third Exposure Draft, Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered through Trusts That Meet Specified Criteria, and Amendments to Certain Provisions of GASB Statements 67 and 68, would complete the pension standards by establishing requirements for those pensions and pension plans that are not administered through a trust meeting specified criteria.
On the Horizon…
The following FASB exposure drafts and projects are outstanding as of July 17, 2014.
- The FASB continues to work on its Financial Instruments project. This project took on heightened significance in the wake of the 2008 financial crisis and once was considered an essential international accounting convergence project. The project has three primary areas that are being individually addressed, (1) classification and measurement, (2), impairment and (3) hedging.
Negotiations with the IASB to write global accounting guidelines have since fallen apart, and the amendments the FASB plans to publish this year are expected to change U.S. GAAP and not match the IASB’s revisions to its standards. At its December 18 meeting, the FASB made two significant decisions in its financial instruments projects that reduce the likelihood of convergence with the IASB:
- Classification and measurement – the FASB tentatively decided to retain the separate models in current U.S. GAAP for classifying and measuring loans and debt securities rather than overhaul its guidance in this area, as it had proposed in 2013. In a change from today’s accounting, however, equity securities would be measured at fair value with changes in fair value recognized in net income.
- Impairment – the FASB confirmed that its proposed “current expected credit loss” (CECL) model would be applied to financial assets that are debt instruments measured at amortized cost (i.e., loans and debt securities). Impairments on financial assets measured at fair value through other comprehensive income would follow a slightly different approach. The FASB had proposed applying the CECL model to all debt instruments.
At its June meeting, the FASB continued redeliberations on its proposed ASUs on financial instrument impairment and classification and measurement (the FASB is expected to begin its deliberations on hedging once the classification and measurement and impairment phases of the project are substantially complete).
The FASB reached these tentative decisions on the proposed impairment ASU:
- Loans Transferred into Held-for-Sale Classification – the cost basis on the transfer date would be the amortized cost basis (excluding the allowance for expected credit losses). A valuation allowance would be recognized equal to the amount by which the cost basis exceeds the fair value.
- Debt Securities Classified as Held-to-Maturity or Available-for-Sale That Are Subsequently Identified for Sale – an entity would adjust its impairment allowance to be the difference between the fair value and the amortized cost.
- Beneficial Interests in Securitized Financial Assets That Have a Significant Difference between Contractual and Expected Cash Flows – the recognition and measurement of the impairment allowance would be consistent with the approach required by the proposed impairment ASU for purchased-credit impaired financial assets.
On the proposed classification and measurement ASU, the FASB tentatively decided to not change current U.S. GAAP for:
- Presentation in the statement of comprehensive income of amounts relating to financial instruments; and
- Disclosures for available-for-sale securities and sales or transfers of held-to-maturity securities.
For financial instruments measured at amortized cost, required disclosures about fair value will be limited to:
- Fair value amounts, disaggregated by major asset category; and
- The level of the fair value hierarchy within which those fair value measurements are categorized (Level 1, 2, or 3).
The FASB expects to issue final guidance in the second half of 2014. Separately, the FASB decided that the FASB staff will perform research on the hedging phase of the project. The IASB issued its final guidance on hedging late last year.
- In May 2013, the FASB issued a proposed ASU, Leases, which was a revision of the 2010 proposed ASU. The core principle of the proposed requirements is that an entity should recognize assets and liabilities arising from a lease. In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term.
The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on whether the underlying asset is property or assets other than property.
In their November meeting, the FASB and the IASB discussed a summary of the feedback received in response to the proposed FASB ASU and the IASB Exposure Draft. The FASB has received nearly 600 comment letters on the proposed ASU from trade groups, companies, and individuals all over the world. Many of the comments have been negative. For example, a consortium of 30 trade associations plus the U.S. Chamber of Commerce signed a comment letter raising concerns about the proposed standards’ impact.
