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Page 1: COMMON SSUES ACING CCOUNTANTS
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COMMON U.S. GAAP ISSUES FACING ACCOUNTANTS

BY RENEE RAMPULLA, CPA, CGMA

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Notice to readers

Common U.S. GAAP Issues Facing Accountants is intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication. This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein. However, neither the author nor publisher can guarantee the applicability of the information found herein. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

© 2019 Association of International Certified Professional Accountants, Inc. All rights reserved.

For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110 USA.

Course Code: 746620 FRU GS-0419-0A Revised: May 2019

You can qualify to earn free CPE through our pilot testing program. If interested, please visit https://aicpacompliance.polldaddy.com/s/pilot-testing-survey.

ISBN 978-1-119-74340-8 (Paper) ISBN 978-1-119-74341-5 (ePDF) ISBN 978-1-119-74337-8 (ePub) ISBN 978-1-119-74343-9 (oBook)

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© 2019 Association of International Certified Professional Accountants. All rights reserved. Table of Contents 1

Table of Contents

Chapter 1 1-1

The Financial Reporting Environment 1-1

Practice questions 1-13

Chapter 2 2-1

Summary of Recent Accounting Standards Updates 2-1

Part 1: Guidance effective in 2018 2-2

Part 2: Guidance effective in 2019 and beyond 2-39

Chapter 3 3-1

Accounting Guidance on the Horizon 3-1

Practice question 3-17

Chapter 4 4-1

Recognizing Revenue Under the New Standard: Core Principles and Resources 4-1

Practice questions 4-16

Chapter 5 5-1

The New Leasing Model 5-1

Chapter 6 6-1

Fair Value Accounting 6-1

Chapter 7 7-1

Inventory 7-1

Practice question 7-10

Chapter 8 8-1

Property, Plant, and Equipment — Including Capitalized Interest and Nonmonetary Transactions 8-1

Practice question 8-12

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© 2019 Association of International Certified Professional Accountants. All rights reserved. Table of Contents 2

Chapter 9 9-1

Accounting for Debt 9-1

Chapter 10 10-1

Accounting for Income Taxes 10-1

Measuring deferred tax assets and liabilities 10-6

Intraperiod tax allocation 10-10

Disclosure requirements 10-13

Chapter 11 11-1

Financial Statement Presentation and Notes Disclosures 11-1

Chapter 12 12-1

The Financial Statements 12-1

Glossary Glossary 1

Index Index 1

Solutions Solutions 1

Chapter 1 Solutions 1 Chapter 2 Solutions 2 Chapter 3 Solutions 5 Chapter 4 Solutions 6 Chapter 5 Solutions 8 Chapter 6 Solutions 10 Chapter 7 Solutions 12 Chapter 8 Solutions 14 Chapter 9 Solutions 15 Chapter 10 Solutions 16 Chapter 11 Solutions 18 Chapter 12 Solutions 19

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© 2019 Association of International Certified Professional Accountants. All rights reserved. 1-1

Chapter 1

The Financial Reporting Environment

Learning objectives

Identify the roles of the Financial Accounting Foundation (FAF), Financial Accounting Standards Board (FASB), the Emerging Issues Task Force (EITF), and the Private Company Council (PCC) in establishing accounting standards.

Identify major characteristics of the FASB Accounting Standards Codification® (ASC) and how this resource is used.

Introduction This chapter provides an overview of the roles played by FASB, the EITF, and the PCC in establishing accounting standards for nongovernmental entities. The chapter also includes discussion of FASB ASC as well as International Financial Reporting Standards and the move toward the globalization of accounting standards.

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Facts about FASB

Financial accounting standards board FASB, established in 1973, is the designated accounting standard setter for establishing private sector financial accounting and reporting standards for nongovernmental entities. FASB is subject to the oversight of the FAF’s board of trustees.

The FASB board is composed of seven independent members. Each individual board member has a diversified background, is appointed to a five-year term, and is then eligible for reappointment for one additional five-year term. To ensure board independence, each board member is required to sever ties with any entities or firms prior to joining the board.

