The FASB on March 3, 2021, voted against adding projects to its technical agenda to clarify rules related to common control transactions, and on asset acquisitions achieved through the issuance of equity instruments – two topics separately flagged by KPMG LLP and PricewaterhouseCoopers LLP.
Specifically, the board, citing the need to prioritize more pressing issues, took a decisive stroke against:
- addressing the current requirement for a receiving entity to push down the parent entity’s basis in a common control transaction; and
- clarifying whether transactions in which an entity issues equity instruments to acquire assets should be accounted for as share-based payments to non-employees within the scope of Topic 718, Stock Compensation, or as asset acquisitions within the scope of Subtopic 805-50, Business Combinations—Related Issues.
The issues are not sufficiently pervasive, would introduce broader knock-on effects on other standards, and did not reach the bar for being a standard-setting priority, the full board said.
On the common control topic, FASB Chair Richard Jones said “when I look at that I look at ‘what is the issue we’re trying to solve,’ which in my mind would be consistency, but I would also consider prevalence and our ability to tackle this issue somewhat narrowly. And it’s on that last point that I get very concerned.”
Related to Topic 718 versus Subtopic 805-50, at issue is whether GAAP is ambiguous about which rule to use. The topic was raised to the board as one whereby accounting differences have cropped up among companies.
Board members said though there may be accounting differences among companies, the fix could open up a bigger can of worms, and trying to tackle it would not be a good use of the board’s resources at this point in time.
“This diversity doesn’t bother me as long as it’s really accounting policy diversity,” Jones said. “So as long as people are looking at this and realizing there need to be reasonable judgments and elect an accounting policy when it is a material transaction, and follow that consistently that’s fine,” he said.
FASB Vice Chair James Kroeker observed that under today’s rules coming up with an accounting policy determination as to when an entity is the scope of one rule versus the other would be critical, but not necessarily in conflict.
“I think we understand this one is the accounting for goods or services and [the other] is the accounting for other asset acquisitions without a precise scope on what a good or service is,” Kroeker said. “And that leaves it to an entity to determine their policy for determining what is sort of ‘goods or services’ then you’re in the 718 model versus what is ‘other asset acquisitions’ which is the catch all,” he said. “And I think that exists in a lot of spaces because asset acquisition accounting is where the catch all for all other things not addressed.”
Board Resources Limited
The issue on common control relates to the requirement to use a parent company’s basis of accounting which, some say, requires retroactive application for pushdown accounting in a common control transaction. Pushdown accounting is “the use of the acquirer’s basis in the preparation of the acquiree’s separate financial statements,” according to the Master Glossary in the GAAP codification.
The issue was flagged as one that creates cost and complexity, but staff research revealed mixed views, according to the discussions.
Board members said overall the feedback they received, including from the Emerging Issues Task Force (ETIF), showed the issue was not pervasive and would eat at limited staff resources.
“I thought about our agenda in totality, and thinking about our limited resources how we should prioritize our agenda,” FASB member Susan Cosper said. “We have a number of things in the pipeline in terms of post-implementation review and we have certain research agenda topics as well as pending agenda consultation, and so taking all of that into account I don’t think this was something we should add to our agenda at this time.”
Similarly, FASB member Marsha Hunt said pervasiveness of an issue is part of the board’s criteria for taking up a topic. “Even though the staff points out it can be narrow in scope that there can be solutions I wasn’t convinced from the information available to us and from the summary of the agenda committee discussion with the EITF that this is a prevalent problem with GAAP today,” she said.
FASB member Harold Schroeder observed that push down accounting in general was tackled by a prior board that was relatively split on the issue, with some favoring flexibility, which he felt was a good point. “It really depends on your ultimate uses of these financial statements, what was most important, and it convinced me that we need to look at more flexibility in this area.”
Would Take Years to Tackle
On the second topic, the scoping issue related to Topic 718 and Subtopic 805-50 would raise substantial issues as both rules have different measurement requirements, board discussions indicated.
Under Topic 718 the measurement date for equity classified warrants is the grant date, and by contrast asset acquisitions accounted for under Subtopic 805-50 are measured at the date of acquisition. Therefore, in certain circumstances it is possible that the same acquisition could be measured differently depending on which set of guidance is applied.
Board members said addressing the topic would mean opening up other standards.
“I think that the potential knock-on effects of trying to go in and trying to define the term goods or removing the term goods from 718 which was some of the suggestions that were made, potentially would become a much bigger issue,” FASB member Christine Botosan said. “If you just look at the number of times the word goods is used in the codification it’s over 500 times so we need to make sure that we weren’t accidentally causing a problem somewhere else in the literature,” she said.
In agreement, FASB member Gary Buesser said “no one has expressed any interest in attempting to define the term goods or services” and given the times that it’s in the codification “this would be a 10-year project.”
Buesser said generally analysts don’t like accounting diversity but in this case it would be acceptable. The preference, however, would be for companies to use guidance in Subtopic 805-50, he said.
This article originally appeared in the March 4, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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