Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Proposal to Offer Amendments to Valuation Adjustments in Business Combinations

The FASB had brief discussions on a series of potential projects at its recent meeting. The board plans to issue a proposed change to the adjustments to the valuation in a business combination. The board also plans to add to its agenda a project to improve the disclosures about interest income related to purchased loans and debt securities.

The FASB plans to release for public comment a proposal to simplify part of the accounting for business combinations, the board decided on March 18, 2015.

The proposal, which will be released for a 45-day comment period, is expected to focus on the accounting for the adjustments to the valuation of a business or group of assets when the buyer gets new information that affects the acquisition’s value.

Under Topic 805, Business Combinations , the buyer must retrospectively adjust the amounts recognized at the acquisition date. The change to the early, or provisional amount, is offset with an adjustment to goodwill, and the buyer then must revise the related information for prior periods.

Businesses told the FASB that revising previously issued financial statements is too costly of an exercise to justify the expense of giving more information to investors and analysts.

“In practice, measurement period adjustments are not significant in nature, therefore preparers spend time and incur costs… explaining why the costs have changed,” a FASB staff member said.

The FASB agreed that businesses should adjust their provisional numbers within one year of the measurement period. The business would then record, in the current period, the cumulative effect on earnings due to changes in depreciation, amortization, or other effects that are caused by a change to the provisional amounts.

The accounting board spent a significant part of the meeting reviewing other issues that it had been told needed further accounting guidance or clarification. The board either decided to keep the current accounting intact, forward some issues to its Emerging Issues Task Force (EITF), or add the projects to its standard-setting agenda.

Board members decided to add to the standard-setting agenda a project to examine the need for further disclosures about the interest income related to callable loans and debt securities.

The project stems from a request from the public for the FASB to examine the accounting for the premium or discount to the components of interest income associated with the purchase of callable municipal securities. The request was made because many banks are holding callable municipal securities that were purchased at a premium and are expected to be repaid during the next few years.

The FASB agreed that it needed to examine whether to require more information about all types of purchased debt securities.

“After the credit crisis, when there was so much purchasing of loans with discounts, there has been a significant amount of interest income impacts because of accretion. It’s become very hard for investors to understand how much the accretion affects total income versus how much is going to be potentially ongoing,” FASB member Marc Siegel said. “I think the disclosures… are extremely responsive to that aspect we’ve been hearing about for a while.”

Two issues to EITF

The board agreed to forward to its Emerging Issues Task Force (EITF) a project to simplify the accounting for embedded put and call options in debt instruments.

Topic 815, Derivatives and Hedging , requires instruments with embedded derivatives to be assessed to determine whether they must be accounted separately from the host contract. The FASB heard that businesses needed more guidance on determining whether put or call options are clearly and closely related to their debt hosts.

The board also forwarded to the EITF a project to determine the effect of derivative contract novations on existing hedge accounting relationships.

In a derivative contract, the term “novation” refers to replacing one party to the derivative contract with another, typically a clearinghouse. The derivative instrument that is the subject of a novation may be the designated hedging instrument in a hedge accounting relationship under Topic 815. The issue is whether the novation of a derivative instrument results in a requirement to de-designate that hedging relationship, and, as a result, discontinue the application of hedge accounting.

More research

Finally, the board decided to do more research on a project related to simplifying the measurement of an asset retirement obligation. This is an area of concern for companies closing down or dismantling long-lived assets, such as nuclear power plants, mines, landfills, and offshore oil-and-gas production sites.

Topic 410, Asset Retirement and Environmental Obligations , requires a business to recognize a liability for an asset retirement obligation at the time the obligation is incurred.

Because many companies use their own resources to shut down or dismantle such assets, current accounting results in the business ending up with a gain or loss once it’s finished, depending on whether the internal costs were more or less than the estimated cost a third party would charge.

Businesses told the FASB that tracking the costs is overly complex and doesn’t provide useful information to analysts and investors, who told the FASB staff that they see “no useful information” in knowing the fair value of an asset retirement obligation because they’re never or very seldom settled by third parties, FASB assistant director Cullen Walsh said.

FASB member Lawrence Smith said he believed it was a project worth pursuing.

“You’ve got preparers griping about it; you’ve got users saying it doesn’t give good information,” Smith said.

Rejected projects

The board agreed it wouldn’t pursue projects for the balance sheet treatment for the payments in some securities lending transactions that are cleared through a regulated central clearinghouse, the classification of credit card processing fees, and the class of assets in a merger or acquisition called reacquired rights.

Tagged with →