Like most financial matters, accounting standards have become increasingly complex over the past decade. This has been in response to increasingly challenging transactions as new products and services emerged and financial products became more complicated. As the amount of information in financial statements and disclosures has grown over the years, there has been a stated desire with the accounting regulators and standard setters to simplify and reduce complexity of financial statement guidance. But how much can really be done when its primary goal of full disclosure and transparency in financial reporting seems to be in opposition to simplifying the requirements?
While simplification may be a goal, the volume of new guidance doesn’t seem to be. We have summarized below just some of the recent financial reporting guidance issued in 2015.
The FASB voted on July 9, 2015 to give companies an extra year to comply with its landmark revenue recognition standard. The accounting board said the standard will be effective in 2018, but companies have an option of adopting it as of the original 2017 effective date.
The standard was published in May 2014 and ushers in a single, principles-based method for companies to calculate the top line in their income statements. The standards get rid of the reams of industry-specific calculation methods in U.S. GAAP and add weight to the limited guidance in IFRS.
In the year since the standards were issued, the accounting boards have received numerous requests to give companies more time to upgrade their financial reporting systems and prepare for the accounting changes. They finally listened to the public and responded appropriately.
This new standard was issued to simplify the measurement of inventory accounted for using a first-in, first-out (FIFO) or average cost methods. Under this new guidance, inventory should be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Net realizable value and its definition have replaced the term “market”.
Private Company Alternative to Accounting for Intangible Assets
This guidance allows private entities to not recognize customer-related intangible assets that are inseparable from other acquired assets and noncompetition agreements in qualifying transactions.
Transactions and events are classified as extraordinary if they are abnormal or unrelated to the entity’s typical activities and their occurrence “cannot reasonably be expected” to recur. New guidance to simplify the income statement presentation eliminated the concept of extraordinary items. This approach retained the guidance related to items that are unusual, infrequently occurring, or both, however, entities will continue to present these items as separate components of continuing operations but not in a separate section on the operating statement.
The accounting standards update to consolidation eliminates the voting interest model for limited partnerships and similar entities and makes changes to the variable interest entity (VIE) model. With the VIE model, the FASB eliminated the deferral of interests in investment companies, but scoped out entities that are money market funds or similar investment vehicles. Among the changes, the update also simplifies the guidance on fees paid to decision-makers and service providers, and causes limited partnerships to be VIEs if the limited partners lack substantive kick-out or participating rights. Under the new voting interest model, the guidance for limited partnerships and similar entities is eliminated, removing the presumption that a general partner in a limited partnership would consolidate the entity.
Presentation of Debt Issuance Cost
New guidance modified the presentation of debt issuance cost related to a recognized debt-liability to be a direct deduction from the carrying amount of the debt liability on the balance sheet. This is consistent with debt discounts and with debt issuance cost presentation as well as International Financial Reporting Standards (IFRS). The change affects presentation, not recognition or measurement of debt issuance costs.
Internal Use Software
This new guidance provides information on how to account for fees paid by a customer in a cloud computing arrangement. The update applies guidance that already existed for the accounting for cloud computing arrangements by vendors to their customers. Hosting arrangements meeting criteria contained in the update will account for the arrangements as a service.
A proposed accounting standards update would eliminate the requirement to distinguish current and noncurrent deferred income tax assets and liabilities. Rather all deferred taxes would be classified as noncurrent on the balance sheet.
Nonprofit Financial Statement Presentation
A proposed accounting standard has been released that would require enhanced disclosures and reporting requirements in an effort to make nonprofit financial statements more transparent. Presentation changes relate to net asset classification, statement of activities, presentation of cash flows and disclosures about liquidity.
The above summary is a very high level summary of new guidance and is not intended to be a full explanation of the guidance. If you would like a more detailed description of each matter, please let us know and we can provide the actual standard or statement and an explanation as to how the new guidance will impact your financial statements.