The Securities and Exchange Commission (SEC) has the statutory authority to establish financial accounting and reporting standards for publicly held companies. However, the SEC policy has historically been to rely on FASB for this function to the extent that their standards demonstrate the ability to fulfill the SEC’s responsibility to the public interest. FASB and SEC have a working protocol in which SEC staff first refer issues it identifies that may have accounting standard setting implications to FASB for consideration; the SEC staff reserves the right to exercise its legislative authority to deal with any issues it identifies.

FASB maintains FASB ASC, which represents the only source of authoritative nongovernmental accounting and reporting standards, other than those issued by the SEC.

Emerging issues task force The EITF was formed in 1984. Their mission is to assist FASB in improving financial reporting by timely addressing and reducing diversity in practice. The EITF addresses narrow emerging issues, and implementation or application issues, arising from existing generally accepted accounting principles (GAAP). Involvement by the EITF in the standard setting process minimizes the need for FASB to address narrow items and thereby provides FASB with additional time to devote to the larger and more complete items on their technical agenda.

The EITF is composed of volunteer members that are drawn from a cross section of constituencies, such as preparers, auditors, and users of financial statements. The chief accountant or the deputy chief accountant of the SEC regularly attends the EITF meetings in the capacity of an observer with the privilege of speaking on the floor.

Private company council The board of the FAF established the PCC in May 2012 to address the needs of private company financial statement users. The PCC serves to advise FASB regarding the proper treatment of private company accounting as it relates to active items on FASB’s technical agenda. FASB and the PCC work closely together, based upon mutually agreed-upon criteria, to determine alternatives to GAAP for private companies.

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The PCC is composed of volunteer members, and the PCC chair works closely with the FASB liaison member, FASB chairman, and the FASB technical director. The FASB board and liaison member are expected to attend and participate in all PCC meeting deliberations.

Knowledge check 1. FASB is subject to the oversight of

a. The PCC. b. The FAF. c. The SEC. d. The EITF.

2. The PCC is the primary private company accounting advisory body to

a. The FAF. b. FASB. c. The EITF. d. The SEC.

FASB ASC On September 15, 2009, FASB ASC became effective as the only source of authoritative nongovernmental GAAP. FASB ASC has only one level of authority; accounting guidance residing inside FASB ASC is considered authoritative, although other accounting literature residing outside FASB ASC is considered nonauthoritative (for example, the FASB Concept Statements).

The content in FASB ASC is arranged topically and updated by the issuance of Accounting Standards Updates (ASUs). FASB ASUs communicate changes to FASB ASC, but are not considered standalone authoritative standards. Upon the issuance of a final FASB ASU, its content is added to FASB ASC. If the FASB ASU adds a new paragraph, that new paragraph is inserted in the appropriate place in FASB ASC. If an existing paragraph is amended or deleted, the amended or deleted paragraph is placed immediately after the existing paragraph. The new, amended, or deleted paragraphs are labeled “Pending Content” and their effective dates and transition provisions are described.

To increase the utility of FASB ASC for public companies, relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance are included for reference in FASB ASC such as Regulation S-X (SX), FASB ASC of Financial Reporting Releases (FRRs), Interpretive Releases (IRs), and Staff Accounting Bulletins (SABs). The SEC sections do not contain the entire population of SEC rules and regulations. FASB ASC does not replace or affect guidance issued by the SEC or its staff for public companies in their filings with the SEC.

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Topical structure When using FASB ASC, it is important to understand its structure. FASB ASC utilizes an organizational structure as reflected in the following chart.

In FASB ASC, topics represent a collection of related guidance. Following the topic level, FASB ASC further refines topics into subtopics, sections, and subsections. Note that subsections are a further disaggregation of a section and, except for the general section, occur in a limited number of cases. Unlike a section, a subsection is not numbered.

The following originates from FASB ASC available on FASB’s website at www.fasb.org.

In FASB ASC the topics reside in six main areas, as illustrated in the following chart.

The six main areas of FASB ASC

General Principles FASB ASC 105-199

This area contains one topic, FASB ASC 105, Generally Accepted Accounting Principles

Presentation FASB ASC 205–299

These topics relate only to presentation matters and do not address recognition, measurement, and derecognition.

205, Presentation of Financial Statements 210, Balance Sheet 215, Statement of Shareholder Equity 220, Income Statement — Reporting Comprehensive Income 230, Statement of Cash Flows 235, Notes to Financial Statements 250, Accounting Changes & Error Corrections 255, Changing Prices 260, Earnings per Share 270, Interim Reporting

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The six main areas of FASB ASC (continued)

272, Limited Liability Entities 274, Personal Financial Statements 275, Risks and Uncertainties 280, Segment Reporting

Assets, Liabilities, and Equity FASB ASC 305–599

This topic area contains guidance on balance sheet accounts.

