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U.S. GAAP Updated to Reflect SEC’s Removal of Some EITF Guidance for Hedging, Revenue Recognition

The FASB’s latest update to U.S. GAAP reflects the SEC staff announcement at the March meeting of the Emerging Issues Task Force (EITF) about some rescinded guidance for revenue recognition and hedge accounting. The rescissions deal with the views of the agency’s chief accountant about the board’s recent amendments to revenue accounting and the guidance for financial instruments that can be treated as debt or equity.

The FASB published Accounting Standards Update (ASU) No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting (SEC Update), on May 2, 2016.

The amendments to U.S. GAAP were issued to update the Accounting Standards Codification to reflect announcements Wesley Bricker, an SEC deputy chief accountant, made to the FASB’s Emerging Issues Task Force (EITF) on March 3. A FASB spokesperson said the rescissions to the revenue guidance will be effective once the FASB’s revenue standard in Topic 606, Revenue From Contracts With Customers (Topic 606) , becomes effective for public companies in 2018.

The SEC rescinded four pieces of its revenue recognition guidance to reflect some of the amendments to U.S. GAAP in the FASB’s May 2014 ASU No. 2014-09,Revenue From Contracts With Customers (Topic 606) :

  • FASB ASC 605-20-S99-2, SEC Observer Comment: Revenue and Expense Recognition for Freight Services in Process ;
  • Accounting for shipping and handling fees and costs in FASB ASC 605-45-S99-1, Revenue Recognition — Principal Agent Considerations — SEC Materials ;
  • Accounting for consideration given by a vendor to a customer in FASB ASC 605-50-S99-1, Revenue Recognition — Customer Payments and Incentives — SEC Materials ; and
  • Accounting for gas-balancing arrangements in FASB ASC 932-10-S99-5, Revenue Recognition — Customer Payments and Incentives — SEC Materials .

ASU No. 2016-11 also updated the Accounting Standards Codification to reflect the SEC’s rescission of FASB ASC 815-10-S99-3, Derivatives and Hedging — Overall — SEC Staff Guidance — Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share Under Topic 815, and FASB ASC 815-10-S55-1, Derivatives and Hedging — Overall — Implementation Guidance and Illustrations — Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share. The SEC’s removal of the guidance reflects the changes in ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, a Consensus of the FASB Emerging Issues Task Force.

Bricker told the EITF that the rescission of FASB ASC 815-10-S99-3 became effective as of the effective date of the amendments in ASU No. 2014-16. The amendments in ASU No. 2014-16 went into effect for fiscal years that started after December 15, 2015. Public companies were expected to apply them in their first-quarter regulatory filings.

In ASU No. 2014-16, the FASB said its amendments to U.S. GAAP do not change the criteria for determining when embedded derivatives and their underlying instruments should be accounted for separately, but they do clarify how to interpret hedge accounting for hybrid instruments. The amendments to FASB ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition , formerly SFAS No. 133, mean that businesses should evaluate an instrument and its embedded derivatives before determining how to classify them.

The SEC, by practice, periodically announces changes to its staff guidance on EITF issues at task force meetings.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

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