FASB Updates Issued in First Quarter 2017
The Financial Accounting Standards Board (FASB) had a quiet first quarter of 2017, issuing just seven new Accounting Standards Updates (ASU). Here are three highlights:
1. ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
This guidance changes the definition of a business, which will have a significant impact on accounting for dispositions, acquisitions and consolidations. When evaluating whether a set of transferred assets and activities is a business, the entity is required to assess whether substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset (or group of similar assets). If so, the set of transferred assets and activities is not a business.
To be considered a business, the acquisition would have to include an input and process that, when combined, significantly contribute to the ability to create outputs. The guidance also narrows the definition of the term “outputs” to be consistent with the description in Topic 606, Revenue from Contracts with Customers.
For public entities, the guidance is effective for fiscal years beginning after Dec. 15, 2017, and interim periods within those years. For all other entities, the guidance is effective for fiscal years beginning after Dec. 15, 2018, and interim periods beginning after Dec. 15, 2019. Early adoption is permitted.
2. ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the requirement to calculate implied fair value (step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, goodwill impairment will be the amount by which carrying value exceeds fair value, not to exceed the carrying amount of goodwill.
Other goodwill impairment guidance essentially remains unchanged. Entities will still have the option to make a qualitative assessment to determine whether a quantitative impairment test is necessary. Entities will apply the same single-step test to goodwill with zero or negative carrying amounts, and be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount.
For SEC filers, the pronouncement is effective for annual or interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019, and non-SEC filers after Dec. 15, 2020. Early adoption is permitted after Jan. 1, 2017.
3. ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
This pronouncement is intended to enhance accounting for amortization of premiums on callable debt securities. Under current rules, premiums are amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder is certain to exercise the call. As a result, the unamortized premium is recorded as a loss in earnings when the call is exercised on a callable debt security held at a premium. This new guidance requires that entities amortize premiums to the earliest call date. This does not impact callable debt securities purchased at a discount.
The guidance is effective for fiscal years and interim periods beginning after Dec. 15, 2018. Early adoption is permitted.
Other new updates finalized in 2017 apply to not-for-profit entities, employee benefit plans, and accounting for gains and losses on the sale of non-financial assets in contracts with non-customers. All companies reporting under U.S. GAAP should carefully review and evaluate the updates to determine which updates will apply to them.