305, Cash and Cash Equivalents 310, Receivables 320, Investments — Debt and Equity Securities 321, Investments — Equity Securities 323, Investments — Equity Method and Joint Ventures 325, Investments — Other 326, Financial Instruments — Credit Losses 330, Inventory 340, Other Assets and Deferred Costs 350, Intangibles — Goodwill and Other 360, Property, Plant, and Equipment 405, Liabilities 410, Asset Retirement & Environmental Obligations 420, Exit or Disposal Cost Obligations 430, Deferred Revenue 440, Commitments 450, Contingencies 460, Guarantees 470, Debt 480, Distinguishing Liabilities from Equity 505, Equity

Revenue and Expenses FASB ASC 605–799

This topic contains guidance on specific income statement accounts.

605, Revenue Recognition 606, Revenue from Contracts with Customers 610, Other Income 705, Cost of Sales and Services 710, Compensation — General 712, Compensation — Nonretirement Postemployment Benefits 715, Compensation — Retirement Benefits 718, Compensation — Stock Compensation 720, Other Expenses 730, Research and Development 740, Income Taxes

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The six main areas of FASB ASC (continued)

Broad Transactions FASB ASC 805–899

These topics relate to multiple financial statement accounts and are generally transaction-oriented.

805, Business Combinations 808, Collaborative Arrangements 810, Consolidation 815, Derivatives and Hedging 820, Fair Value Measurement 825, Financial Instruments 830, Foreign Currency Matters 835, Interest 840, Leases 842, Leases 845, Nonmonetary Transactions 850, Related Party Disclosures 852, Reorganizations 853, Service Concession Arrangements 855, Subsequent Events 860, Transfers and Servicing

Industries FASB ASC 905–999

These topics relate to accounting that is unique to an industry or type of activity.

905, Agriculture 908, Airlines 910, Contractors — Construction 912, Contractors — Federal Government 920, Entertainment — Broadcasters 922, Entertainment — Cable Television 924, Entertainment — Casinos 926, Entertainment — Films 928, Entertainment — Music 930, Extractive Activities — Mining 932, Extractive Activities — Oil and Gas 940, Financial Services — Brokers and Dealers 942, Financial Services — Depository and Lending 944, Financial Services — Insurance 946, Financial Services — Investment Companies 948, Financial Services — Mortgage Banking 950, Financial Services — Title Plant 952, Franchisors 954, Health Care Entities 958, Not-for-Profit Entities 960, Plan Accounting — Defined Benefit Pension Plans 962, Plan Accounting — Defined Contribution Pension Plans 965, Plan Accounting — Health and Welfare Benefit Plans 970, Real Estate — General 972, Real Estate — Common Interest Realty Associations

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The six main areas of FASB ASC (continued)

974, Real Estate — Real Estate Investment Trusts 976, Real Estate — Retail Land 978, Real Estate — Time Sharing Activities 980, Regulated Operations 985, Software 995, U.S. Steamship Entities

Note. FASB ASC also contains a master glossary that includes links to the topics, subtopics, sections, and paragraphs where the terminology is used in FASB ASC.

Sections The following excerpts originated from FASB ASC, About the Codification (v4.10), the full text of which is available on FASB ASC’s website at www.fasb.org.

Sections represent the nature of the content in a subtopic such as recognition, measurement, disclosure, and so forth. Every subtopic uses the same sections. If there is no content for a section, then the section will not display.

Similar to topics, sections correlate very closely with sections of individual International Financial Reporting Standards. The sections of each subtopic include the following:

XXX-YY-ZZ where XXX = topic, YY = subtopic, ZZ = section

XXX-YY-00 Status XXX-YY-05 Overview and Background XXX-YY-10 Objectives XXX-YY-15 Scope and Scope Exceptions XXX-YY-20 Glossary XXX-YY-25 Recognition XXX-YY-30 Initial Measurement XXX-YY-35 Subsequent Measurement XXX-YY-40 Derecognition XXX-YY-45 Other Presentation Matters XXX-YY-50 Disclosure XXX-YY-55 Implementation Guidance and Illustrations XXX-YY-60 Relationships XXX-YY-65 Transition and Open Effective Date Information XXX-YY-70 Grandfathered Guidance XXX-YY-75 XBRL Elements

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Accessibility Three views of FASB ASC are available online: the professional view, the academic view, and the basic view. The professional and academic views are available for an annual subscription fee and provide full functionality and advanced navigation. The basic view is available free of charge; and although it does allow browsing by topic, printing is limited.