In their 2014 meetings, the FASB and the IASB have begun to back away from the lessee accounting model they proposed in May 2013. In redeliberations, the IASB supported a single on-balance sheet model, while the FASB supported a dual on-balance sheet model that would use the International Accounting Standard (IAS) 17, Leases, classification principles. These principles are similar to current U.S. GAAP but without bright lines. The Boards also indicated that they do not intend to significantly change lessor accounting. Instead, they supported retaining a dual classification model. The Boards also reached certain tentative decisions on lease term, a short-term lease exception and other ways to simplify their 2013 proposal. Redeliberations are expected to continue through much of 2014.
- 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. On March 4, 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. A final Concepts Statement is expected to be issued by the end of 2014.
- In October 2011, the FASB issued a proposed ASU, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The proposal would have required an investment company to consolidate controlling financial interests in another investment company in a fund-of-funds structure. The FASB reasoned that consolidation would provide transparency into underlying investments and obligations to which the parent investment company has economic exposure. However, in response to the proposal, many constituents stated that the FASB’ concerns regarding transparency into the assets, liabilities, income, and expenses of a controlled investee fund could be addressed through expanded disclosures in the notes to the financial statements rather than through consolidation of the controlled investee fund. Constituents stated that information should be provided about investee funds that are significant to the reporting investment company and not just those that are controlled. In light of the feedback on the proposal, the FASB is expected to issue a proposed ASU in the third quarter of 2014. The objective of this project is to require disclosures in an investment company’s financial statements that will provide transparency into the risks, returns, and expenses of an investee that is also an investment company.
- On April 28, 2014, the FASB issued a proposed ASU, Pushdown Accounting, in response to the EITF’s consensus on Issue 12-F. Under the proposal, acquired entities would have the option of applying pushdown accounting (i.e., establishing a new accounting and reporting basis) in their stand-alone financial statements upon the occurrence of a change-in-control event. An entity that elects this option would recognize the new basis of accounting established by the acquirer for the individual assets and liabilities of the acquired entity by applying the business combination guidance. The acquired entity would be required to recognize any goodwill that arose from the change-in-control transaction but would be prohibited from recognizing any bargain purchase gain. The option to apply pushdown accounting could be elected for each individual change-in-control event in which an acquirer obtains control of the acquired entity. In addition, acquired entities that elect the option would be required to provide disclosures about the effect of pushdown accounting on their financial statements.
Financial Statements of Not-for-Profit Entities
- The objective of this project is to reexamine existing standards for financial statement presentation by not-for-profit entities (NFP), focusing on improving:
o Net asset classification requirements
o Information provided in financial statements and notes about liquidity, financial performance, and cash flows.
An exposure draft is expected in the second half of 2014.
Accounting for Goodwill for Public Business Entities and Not-for-Profits
- At its February 2014 meeting, the FASB discussed four alternative views on how public business entities (PBEs) and not-for-profit entities (NFPs) should account for the subsequent measurement of goodwill:
- View A — Private Company Council model which is included in ASU 2014-02.
- View B — Amortize goodwill over its expected useful life, not to exceed a specified number of years, and retain impairment testing.
- View C — Direct write-off.
- View D — Simplified impairment test without amortization.
Although the FASB did not make any decisions at the meeting, the FASB asked the staff to further analyze and research the following accounting alternatives for PBEs:
- Direct write-off of goodwill at initial recognition or transition, with the charge reflected in net income or equity and additional disclosures provided for each acquisition — Under this alternative, there would be no subsequent-accounting considerations related to goodwill.
- Simplified goodwill impairment test — Such a model would most likely eliminate step 2 of the goodwill impairment test in FASB ASC 350, Intangibles—Goodwill and Other, and would potentially simplify the unit of account (i.e., raise the unit of account to a level above the reporting unit).
The FASB will also determine whether NFPs should have the option to use the PCC model or be required to apply the guidance for PBEs after it decides on an alternative for PBEs.
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.
Government Assistance Disclosures
- The objective of this project is develop disclosure requirements about government assistance that improves the content, quality and comparability of financial information and financial statements and that is responsive to the emerging issues in the changing financial and economic environment in which reporting entities operate. The FASB staff is currently performing additional research and outreach about what disclosures may provide decision-useful information about the accounting for government assistance. The staff plans to discuss topics including the scope of the project with the FASB at a future meeting.
