Accounting Standards Updates for the 2016 Reporting Period
The Financial Accounting Standards Board (FASB) has several new Accounting Standards Updates (ASU) that take effect for the 2016 reporting period. This article discusses a few significant ones companies should consider when preparing 2016 financial statements.
ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
ASU 2015-01 was the first ASU under FASB’s simplification initiative aimed at reducing the cost and complexity of financial reporting. The guidance simplified income statement presentation by eliminating extraordinary items.
Under existing U.S. GAAP, companies would separately classify, present and disclose extraordinary items if they were deemed unusual, and occurred so infrequently that they were not reasonably expected to recur in the foreseeable future. In recent years, extraordinary items for financial statement purposes have been extremely rare. FASB determined that eliminating extraordinary events could reduce the cost and complexity of applying U.S. GAAP, while maintaining or improving the usefulness of information in the financial statements.
For calendar year-end entities, the guidance is effective for interim and annual periods beginning in 2016. Early adoption is permitted, as long as adoption occurs at the beginning of the year. Entities can elect to apply the guidance prospectively or retrospectively.
ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965)
FASB also simplified financial reporting for employee benefit plans by eliminating the requirement to measure and disclose the fair value of fully benefit-responsive investment contracts. Previously, these plans were required to measure, present and disclose investment contracts at fair value. Yet, because contract value was acknowledged as the relevant measure, financial statements showed an adjustment from fair value to contract value.
FASB also simplified the related investment contract disclosures. Footnotes must still describe the nature of the investment contract and how it operates, but some previously required disclosures have been eliminated, including the requirement to disclose information on credit rating and average yield.
The guidance also allows plans with a fiscal year end that doesn’t coincide with the end of a calendar month to measure investments and investment-related accounts using the month end closest to their fiscal year end. However, if a plan uses this practical expedient and a significant contribution, distribution or other event occurs between the nearest month end and the plan's fiscal year end, the plan will need to disclose such amounts.
The guidance was effective for fiscal years beginning Dec. 15, 2015.
ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
Cloud computing has rapidly changed the nature of business, but the accounting treatment has not always been clear. FASB continued progress on its simplification initiative by providing guidance to help customers in cloud computing arrangements determine whether the arrangement includes a software license.
Previously, the accounting treatment for cloud computing arrangements included reporting the agreement as a service contract and increasing the prepaid expense account. In subsequent periods, the prepaid balance was amortized as software expense over the contractual term. The new guidance allows customers to record the underlying software as an intangible asset and makes the accounting for software licenses consistent with other intangible asset licenses.
The pronouncement was effective Jan. 1, 2016, for all public entities, and Jan. 1, 2017, for private companies. Early adoption is permitted. Companies can choose to apply the guidance prospectively or retrospectively.
ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs
This pronouncement is another piece of FASB’s simplification initiative and aligns the presentation guidance in US GAAP and the International Financial Reporting Standards. The guidance requires balance sheet presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the debt liability rather than as an asset.
Historically, entities were required to present issuance costs related to term debt, including legal and underwriting costs, as assets on the balance sheet. Debt discounts, such as lenders’ fees, were required to be presented as a reduction of the related debt’s carrying amount.
For public entities, the final guidance was effective for fiscal years beginning after Dec. 15, 2015, and interim periods within those fiscal years. For all other entities, the guidance was effective for fiscal years beginning after Dec. 15, 2015, and interim periods within fiscal years beginning after Dec. 15, 2016.
There are 18 new pronouncements effective for 2016 interim or annual periods for calendar-year entities. All companies reporting under U.S. GAAP should carefully evaluate which accounting requirements will apply to them for the first time this year.