Knowledge check 3. How many levels of authority does FASB ASC include?

a. Five. b. Three c. Two. d. One.

Globalization of accounting standards The following information provides a brief overview of the ongoing globalization of accounting standards, International Financial Reporting Standards (IFRSs) as a body of accounting literature, the status of convergence with IFRSs in the United States, and the related issues that accounting professionals need to consider today.

As the business world becomes more globally connected, regulators, investors, audit firms, and public and private companies of all sizes are expressing an increased interest in having common accounting standards among participants in capital markets and trading partners around the world. Proponents of convergence with or adoption of IFRSs for financial reporting in the United States believe that one set of financial reporting standards would improve the quality and comparability of investor information and promote fair, orderly, and efficient markets.

Many critics, however, believe that accounting principles generally accepted in the United States of America (GAAP) are the superior standards and question whether the use of IFRSs will result in more useful financial statements in the long term and whether the cost of implementing IFRSs will outweigh the benefits. Implementing IFRSs will require a staggering effort by management, auditors, and financial statement users, not to mention educators.

The increasing pressure to globalize accounting standards, both in the United States and around the world, means that now is the time to become knowledgeable about these changes. The discussion that follows explains the underpinnings of the international support for a common set of high quality global standards and many of the challenges and potential opportunities associated with such a fundamental shift in financial accounting and reporting.

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History The international standard setting process began several decades ago as an effort by industrialized nations to create standards that could be used by developing and smaller nations. However, as cross-border transactions and globalization increased, other nations began to take interest, and the global reach of IFRSs expanded. More than 100 nations and reporting jurisdictions permit or require IFRSs for domestic listed companies and most have fully conformed to IFRSs as promulgated by the International Accounting Standards Board (IASB) and include a statement acknowledging such conformity in audit reports. Several countries, including Argentina and Canada, adopted IFRSs on January 1, 2011, and many other countries have plans to converge (or eliminate significant differences between) their national standards and IFRSs.

For many years, the United States has been a strong leader in international efforts to develop globally accepted standards. Among other actions in support of IFRSs, the U.S. SEC removed the requirement for foreign private issuers registered in the United States to reconcile their financial reports with U.S. GAAP if their accounts complied with IFRSs as issued by IASB. In addition, the SEC continues to analyze and evaluate appropriate steps toward, and challenges related to, incorporating IFRSs into the U.S. financial reporting system, as subsequently described.

In addition to the support received from certain U.S.-based entities, financial and economic leaders from various organizations have announced their support for global accounting standards. Most notably, in 2009, the Group of Twenty Finance Ministers and Central Bank Governors (G20), a group from 20 of the world’s industrialized and developing economies (with the 20th member being the European Union, collectively), called for standard setters to redouble their efforts to complete convergence in global accounting standards.

Costs versus benefits Acceptance of a single set of high quality accounting standards may present many significant opportunities, including the improvement in financial reporting to global investors, the facilitation of cross-border investments, and the integration of capital markets. Further, U.S. entities with international operations could realize significant cost savings from the use of a single set of financial reporting standards. For example, U.S. issuers raising capital outside the United States are required to comply with the domestic reporting standards of the foreign country and U.S. GAAP. As a result, additional costs arise from the duplication and translation of financial reporting information.

Many multinational companies support the use of common accounting standards to increase comparability of financial results among reporting entities from different countries. They believe common standards will help investors better understand the entities’ business activities and financial position. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors. In addition, some believe that in a truly global economy, financial professionals, including CPAs, will be more mobile, and companies will more easily be able to respond to the human capital needs of their subsidiaries around the world.

