By Denise Lugo
The FASB plans to issue in early March amendments to financial instruments accounting rules on seven narrow topics, benign items that will not prove contentious for companies, according to board discussions on January 29, 2020.
The board unanimously voted to carve out the issues from a November 2019 proposal, including tweaks to Topic 326, Financial Instruments—Credit Losses, which took effect for large public companies this year.
The revisions, which would be effective upon issuance for financial statements that have not yet been issued, would reduce cost, the board agreed.
“This is primarily done to reduce cost and does not in essence in my opinion change the information to investors,” FASB Chairman Russell Golden said. “I think that’s a good thing and that’s my basis for voting for it.”
Topic 326 is one of the most significant accounting changes the FASB issued in the past decade, developed in response to the 2007-2008 global financial meltdown. The standard requires banks to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. Legislators have tried to pressure the board to do an impact study, fearing it will deter lending.
Clarifies Interaction of CECL and Leases Rules
The CECL standard specifies the “contract term” reduced by prepayments and references specific instances where a company would extend the contract term. Conversely, the leases standard specifies that companies have to include renewal periods that are reasonably certain to occur. Because of the difference, companies asked the board to clarify whether the term used in determining a CECL reserve for a net investment in a lease should be the one specified in the CECL standard or the one in the leases standard.
The board clarification would state that it should be the term as determined under the leasing guidance. In other words, the term of a lease should be the same—whether accounting for the lease itself or estimating a credit loss on that same lease. The clarification was one agreed to by the board’s constituents.
“The only one that I think might change recognition and measurement might be the lease issue,” FASB Vice Chairman James Kroeker said. “And I think that even reduces cost because it reduces uncertainty about what the board intended, and [because] you don’t have to come up with separate lease terms for CECL versus leases,” he said.
Six Other Separate Issues
The six other issues the board affirmed are as follows:
- all companies, including private companies are subject to the fair value option disclosures in paragraphs 825-10-50-20 through 50-32;
- applicability of the portfolio exception in Topic 820, Fair Value Measurement, to nonfinanical items;
- clarifying a disclosure rule for depository and lending institutions under Topic 942, Financial Services–Depository and Lending;
- clarifying a cross-reference to line-of-credit or revolving debt arrangements guidance in subtopic 470-50;
- clarifying a cross-reference to net asset value practical expedient in subtopic 820-10; and
- clarifying the interaction of Topic 326 (credit loss rules) and subtopic 860-20 (transfers and servicing–sales of financial assets).
Discussing Contentious Issues Later
The seven financial instruments topics the board affirmed were pulled from Proposed Accounting Standards Update (ASU) No. 2019-800, Codification Improvements, issued to address 55 issues in the GAAP codification. The proposal includes the removal of redundant concept statement references in standards, and either clarify or simplify paragraphs in dozens of different topics and the master glossary. (See U.S. GAAP Codification Being Amended to Remove Redundancies, Companies Asked to Weigh in in the December 2, 2019, edition of Accounting & Compliance Alert.)
The proposal generated 10 comment letter responses, including from Big Four accounting firms that said some of the proposed amendments—seemingly minor tweaks—would change practice and create financial reporting confusion. (See Portions of FASB Proposal to Amend GAAP Codification Would Change Practice, Big Four Firms Caution in the January 3, 2020, edition of ACA.)
The contentious issues, much of which involve the removal of concept statement references, will be discussed at a future meeting after more staff research, the board said.
FASB member Susan Cosper, during the discussions, cautioned that the board needed to ensure that private companies are made aware of the changes it planned to finalize. Those, for example, related to fair value option disclosures.
“Their financial statements may not be issued until June; they might not necessarily pick up on it, because [the clarification] was issued in 2020,” Cosper said.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.
For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases , also on Checkpoint.
Additional analysis of the lease standard can be found in the Accounting and Auditing Update Service[AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service[SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—an Explanation and Analysis of Accounting Standards Update No. 2016-02.
This article originally appeared in the January 30, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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