Industry Insights

Public Companies – New Accounting Rules for First Quarter 2017

January 2017
Author:  Anne Coughlan

Anne Coughlan



201 N. Illinois Street, Suite 700
P.O. Box 44998
Indianapolis, IN 46244-0998 (46204)


As calendar-year companies work to complete their 2016 financial reporting for U.S. Securities and Exchange Commission Form 10-K, they should be aware of upcoming changes to accounting rules. While much has been written and discussed regarding the “Big Three” changes (revenue recognition, leases and credit losses) with wide-ranging effects, there are several narrower changes taking effect in 2017. 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 2017 for calendar-year companies. Here are some newly effective pronouncements that could affect you. This is not a comprehensive list, but it highlights some of the more significant standards. The below standards are effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2016.

Newly Effective

ASU 2015-11, Inventory (Topic 330):  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 2015-17, Income Taxes (Topic 740):  Balance Sheet Classification of Deferred Taxes

  • Requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of an entity’s tax-paying component be offset and presented as a single amount is not affected by this ASU’s amendments.
  • May be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.
  • Related resource:  Simplifying Classification of Deferred Taxes

ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323):  Simplifying the Transition to the Equity Method of Accounting

  • Investor entities will add the cost of acquiring an additional equity interest to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. Eliminates the requirement to retroactively adjust the investment, results of operations and retained earnings on a step-by-step basis as if the equity method had been in effect during all previous periods the investment was held.
  • Entities should prospectively apply the ASU to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
  • Related resource:  Simplifying the Transition to the Equity Method of Accounting

ASU 2016-09, Compensation—Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting

  • Offers a simplified accounting alternative for forfeitures because they can be accounted for when they occur instead of having to estimate them. Eliminates the complex accounting for additional paid-in capital pools by requiring recognition of the income tax effects of share-based payment transactions in the income statement upon award vesting or settlement. Revises the amount of employee shares an employer is allowed to withhold to meet the employer’s minimum statutory withholding obligation without triggering liability classification. Changes the classification of excess tax benefits and clarifies the classification of employee taxes paid in the statement of cash flows.
  • Can be adopted on a prospective, retrospective or modified retrospective basis, depending on the provision.
  • Related resource:  Share-Based Payment Accounting Simplifications

Early Adoption

Many recent standards provide for early adoption. Public companies should consider the potential benefit of early adopting the below standard for first-quarter 2017 interim financial statements.

ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments

  • ASU 2016-15 aims to decrease diversity in practice where current U.S. generally accepted accounting principles are unclear or do not provide specific guidance on cash flow transactions. Topics covered include:
    • Debt prepayment/extinguishment costs
    • Settlement of zero-coupon instruments
    • Insurance settlement proceeds
    • Settlements of contingent consideration in business combinations
    • Life insurance proceeds
    • Equity method distributions
    • Beneficial interests in securitization
  • The final amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
  • Early adoption is permitted, including adoption in an interim period provided all amendments are adopted in the same period.
  • Related resource:  Update to Classification Requirements of Certain Cash Receipts & Payments

Again, this is not a complete list of newly issued or effective standards; look for a comprehensive update later in the first quarter of 2017.

For more information related to these or other standards that may affect your organization, contact your BKD advisor.

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