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Although certain cost reductions are expected, the initial cost of convergence with IFRSs is expected to be one of the largest obstacles for many entities, including accounting firms and educational institutions. Substantial internal costs for U.S. corporations in the areas of employee training, IT conversions, and general ledger software have been predicted. In addition, the time and effort required from various external functions, including the education of auditors, investors, lenders, and other financial statement users, will be significant factors for consideration.

Although the likelihood of acceptance of IFRSs may lack clarity for the time being, U.S. companies should consider preparing for the costly transition to new or converged standards, which likely will include higher costs in the areas of training and software compliance.

IASB The IASB is the independent standard setting body of the IFRS Foundation, formerly the International Accounting Standards Committee Foundation. As a private sector organization, the IFRS Foundation has no authority to impose funding regimes on countries. However, a levy system and national contributions through regulatory and standard setting authorities or stock exchanges have been introduced in a number of countries to fund the organization. Although the AICPA was a founding member of the International Accounting Standards Committee, IASB’s predecessor organization, it is not affiliated with IASB.

IASB, founded on April 1, 2001, in London, England, is responsible for developing IFRSs and promoting the use and application of these standards. In pursuit of this objective, IASB cooperates with national accounting standard setters to achieve convergence in accounting standards around the world.

The structure includes the following primary groups: (a) the IFRS Foundation, an independent organization having two main bodies: the IFRS Foundation trustees and IASB; (b) the IFRS Advisory Council; and (c) the IFRS Interpretations Committee, formerly the International Financial Reporting Interpretations Committee (IFRIC). The trustees appoint the IASB members, exercise oversight, and raise the funds needed, but IASB itself has responsibility for establishing IFRSs.

The IFRS Foundation is linked to a monitoring board of public authorities, including committees of the International Organization of Securities Commissions, the European Commission, and the SEC. The monitoring board’s main responsibilities are to ensure that the trustees continue to discharge their duties as defined by the IFRS Foundation Constitution, as well as approving the appointment or reappointment of trustees. In addition, through the monitoring board, capital markets authorities that allow or require the use of IFRSs in their jurisdictions will be able to more effectively carry out their mandates regarding investor protection, market integrity, and capital formation.

The IASB board members are selected chiefly upon their professional competence and practical experience. The trustees are required to select members so that IASB will comprise the best available combination of technical expertise and international business and market experience and to ensure that IASB is not dominated by any particular geographical interest or constituency. IASB has members from several different countries, including the United States. The members are responsible for the development and publication of IFRSs, including International Financial Reporting Standard for Small-

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and Medium-sized Entities (IFRS for SMEs), and for approving the interpretations of IFRSs as developed by the IFRS Interpretations Committee.

The IFRS Interpretations Committee, founded in March 2002, is the successor of the previous interpretations committee, the Standing Interpretations Committee (SIC), and is the interpretative body of IASB. The role of the IFRS Interpretations Committee is to provide timely guidance on newly identified financial reporting issues not specifically addressed in IFRSs or issues in which interpretations are not sufficient.

IFRSs are developed through a formal system of due process and broad international consultation, similar to the development of U.S. GAAP.

In May 2008, the AICPA Governing Council voted to recognize IASB as the designated accounting body for purposes of establishing international financial accounting and reporting principles. Accordingly, IFRSs are not considered to be another comprehensive basis of accounting, but rather a source of generally accepted accounting principles.

IFRSs The term IFRSs has both a narrow and broad meaning. Narrowly, IFRSs refer to the numbered series of pronouncements issued by IASB, collectively called standards. More broadly, however, IFRSs refer to the entire body of authoritative IASB literature, including the following:

1. Standards, whether labeled IFRSs or International Accounting Standards (IASs) 2. Interpretations, whether labeled IFRIC (the former name of the interpretive body) or SIC (the

predecessor to IFRIC)

IFRSs are not designed to apply to not-for-profit entities or those in the public sector, but these entities may find IFRSs appropriate in accounting for their activities.

IASB’s Conceptual Framework for Financial Reporting (conceptual framework) establishes the concepts that underlie the preparation and presentation of financial statements for external users. IASB is guided by the conceptual framework in the development of future standards and in its review of existing standards. The conceptual framework is not an IFRS, and when there is a conflict between the conceptual framework and any IFRS, the standard will prevail.

