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Financial Reporting and Regulatory Update

Fourth Quarter 2020

From the FASB

Final standards

Long-duration insurance contracts effective date deferral

In 2018, the FASB issued ASU 2018-12 and revised its accounting guidance for insurance companies that issue long-duration insurance contracts, including life insurance and annuity contracts. On Nov. 5, 2020, the FASB issued ASU 2020-11, “Financial Services – Insurance (Topic 944): Effective Date and Early Application,” which deferred the effective date for all insurance entities applying ASU 2018-12.

Effective dates of ASU 2018-12 as amended by ASU 2020-11

For public business entities (PBEs) that meet the definition of an SEC filer and are not smaller reporting companies, ASU 2018-12 is effective for fiscal years beginning after Dec. 15, 2022, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025. Early adoption is permitted.

Various codification improvements

On Oct. 29, 2020, the FASB issued ASU 2020-10, “Codification Improvements.” This ASU amends various disclosure sections of the codification. Disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements originally were not included in the appropriate disclosure sections of the codification. The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification. This ASU amends various other sections of the codification to clarify the codification or correct unintended application of guidance and are not expected to have a significant effect on the current accounting practice.

Effective dates

For PBEs, the amendments are effective for fiscal years beginning after Dec. 15, 2020, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption is permitted.

Amendments to SEC paragraphs

In October 2020, the FASB issued ASU 2020-09, “Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762.” This ASU amends and supersedes various SEC paragraphs to reflect SEC Release No. 33-10762, which includes amendments to financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The SEC rules make it easier for a registrant to qualify for an exception to the requirement to file separate audited financial statements of a subsidiary issuer or guarantor of registered debt securities.

Effective dates

The SEC rules are effective Jan. 4, 2021. Earlier compliance is permitted.

Improvements in accounting for certain purchased callable debt securities

On Oct. 15, 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs.” This ASU clarifies amendments in ASU 2017-08, which amended the amortization period for certain purchased callable debt securities held at a premium by shortening the period to the earliest call date. The amendments in this ASU clarify that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of ASC paragraph 310-20-35-33 for each reporting period.

Effective dates

For PBEs, the amendments are effective for fiscal years beginning after Dec. 15, 2020, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020.

Proposals

Goodwill triggering event accounting alternative

On Dec. 21, 2020, the FASB issued a proposed ASU, “Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events,” to reduce the cost and complexity of private companies evaluating triggering events and potentially measuring a goodwill impairment at an interim date. The proposed amendments would provide private companies and not-for-profit entities that report in-scope financial information on only an annual basis with an option to perform the identification and evaluation of a triggering event for goodwill impairment only as of their annual reporting date. An entity that elects the proposed alternative would not be required to monitor for goodwill impairment triggering events in interim periods. The proposed amendments would not be limited to entities that have elected the accounting alternative for amortizing goodwill. An entity that elects the accounting alternative for evaluating triggering events but has not elected the alternative for amortizing goodwill and performs its annual goodwill impairment test on a date other than its annual reporting date will have to evaluate only at its annual reporting date whether impairment between the annual goodwill impairment test date and the entity’s annual reporting date has occurred.

The proposed ASU would be effective prospectively for annual periods beginning after Dec. 15, 2019. Early application would be permitted.

Comments were due on Jan. 20, 2021.

Acquired revenue contracts with customers in a business combination

On Dec. 15, 2020, the FASB issued a proposed ASU, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers,” to improve accounting for acquired revenue contracts with customers in a business combination. The proposal addresses questions raised in applying Topic 805 to a contract with a customer acquired in a business combination after the acquirer has adopted Topic 606, “Revenue From Contracts With Customers.” The proposed amendments would require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts (that is, recognizing and measuring acquired contract assets and contract liabilities similar to how they were recognized and measured in the acquiree’s GAAP financial statements).

The proposed ASU does not yet include an effective date. Early application would be permitted.

Comments are due on March 15, 2021.

Reference rate reform scope adjustments

On Oct. 29, 2020, the FASB issued a proposed ASU, “Reference Rate Reform  (Topic 848): Scope Refinement,” to address questions raised about whether the guidance in Topic 848 can be applied to contracts that do not reference a rate that is expected to be discontinued (as required by the scope of Topic 848) but that are affected by reference rate reform as a result of the discounting transition. Changes in the interest rate used in the derivatives market for margining, discounting, or contract price alignment are being implemented as part of the marketwide transition to new reference rates (commonly referred to as the “discounting transition”), and these changes have created particular accounting implications. The proposed amendments would refine the scope of Topic 848 such that contracts effected by the discounting transition would be eligible for certain optional expedients and exceptions in Topic 848.

The proposed ASU would be effective for all entities upon issuance.

