by Ed Schenkein
In July 2018, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-09, Codification Improvements. The FASB has a standing project on its agenda to address suggestions received from stakeholders on the Codification and to make other incremental improvements to GAAP. This perpetual project facilitates Codification updates for technical corrections, clarifications, and other minor improvements and should eliminate the need for periodic agenda requests for narrow and incremental items. These amendments are referred to as Codification improvements.
Prior to amendment, FASB ASC Section 220-10-45, Comprehensive Income—Overall—Other Presentation Matters, specifically excluded “taxes not payable in cash” as an item of comprehensive income. That phrase was intended to apply to the accounting treatment of tax benefits that may arise from net operating losses of an entity before bankruptcy reorganization. However, it could have been interpreted to mean any tax expense not payable in cash, including, for example, the utilization of a deferred tax asset. The amendment removes the generic phrase “taxes not payable in cash,” and adds guidance that is specific to certain quasi-reorganizations.
Debt Modifications and Extinguishments
Prior to the amendment, the guidance in FASB ASC 470-50-40, Debt—Modifications and Extinguishments—Derecognition, required that the difference between the reacquisition price of debt and its net carrying amount be recognized in income in the period of extinguishment. The amendment clarifies that, in an early extinguishment of debt for which the fair value option has been elected, (1) the net carrying amount of the extinguished debt is equal to its fair value at the reacquisition date, and (2) upon extinguishment, the cumulative amount of the gain or loss on the extinguished debt that resulted from changes in instrument-specific credit risk should be presented in net income.
Distinguishing Liabilities from Equity
Prior to the amendment, FASB ASC 480-10-25, Distinguishing Liabilities from Equity—Overall—Recognition, freestanding financial instruments could not be combined with a non-controlling interest, unless such a combination was required under FASB ASC Topic 815, Derivatives and Hedging. An example illustrating written put and call options embedded in a non-controlling interest conflicted with that guidance by stating that the freestanding option contracts should be combined with the non-controlling interest. The amendment modifies the illustrative example to make it consistent with the guidance in FASB ASC 480-10-25.
In accordance with the guidance in FASB ASC 718-740-35, Compensation—Stock Compensation—Income Taxes—Subsequent Measurement, when actual tax deductions for compensation expense taken on an entity’s tax return for share-based payment arrangements differ in amounts and timing from those recorded in the financial statements, then the tax effect of any difference between the cumulative compensation cost of an award recognized for financial reporting purposes and the deduction for an award for tax purposes has to be recognized as income tax expense or benefit in the income statement, even if the entity cannot use the deduction to reduce taxes payable in the current period (e.g., when an entity has a net operating loss). The guidance prior to amendment was, however, unclear regarding whether excess tax benefits or tax deficiencies should be recognized in the income statement in the period when the amount of the tax deduction is determined or in the period when the tax deduction is taken on the entity’s tax return. The amendment clarifies that excess tax benefits or tax deficiencies should be recognized in the period in which the amount of the tax deduction is determined, which typically is when an award is exercised (in the case of share options) or vests (in the case of non-vested stock awards).
As it previously stood, FASB ASC 805-740-25, Business Combinations—Income Taxes—Recognition, permitted the application of any of the following three methods to allocate consolidated tax expense to the separate financial statements of members of the consolidated group when there was a continuation of the historical basis of financial reporting for an acquired entity and, at the same time, there was a step-up in tax basis: (1) by modifying the intra-entity tax allocation agreement so that taxes are allocated to the acquired entity on the pre-acquisition tax basis; (2) by crediting the tax benefit from the tax basis step-up to the acquired entity’s additional paid-in capital when realized; or (3) by crediting the tax benefit to income of the acquired entity as a permanent difference when realized. The amendment eliminates all such methods because they are inconsistent with the guidance in FASB ASC 740-20-45, Income Taxes—Intraperiod Tax Allocation—Other Presentation Matters. Under the amended guidance, if there is a continuation of the historical basis for financial reporting, (e.g., pushdown accounting has not been applied), while, at the same time, there is a tax basis step-up, the tax benefit from the step-up should be credited to the acquired entity’s additional paid-in capital.