IFRS for SMEs IFRS for SMEs is a modification and simplification of full IFRSs aimed at meeting the needs of private company financial reporting users and easing the financial reporting burden on private companies through a cost-benefit approach. IFRS for SMEs is a self-contained global accounting and financial reporting standard applicable to the general purpose financial statements of entities that, in many countries, are known as small- and medium-sized entities (SMEs). Full IFRSs and IFRS for SMEs are promulgated by IASB.

The AICPA has developed a resource that compares IFRS for SMEs with corresponding requirements of U.S. GAAP. To learn more about the resource, visit www.ifrs.com.

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FASB and IASB convergence efforts To address significant differences between IFRSs and U.S. GAAP, the FASB and IASB agreed to a “Memorandum of Understanding” (MoU), which was originally issued in 2006 and subsequently updated. FASB and IASB have converged several topics, such as Revenue Recognition (ASU No. 2014-09 & IFRS 15) and Fair Value Measurements (ASU No. 2011-04 and IFRS 13). Consider monitoring the FASB and IASB websites for additional developments regarding the convergence efforts, such as discussion papers, exposure drafts, and requests for comments.

SEC work plan The SEC continues to affirm its support for a single set of high quality, globally accepted accounting standards; however, no decision has been made on whether or not to adopt IFRSs. In May 2011, the SEC staff produced a work plan outlining how such a possible transition might happen.

In November 2011, the SEC released a staff paper that summarizes the current status of convergence projects, which are grouped by both short term and long term, as well as by level of priority (greater priority versus lower priority). Currently, the three projects that are of greater priority are financial instruments, revenue recognition, and leases.

In July 2012, the SEC published its final staff report on the work plan, which focuses on the arguments for and against various forms of adoption of global accounting standards. When assessing the implications of incorporating IFRSs in the U.S. financial reporting system, the SEC concluded that although international standards have improved in comprehensiveness, there are still some gaps, especially in the areas of insurance, extractive industries, and rate-regulated industries. The report also states that the costs of full IFRS adoption remain among the most significant costs required from an accounting perspective and that companies questioned whether the benefits would justify such a full-scale transition. Although the report does not contain information leading to any decision the SEC has made regarding incorporation of IFRSs, the staff expects that the SEC and others in the United States will remain involved with the development and application of IFRS.

Refer to www.sec.gov for the full version of the staff paper.

Knowledge check 4. Which statement is accurate regarding IFRSs?

a. IFRSs have both a narrow and broad meaning. b. IFRSs merely refers to the numbered series of pronouncements issued by IASB. c. IFRSs are designed to apply to not-for-profit entities. d. IFRSs are designed to apply to entities in the public sector.

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Practice questions 1. What is the EITF’s role in the standard setting process?

2. Why does FASB ASC contain authoritative content issued by the SEC?

3. What is your view on the globalization of accounting standards? Are you for or against it?

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Chapter 2

Summary of Recent Accounting Standards Updates

Learning objectives

Identify key aspects of FASB Accounting Standards Updates (ASUs) effective in 2018.

Identify key aspects of ASUs effective in 2019 and beyond.

Identify key aspects of ASUs specific to private companies.

Overview This chapter is organized in the following two parts:

Part 1: ASUs effective in 2018. Part 2: ASUs effective in 2019 and beyond.

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Part 1: Guidance effective in 2018

ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

Overview This ASU is part of FASB’s simplification project to reduce the unnecessary complications of determining the current and noncurrent portions of deferred taxes. The ASU addresses feedback from stakeholders about the costs and benefits of current requirements. Specifically, the separation of deferred income tax liabilities and assets into current and noncurrent components offers limited benefit to users of financial statements because the classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled.

Scope This ASU is applicable to all entities who present a classified balance sheet (statement of financial position).

Requirements This ASU, when effective, will require that an entity within the scope present deferred tax assets or deferred tax liabilities only as noncurrent. The requirement to offset deferred tax assets and liabilities is not affected by the issuance of this ASU.

Effective dates Application details include the following:

For public business entities: Effective for fiscal periods beginning after December 15, 2016, including interim periods within those periods.

For all other entities: Effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.

Early application is permitted for all entities as of the beginning of an interim or annual period.

Applied prospectively or retrospectively for all periods presented, and disclosure of the change is needed in the first period in which the change is adopted. If retrospectively adopted, quantitative information about the effects of the change in accounting on prior periods is needed.