Consolidation: Principal vs. Agent Analysis
- On November 3, 2011, the FASB issued proposed ASU, Consolidation (Topic 810): Principal versus Agent Analysis, for public comment. The objective of this project is to:
- Provide criteria for a reporting entity to evaluate whether a decision maker is using its power as a principle or agent
- Eliminate inconsistencies in evaluating kick-out and participating rights
- Amend the requirements for evaluating whether a general partner controls a limited partnership.
The FASB is currently in the process of redeliberations and will continue to consider feedback received on the proposal.
Clarifying Certain Existing Principles on Statement of Cash Flows
- In November 1987, the FASB issued FASB Statement No. 95, Statement of Cash Flows. Statement 95 was later codified in FASB ASC 230, Statement of Cash Flows. Recently, FASB staff research indicated that there was diversity in practice with respect to the classification of certain cash receipts and payments. The FASB staff’s research also indicated that the primary reasons for the diversity in classification is the result of lack of specific accounting guidance and inconsistent application of the existing principles within FASB ASC 230. This project will include clarifying existing principles in FASB ASC 230 on how to classify cash receipts and cash payments. As part of the project, the FASB staff will research potential additional disclosures that could result in increased relevance for users.
Customer’s Accounting for Fees in a Cloud Computing Environment
- This project is intended to improve financial reporting for customers on how to account for the fees in a cloud computing arrangement and reduce the diversity in practice by improving the guidance in the FASB Accounting Standards Codification about how a customer should account for its fees paid in a cloud computing arrangement.
FASB Simplification Project
- Recently, as part of its initiative to reduce complexity in accounting standards, the FASB added two short-term projects to its agenda to simplify U.S. GAAP. The initiative involves the FASB adding narrow-scope projects to its agenda that stakeholders have identified as opportunities to simplify U.S. GAAP in a relatively short time period. The projects included in the initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing costs and complexity in financial reporting. In July 2014, the FASB issued the following two proposed ASUs:
- Simplifying the Measurement of Inventory. The proposed ASU would require inventory to be measured at the lower of cost and net realizable value. As such, it would eliminate existing requirements to consider the replacement cost of inventory and the net realizable value of inventory less an approximately normal profit margin.
- Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The proposed ASU would remove the concept of extraordinary items from U.S. GAAP. The proposal is intended to alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer would evaluate whether a preparer presented an unusual and/or infrequent item appropriately.
- In June 2013, FASB released a proposed ASU, Disclosure of Uncertainties about an Entity’s Going Concern Presumption. The proposal seeks to clarify management’s responsibilities about evaluating and disclosing going concern uncertainties. Established practice has for years assigned the responsibility to outside auditors. The proposed ASU calls on the company’s management to make regular assessments about whether the company’s future is shaky and disclose information in the footnotes of their financial statements depending on the severity of their financial outlook.
However, in light of the feedback received on the proposal, the FASB decided not to require the proposed early-warning disclosures. Instead, the FASB decided to pursue an approach that would require disclosures when there is substantial doubt similar to disclosures provided today under existing auditing standards. The FASB also reached the following decisions at a March 2014 meeting:
- The term going concern presumption will not be defined. Instead, the guidance will specify that the going concern basis of accounting would be used until an entity’s liquidation is imminent, which is consistent with the provisions of FASB ASC 205, Presentation of Financial Statements, on the liquidation basis of accounting.
- The definition of substantial doubt will incorporate a likelihood component defined using the term probable, as used in FASB ASC 450, Contingencies. In addition, the assessment period for substantial doubt would be one year from the date the financial statements are issued (or, for nonpublic entities, the date financial statements are available for issuance). Entities will be required to assess substantial doubt at each annual and interim reporting period.
- Information about conditions and events will be assessed as of the financial statement issuance date (or, for nonpublic entities, the date financial statements are available for issuance).