Derivatives and Hedging
Previous guidance in FASB ASC 815-10-45, Derivatives and Hedging—Overall—Other Presentation Matters, specifically referenced the criteria in FASB ASC 210-20-45, Balance Sheet—Offsetting—Other Presentation Matters, which permits derivatives to be offset only when all four conditions (including the intent to set off) are met. The amendment to FASB ASC 815-10-45 clarifies that the intent to set off is not required to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value that are executed with the same counterparty under a master netting arrangement.
Fair Value Measurement
FASB ASC 820-10-35, Fair Value Measurement—Overall—Subsequent Measurement, has been amended as follows:
- To clarify that, when measuring the fair value of a liability or an equity instrument held by another party as an asset, (1) the quoted price of the asset should be adjusted only if there are factors specific to the asset that are not applicable to the fair value measurement of the liability or equity instrument, and (2) if the asset held by another party includes a characteristic restricting its sale, the fair value of the corresponding liability or equity instrument should include the effect of the restriction. Prior to amendment, the wording of the requirement in respect of the effect of a restriction could have been interpreted to mean that the effect of the restriction should not have been included.
- To state explicitly that a group of financial assets, financial liabilities, or non-financial items accounted for as derivatives and otherwise meeting the criteria to do so is permitted to apply the portfolio exception for measuring fair value of the group (i.e., fair value could be measured on a net basis for portfolios in which financial assets and financial liabilities and non-financial instruments are managed and valued together). Under previous guidance, a mixed portfolio of physically settled commodity contracts that were derivatives, but not financial assets, and that were managed with offsetting cash-settled derivatives that were financial assets or financial liabilities, was not eligible for the portfolio exception.
Offsetting of Securities Borrowed and Loaned
- FASB ASC Subtopic 940-405, Financial Services— Brokers and Dealers—Liabilities, and FASB ASC 942-210, Financial Services—Depository and Lending—Balance Sheet, have been amended to remove the inconsistent guidance on offsetting that paraphrased, respectively, the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guides, Brokers and Dealers in Securities, and Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies, and replace it with the full guidance on offsetting in FASB ASC 210-20-45, Balance Sheet—Offsetting—Other Presentation Matters.
Stable Value Fund Investments Held by Defined Contribution Pension Plans
- The illustrative example in FASB ASC 962-325, Plan Accounting— Defined Contribution Pension Plans—Investments—Other, that included a stable value common collective trust fund valued at net asset value has been removed to avoid the misleading interpretation that such an investment would not have a readily determinable fair value and, thus, should always apply the net asset value per share practical expedient pursuant to FASB ASC 820, Fair Value Measurement. Under the amended guidance, a pension plan is required to evaluate whether a readily determinable fair value exists or whether such an investment may qualify for the practical expedient.
EFFECTIVE DATE AND TRANSITION
Amendments not expected to result in a change in practice carry no effective dates or transition guidance (i.e., they are effective immediately).
Amended guidance for issues identified by the FASB as possibly altering future practice should be applied as follows:
- For (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file or furnish financial statements with or to the Securities and Exchange Commission (SEC), the amendments are effective for years beginning after December 15, 2018 (i.e., calendar-year 2019), including interim periods within those years. Early adoption is permitted for any year or interim period for which the entity’s financial statements have not yet been issued.
- For all other entities, the amendments are effective for years beginning after December 15, 2019 (i.e., calendar-year 2020), and interim periods within years beginning after December 15, 2020. Early adoption is permitted for any year or interim period for which financial statements are available to be issued.
Amended guidance for the following issues should be applied using a modified retrospective approach (i.e., the cumulative effect of the change is recorded as an adjustment to the opening balance of retained earnings); note, however, that the full retrospective approach is allowed:
- Comprehensive income.
- Debt modifications and extinguishments.
- Distinguishing liabilities from equity.
- Stock compensation.
- Business combinations.
- Offsetting securities borrowed and loaned (by brokers and dealers).
- Stable value fund investments held by defined contribution pension plans.
Amendments to the following issues, which carry the same effective dates, should be applied prospectively:
- Derivatives and hedging.
- Fair value measurement.
Technical Corrections and Clarifications to the FASB Codification
Prepared by Allan B. Afterman, CPA, Ph.D.
For questions please contact Ed Schenkein at [email protected]