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ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

Overview This ASU provides guidance for both the initial and subsequent recognition of financial assets and financial liabilities, as well as presentation and disclosure issues. The objective of the ASU is to provide a more enhanced or robust reporting model for financial instruments.

Scope Applicable to all entities that hold financial assets or financial liabilities.

Requirements The ASU segregates the accounting for debt and equity securities by modifying FASB ASC 320, Investments — Debt and Equity Securities, to include guidance related only to debt securities. The ASU has created a new FASB ASC topic, FASB ASC 321, Investments — Equity Securities, to provide guidance for equity securities.

New FASB ASC Topic 321

Under existing GAAP, a reporting entity determines whether marketable equity securities are classified as “trading” securities or “available-for-sale” securities. Both classifications required measurement at fair value, with differences in how the unrealized gain or loss was presented. Trading unrealized gains and losses are included in net income, although unrealized gains and losses from available-for-sale securities are included in other comprehensive income.

This ASU eliminates the distinction between trading and available-for-sale securities. All equity investments (with exceptions noted as follows) will now be measured at fair value with the unrealized gain or loss recognized in net income.

Equity investments that meet the following criteria are not subject to the provisions of this update:

Equity investments accounted for under the equity method Equity investments that result in the consolidation of the investee

Equity securities without readily determinable fair values (ASC 321-10-35-2)

An entity may elect to measure an equity security without a readily determinable fair value by measuring such security at cost less impairment. This measurement is further supplemented by requiring an adjustment (plus or minus) resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

The election to treat such equity securities should remain in effect until such time as the security no longer qualifies to be accounted for within this section. The entity should reassess at each reporting

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period whether the equity investment continues to qualify as an equity security without a readily determinable fair value.

Impairment of equity securities without readily determinable fair values (ASC 321-10-35-3)

If an entity holds an equity security without a readily determinable fair value (that does not qualify for the practical expedient to estimate fair value under ASC 820-10-35-59), a qualitative assessment is now available under ASC 321-10-35-3. The equity security should be written down to its fair value if the qualitative assessment indicates the security is impaired. The following factors should be considered in the qualitative assessment:

A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee

A significant adverse change in the regulatory, economic, or technological environment of the investee

A significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates

A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of the investment

Factors that raise significant concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants

The preceding list of items is not considered to be all-inclusive. Any other factors that an entity would consider in determining if impairment exists should be considered.

Investments–debt securities (ASC 320)

Initial and subsequent measurement

Unlike the changes to equity securities, investments in debt securities will continue to be classified into the following three categories described in existing GAAP:

Trading securities Available-for-sale securities Held-to-maturity securities

The initial measurement and subsequent measurement for debt securities will remain unchanged.

Disclosure of certain information related to financial instruments measured at amortized cost

The following changes to disclosures are included in the ASU:

Entities that are not public business entities that measure debt securities at amortized cost are no longer required to disclose the fair value of such financial instruments.

Public business entities are no longer required to disclose the methods and significant assumptions used to estimate fair value for financial instruments that are measured at amortized cost on the balance sheet.

Public entities are required to use the exit price notion when measuring the fair value.

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Presentation issues for comprehensive income Certain financial liabilities that elect to be accounted for under the fair value option in ASC 825-10-25-1 will now be required to present separately in other comprehensive income, the portion of the total change in the fair value of the liability resulting from a change in the instrument-specific credit risk.

Presentation and disclosure issues — balance sheet An entity must present separately on the face of the balance sheet or in the notes to the financial statements the following information:

Financial assets by measurement category – Trading – Available-for-sale – Held to maturity

Financial assets by form of financial asset – Securities – Loans – Receivables

Financial liabilities by measurement category Financial liabilities by form of financial liability

Consideration of a valuation allowance for a deferred tax asset The ASU clarifies the need for an entity to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

Effective dates Public business entities: Effective for fiscal years beginning after December 15, 2017, including interim periods within those years.

All other entities, including not-for-profit entities and employee benefit plans within the scope of FASB ASC 960–985: Effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.

There is a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

The ASU is applied prospectively to equity securities without readily determinable fair values that exist as of the date of the adoption.

