Public Companies – New Accounting Standards Effective for First Quarter 2016
Author: Anne Coughlan
If you’re a calendar-year company, you’ve likely just filed or are getting ready to file your U.S. Securities and Exchange Commission (SEC) Form 10-K. Now it’s almost the end of your first quarter; are you on top of the new accounting pronouncements that become effective this period?
A number of Accounting Standards Updates (ASU) issued by the Financial Accounting Standards Board (FASB) take effect during the first quarter of 2016 for calendar-year public companies. Here are some newly effective pronouncements that could affect you. These are only the highlights of some of the more significant standards; it’s not a comprehensive list. Unless otherwise noted, standards are effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2015.
ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
- Eliminates from U.S. generally accepted accounting principles (GAAP) the concept of extraordinary items and the requirement to separately classify, present and disclose extraordinary events and transactions
- A reporting entity has the option to prospectively or retrospectively apply the amendments to all prior periods presented in the financial statements
- Related resource – Extraordinary Items Eliminated
ASU 2015-02, Amendments to the Consolidation Analysis
- Establishes a new way for entities to evaluate consolidation, potentially resulting in new consolidation conclusions and disclosures; application of the new standard may result in some entities being deconsolidated or considered variable-interest entities subject to additional disclosures
- Ends a deferral granted to investment companies; partnerships and investment companies may be most affected by the new guidance
- A reporting entity may apply the amendments using a modified retrospective approach or retrospectively apply the amendments
- Related resources – FASB's New Consolidation Guidance, Impact of Revised Consolidation Guidance on LP Investments in LIHTC
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs
- Requires debt issuance costs to be presented as a direct deduction from the debt liability, consistent with debt discounts or premiums, rather than as a deferred asset
- The guidance would be retrospectively adopted; upon transition, an entity would be required to comply with the applicable disclosures for changes in accounting principle, including the nature and reason for the change, a description of the prior-period information adjusted and the effect on the change in financial statement line items
- Related resource – FASB Standard Simplifies Presentation of Debt Issuance Costs
ASU 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
- Provides a practical expedient for employers with fiscal year-ends not falling on a month-end by allowing them to measure defined benefit plan assets and obligations as of the month-end closest to the entity’s fiscal year-end and to follow that measurement date methodology consistently from year to year
- The proposed amendments should be prospectively applied
ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
- Provides guidance to customers about whether a cloud computing arrangement includes a software license; helps entities evaluate accounting for fees paid by a customer in a cloud computing arrangement
- A reporting entity can elect to prospectively adopt the amendments to all arrangements entered into or materially modified after the effective date or retrospectively
- Related resources – FASB Issues Final Standard on Cloud Computing, A Closer Look at Software Hosting Arrangements
ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
- Removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (NAV) per share practical expedient; removes the requirement to make certain disclosures for all investments eligible to be measured at fair value using the NAV per share practical expedient
- A reporting entity should retrospectively apply the amendments to all periods presented
- Related resource – FASB Simplifies Fair Value Disclosures
ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments
- Acquirers must recognize adjustments to estimated amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined
- Acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date
- The amendments should be prospectively applied to adjustments to provisional amounts occurring after the effective date, with earlier application permitted for financial statements not yet issued
- Related resource – Accounting Relief for Business Acquisitions with Measurement Period Adjustments
Several recent standards provide considerable relief from reporting or disclosure requirements. Public companies should consider the potential benefit from early adopting the below provisions for first-quarter 2016 interim financial statements.
ASU 2015-11, Simplifying the Measurement of Inventory
- Requires inventory to be measured at the lower of cost and net realizable value; eliminates guidance in Topic 330 requiring reporting entities to also consider replacement cost and net realizable value of inventory, less approximately normal profit margin
- Prospective application
- Related resource – FASB Simplifies Inventory Guidance
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities—only the following provision can be early adopted by public business entities (not the standard as a whole)
- Fair value changes resulting from own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income; an entity can measure the effect of “own” credit using any method that faithfully represents the change in an instrument’s specific credit risk, but the entity must disclose the method chosen and apply it consistently from period to period.
- Related resources – New Financial Instruments Measurement & Classification Guidance Offers Relief for 2015 Financials, New Measurement & Classification Guidance for Financial Instruments
Again, this isn’t a complete listing of newly issued or effective standards. Companies can find a more complete list in BKD’s white paper, What You Need to Know – Changes in Financial Accounting Standards: 2015, which includes all standards where early adoption is permitted and may be beneficial.
For more information related to these or other standards that may affect your organization, contact your BKD advisor.