Comments were due on Nov. 13, 2020.

Issuer’s accounting for certain modifications of freestanding equity-classified forwards and options

On Oct. 26, 2020, the FASB issued a proposed ASU, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Forwards and Options (a Consensus of the Emerging Issues Task Force),” to clarify an issuer’s accounting for modifications or exchanges of freestanding equity-classified forwards and options (including warrants) that remain equity classified after modification or exchange. The proposal provides a principles-based framework to determine whether an issuer would recognize the modification or exchange as an adjustment to equity or an expense.

The proposed ASU does not yet include an effective date. Early application would be permitted.

Comments were due on Dec. 28, 2020.

Targeted improvements to lease accounting

On Oct. 20, 2020, the FASB issued a proposed ASU, “Leases (Topic 842): Targeted Improvements,” to assist stakeholders with potential implementation issues of the new lease standard (ASU 2016-02).

The proposal would amend lease classification requirements for lessors. Under the proposal, lessors would classify and account for a lease with variable lease payments that do not depend on a reference index or rate as an operating lease. This is to address concerns raised regarding recognition of an immediate loss for a sales-type lease with variable payments that do not depend on a reference index or a rate. With such a lease classified as operating, the lessor would not recognize a lease receivable, would not derecognize the underlying asset, and, therefore, would not recognize a selling profit or loss.

The proposal would provide lessees with the option to make an entitywide accounting policy election to remeasure lease liabilities for changes in a reference index or a rate affecting future lease payments at the date that those changes take effect. This is to address some inconsistencies between generally accepted accounting principles and International Financial Reporting Standards (IFRS) given that IFRS requires a lessee to remeasure the lease liability in subsequent periods when a change to the lease payments resulting from a change in a reference index or a rate takes effect.

The proposal would exempt entities from applying modification accounting to the remaining lease components within a lease contract for transactions in which one or more lease components are terminated before the end of the lease term and that early termination does not economically affect the remaining lease components.

The proposed ASU does not yet include an effective date. Early application would be permitted.

Comments were due on Dec. 4, 2020.

Post-implementation review

Monitoring and evaluation of CECL standard

At its board meeting on Dec. 2, 2020, as part of its post-implementation review (PIR) process, the FASB discussed feedback received on the post-issuance date implementation monitoring and post-effective date evaluation of costs and benefits related to ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” From the feedback, the board identified and discussed four issues for which it could consider making certain targeted improvements:

  • Issue 1: Accounting for purchased assets that do not qualify as purchased financial assets with credit deterioration
  • Issue 2: Accounting for troubled debt restructurings (TDRs) by creditors
  • Issue 3: Amending the scope of financial assets included in ASU 2016-13
  • Issue 4: Enhancing disclosures for ASU 2016-13

While no tentative decisions were made, the staff concluded that it will take these actions:

  • Perform additional research and outreach on the accounting for non-purchased credit deteriorated financial assets and TDRs for consideration as part of future request activities.
  • Continue to monitor feedback related to the scope of financial assets included in ASU 2016-13.
  • Continue to monitor feedback on disclosures under ASU 2016-13.
  • Perform additional general outreach with stakeholders and accumulate feedback for presentation to the board at future meetings.

A recording of the meeting will be available on the FASB site until March 2, 2021.

Initial costs and benefits of CECL standard

At its quarterly meeting on Sept. 24, 2020, the Financial Accounting Standards Advisory Council (FASAC) discussed post-implementation review of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” with a focus on the initial costs and benefits of the standard.

This is the first in a series of discussions as part of the FASB’s PIR on the CECL standard and focused on trade receivables. Specifically, members noted that the adoption of the standard had an insignificant financial impact on the allowance for credit losses related to trade receivables. Given the minimal impact, FASAC members discussed whether the standard should be amended to either exclude trade receivables or provide an option to not apply the guidance to trade receivables. It was also noted that that there might be a benefit for private companies applying the standard to trade receivables as it might provide more standardization in how entities calculate their trade receivables allowance for credit losses.

Private Company Council

Goodwill amortization considerations

At its Dec. 3, 2020, meeting, the FASB PCC discussed identifiable intangible assets and subsequent accounting for goodwill. At a previous meeting the board had requested that the staff consider adding amortization to the goodwill impairment model as well as changing the impairment model, accounting for identifiable intangible assets, and exploring disclosure, presentation, and transition matters. The PCC was asked to consider amortization period concerns that might arise if a new model was created that harmonizes GAAP for all types of entities including public entities, private entities, and not-for-profits. Questions included the following topics:

  • Consideration of a default period other than 10 years for amortization
  • Management’s ability to deviate from a default period and justification for that difference
  • Cap or floor on an amortization period
  • Transition challenges