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Disclosure example1

Many entities, including large public companies such as Microsoft Corporation, own debt and equity investments. The following is an excerpt from Microsoft Corporation’s accounting policies as reported in their first quarter (10-Q) September 30, 2018 financial statements addressing the adoption of the guidance in this ASU:

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income (“OCI”) [emphasis added]. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method, or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative) [emphasis added]. We perform a qualitative assessment on a quarterly basis and recognize impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net [emphasis added].

1 The full text of the financial statement that includes the following excerpt can be found on the SEC’s website at https://www.sec.gov/cgi-bin/viewer?action=view&cik=789019&accession_number=0001564590-18-024893&xbrl_type=v#

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ASU No. 2016-04, Liabilities — Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force)

Issue date March 2016

Who is affected This ASU affects entities that issue certain prepaid stored-value products, whether in physical or digital form, such as gift cards that customers may redeem with merchants accepting such products within a certain network, prepaid telecommunication (phone) cards, and travelers’ checks.

Background This ASU seeks to minimize current and future diversity in practice when an entity derecognizes prepaid stored-value product liability.

Today there is diversity in practice in how entities account for prepaid stored-value product liabilities, with some entities viewing them as financial liabilities and others viewing them as nonfinancial liabilities. FASB ASC 405-20, Liabilities — Extinguishments of Liabilities, includes derecognition guidance for both financial and nonfinancial liabilities. But entities use diverse methodologies for recognizing “breakage” (that is, the portion of the dollar value of prepaid stored-value products that goes unredeemed); and no such guidance currently exists in the subtopic.

Discussion of significant changes This ASU aligns FASB ASC 405 with the authoritative breakage guidance in FASB ASC 606, Revenue from Contracts with Customers, by allowing entities to follow the guidance in FASB ASC 606 to recognize breakage on prepaid stored-value products. An excerpt from the pending guidance in FASB ASC 405 follows:

If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product in the scope of paragraph 405-20-40-3, the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid stored-value products in the scope of paragraph 405-20-40-3, the entity shall derecognize the amount related to breakage when the likelihood of the product holder exercising its remaining rights becomes remote. At the end of each period, an entity shall update the estimated breakage amount to represent faithfully the circumstances present at the end of the period and the changes in circumstances during the period. Changes to an entity’s estimated breakage amount shall be accounted for as a change in accounting estimate in accordance with paragraphs 250-10-45-17 through 45-20.

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This ASU provides a narrow-scope exception per the preceding but does not apply to

products that can be redeemed only for cash. products subject to escheatment laws. products associated with customer loyalty programs. products attached to a segregated bank account.

Effective date and transition requirements

Public business entities, certain not-for-profit entities, and certain employee benefit plans

Effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods.

All other entities

Effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

Early application

Early application is permitted, including adoption in an interim period.

ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force) Issue date March 2016

Background Parties to a derivative investment may change over time for various reasons, including mergers or regulatory requirements, through “novation” (meaning, to replace one party to a derivative instrument with another party). This ASU clarifies whether novation in a derivative instrument that has been designated a hedging instrument under Topic 815 terminates the hedging relationship, requiring the entity to de-designate the hedging relationship and cease hedge accounting. This ASU seeks to mitigate diversity in practice.

Who is affected This ASU affects entities that experience a change in counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815.

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Main provisions If the only change to a hedging instrument is novation, this ASU provides that de-designation of that hedging relationship is not required, provided that all other hedge accounting criteria continue to be met. This would include criteria in FASB ASC 815-20-35-14 through 35-18.

Discussion of changes Current GAAP is limited and not sufficiently clear about whether novation affects the ongoing hedging instrument status. This ASU clarifies that novation does not terminate the hedge relationship and that de-designation is not required.

Effective date and transition requirements

Public business entities

Effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

All other entities

Effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

Early application

An entity may apply this ASU on either a prospective basis or a modified retrospective basis subject to certain requirements.

ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) Issue date March 2016

Background This ASU seeks to address certain questions about the “four-step decision sequence” provided as implementation guidance by the Derivatives Implementation Group (DIG), and how the implementation guidance interacts with the original guidance in FASB ASC 815, Derivatives and Hedging, for assessing embedded contingent call (or put) options in debt instruments. Currently, entities use two different approaches, which may lead to different conclusions about whether the embedded call (or put) option is “clearly and closely related” to its debt host, and, thus, should be bifurcated and accounted for separately as derivatives. This ASU seeks to resolve the diversity in practice.