- When there is substantial doubt about an entity’s ability to continue as a going concern, the notes to the financial statements would disclose:
- A statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern.
- The principal conditions and events giving rise to substantial doubt.
- Management’s evaluation of the significance of those conditions and events.
- Any mitigating conditions and events including management’s plans.
- When substantial doubt about an entity’s ability to continue as a going concern has been alleviated primarily by management’s plans, disclosures would include the principal conditions and events that initially raised the substantial doubt, and management’s plans that alleviated the substantial doubt, unless the information is disclosed elsewhere in the financial statements.
- Disclosures would apply to both public entities and nonpublic entities.
FASB staff will perform outreach on the tentative decision to make the assessment period one year from the financial statement issuance date as compared with the alternative of one year from the balance sheet date. The staff will also discuss the assessment period decision with the Private Company Council and the Small Business Advisory Committee to better understand the implication of that decision on nonpublic entities. A final standard is expected in the third quarter of 2014.
EITF Agenda Items
- At its June 2014 meeting, the FASB’s Emerging Issues Task Force (EITF) reached a final consensus on two issues. Further discussion is expected on one other open issue.
- Final Consensus – Issue 12-G, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Financing Entity”: the EITF affirmed its previous decision to provide a measurement alternative to FASB ASC 820, Fair Value Measurement, for reporting entities that consolidate collateralized financing entities (CFEs) within the scope of the issue. The EITF also made further clarifications regarding which consolidated CFEs would fall within the scope.
- Final Consensus – Issue 13-F, “Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor”: the EITF affirmed its previous decision on the classification of government-guaranteed mortgage loans and expanded the scope to include both fully government-guaranteed mortgage loans and certain partially government-guaranteed mortgage loans when either type of loan is collateralized by either residential or non-residential property.
- Open issues that could potentially impact financial reporting for certain reporting entities in the future:
- Issue No. 13-G, “Determining Whether the Host Contract in a Hybrid Financial Instrument Is More Akin to Debt or to Equity”: the EITF discussed whether and, if so, how to provide implementation guidance that helps reporting entities apply the EITF’s previously reached consensus-for-exposure under which entities use the whole-instrument approach when determining the nature of the host contract in a hybrid financial instrument issued in the form of a share (the chameleon approach would no longer be permitted.) The EITF discussed several alternatives, including (1) providing implementation guidance on how to determine the nature of the host, (2) establishing a rebuttable presumption that a fixed-price, noncontingent redemption option held by the investor leads to a determination that the host contract is debt-like, and (3) reaffirming the EITF’s original consensus-for-exposure without providing additional implementation guidance. Although the EITF generally favored the first alternative, it did not reach a consensus on the nature of the implementation guidance.
- At its April 2014 meeting, the Private Company Council (PCC) continued its discussion of alternatives for the accounting for identifiable intangible assets in a business combination. The FASB staff presented the following additional alternatives to the PCC:
View B1: Principle with Rebuttable Presumptions—Intangible assets would only be separately recognized if they are capable of being sold or licensed independently from other assets of a business. This alternative includes rebuttable presumption language on which assets would typically be expected to be recognized and which would not.
View B2: Change Limited to Non-Competition Agreements (NCA) and Customer-Related Intangibles (CRI)—NCAs would not be recognized and CRIs would only be recognized if they are capable of being sold or licensed independently from other assets of a business. This alternative includes a rebuttable presumption that CRIs generally would not meet the criteria for recognition.
View B3: Principle and Rebuttable Presumption Limited to CRIs—Similar to View B2, but limited to CRIs.
View B4: Narrower Definition of Contractual CRIs—This alternative narrows the guidance for determining when a CRI meets the contractual-legal criterion for recognition in FASB ASC 805, Business Combinations.
The PCC directed the FASB staff to conduct further outreach and analysis on alternatives View B1 and View B2.
The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda. The PCC has advised the FASB on the following FASB projects:
- Revenue Recognition
- Accounting for Financial Instruments
- Going Concern
- Disclosure Framework
- Government Assistance
- Reporting Discontinued Operations