ACCTFAX Bulletin Board
Originally Published in The Cooperative Accountant, Spring 2021 Issue
Recent Activities of The Private Company Council
The Private Company Council (PCC) met on Thursday, December 3, 2020. Below is a brief summary of issues addressed by the PCC at the meeting:
PCC Issue No. 2018-01, Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards: FASB staff gave an overview of the feedback received from comment letters in response to the proposed Accounting Standards Update—Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards. PCC members discussed the comment letter feedback on the areas associated with the proposed practical expedient. At a future meeting, the PCC will consider expanding the scope of the practical expedient, clarifying the basis of application, and expanding the references to Section 409A.
Current Issues in Financial Reporting: FASB staff highlighted that a FASB Staff Educational Paper on Topic 470 (Debt): Borrower’s Accounting for Debt Modifications was recently made available on the FASB website.
FASB staff briefly reviewed the Goodwill—Triggering Event Assessment Alternative for Private Companies and Not-For-Profit Entities project, which was added to the Board’s technical agenda in response to feedback received from the PCC and the AICPA’s Technical Issues Committee (TIC), and for which the Board has instructed the staff to proceed with a proposed Update. Given the proximity to year-end, PCC members concurred with the 30-day comment period decided by the Board. PCC members discussed which entities should be included in the scope of the accounting alternative. FASB staff expects the proposed Update to be issued for public comment in mid-December.
Identifiable Intangible Assets and Subsequent Accounting for Goodwill: FASB staff provided the PCC with an update on this project, focusing on recent Board discussions. FASB staff gave an overview of the approaches being considered by the Board for amortization periods, including default amortization periods, management-determined amortization periods, and approaches with elements of both. PCC members provided their views on the length of a default amortization period, management deviations from a default amortization period, and whether there should be an imposed cap or floor on an amortization period. PCC members mostly supported a 10-year default amortization period. Some PCC members expressed the need for a floor to be imposed on the amortization period, others did not think a floor would be necessary, and still others preferred that a cap be imposed on the amortization period.
Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff briefly summarized the PCC’s prior discussion about profits interests and partnership accounting. FASB staff noted that a working group was formed in August comprising three PCC members and a member of the AICPA’s TIC. The working group currently is conducting outreach with specialists to better understand legal, tax, and valuation issues associated with profits interests. Based on the initial outreach conducted, FASB staff described common valuation methodologies used to measure awards of profits interests and some of the factors that contribute to complexity in practice. FASB staff reiterated that its outreach was in the early stages and would be supplemented by additional outreach and research going forward.
Implementation Issues—Revenue: FASB staff provided the PCC with an update of the Revenue Recognition—Practical Expedient for Private Company Franchisors project and the proposed Accounting Standards Update, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient, whose comment period ended in early November. The project seeks to address certain difficulties private company franchisors experience in applying Topic 606, Revenue from Contracts with Customers. FASB staff briefly summarized the comment letter feedback received and asked PCC members for feedback. Generally, PCC members supported the Board’s efforts to reduce the cost of applying the revenue guidance for private company franchisors.
Implementation Issues—Leases: FASB staff provided the PCC with an update on the post-implementation review process and summarized the Board’s discussion at the December 2, 2020 Board meeting. At that meeting, the Board directed the staff to conduct additional research on the practical expedient that allows nonpublic lessees to use the risk-free rate as the lease discount rate. Specifically, the Board requested additional information on the appropriateness of the risk-free rate and whether the practical expedient should be applied at the underlying-class-of-asset level rather than at an entity-wide level. PCC members were supportive of refining the practical expedient and provided feedback on the appropriateness of replacing the risk-free rate with an alternative rate (for example, an A or BBB rate).
Disclosure Review—Share-Based Payments: FASB staff provided an overview of this research project and highlighted private company considerations raised during research. PCC members noted that the current required disclosures for private companies generally are not difficult to prepare and those disclosures provide relevant information to users of private company financial statements. Some PCC members indicated that there could be some opportunity to improve certain disclosures required for private companies.
The next PCC meeting is scheduled for Monday, April 19 and Tuesday, April 20, 2021.
FASB Proposes Improvements to Accounting for Acquired Revenue Contracts With Customers in a Business Combination
On December 15, 2020, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to address inconsistency and diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Stakeholders are encouraged to review and share input on the proposed ASU by March 15, 2021.
Current GAAP provides guidance on when to recognize and how to measure assets and liabilities in a business combination but does not provide guidance specific to contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers.
Some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.
The proposed ASU would address these issues by providing guidance in Topic 805, Business Combinations, that would require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Generally, this would result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquirer’s financial statements before the acquisition. The proposed ASU would not affect the accounting for other assets or liabilities that may arise from revenue contracts from customers in a business combination, such as customer-related intangible assets and contract-based intangible assets.
The proposed ASU is available at www.fasb.org.
FASB Proposes Accounting Alternative to the Goodwill Triggering Event Assessment for Certain Private Companies and Organizations
On December 21, 2020, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to provide an accounting alternative that would reduce the complexity for certain private companies and not-for-profit organizations when performing the goodwill triggering event evaluation. Stakeholders were encouraged to review and provide comment on the proposed ASU by January 20, 2021.
Under current GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value. Companies and organizations are required to monitor for and evaluate goodwill triggering events as they occur throughout the year.
Some stakeholders raised questions about the value of evaluating a triggering event at an interim date when certain private companies and not-for-profit organizations only issue GAAP-compliant financial statements on an annual basis. They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued.
To address this, the proposed ASU would introduce an accounting alternative that would allow private companies and not-for-profit organizations that only report goodwill (or accounts that would be affected by a goodwill impairment such as retained earnings and net income) on an annual basis to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, on the annual reporting date only. It would eliminate the requirement for companies and organizations that elect this alternative to perform this assessment during interim reporting periods, limiting it to the annual reporting date only.
The scope of the proposed alternative would be limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles—Goodwill and Other—Goodwill. The guidance would not be limited to a specified time period but would be available on an ongoing basis. No additional disclosures would be required.
The proposed ASU is available at www.fasb.org.
FASB Clarifies Scope of Recent Reference Rate Reform Guidance
On January 7, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance.
In March 2020, the FASB issued guidance aimed at easing the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-term loans to each other. That guidance, known as Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provided temporary, optional expedients and exceptions for applying accounting guidance to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
Some stakeholders have questioned whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. These stakeholders indicated that the modification, commonly referred to as the “discounting transition,” may have accounting implications, and raised concerns about the potential need to reassess previous accounting determinations related to those derivatives and about the possible hedge accounting consequences of the discounting transition.
The amendments in the new ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
The ASU is available at www.fasb.org.
FASB Simplifies How Private Company Franchisors Evaluate Certain Performance Obligations
On January 28, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides a practical expedient that simplifies how private company franchisors analyze certain activities when determining their performance obligations in a franchise agreement.
When a business owner (the franchisee) opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support certain pre-opening activities to support the new branch. Those activities may include services such as training or site selection. The practical expedient permits certain pre-opening services listed within the guidance to be accounted for as distinct from the franchise license.
The ASU, including effective date information, is available at www.fasb.org.
SEC Adopts Rules to Facilitate Electronic Submission of Documents to the Agency
On Nov. 17, 2020, the Securities and Exchange Commission voted to adopt rules and rule amendments that will provide additional flexibility in connection with documents filed with the Commission by permitting the use of electronic signatures in authentication documents, and facilitate electronic service and filing in the Commission's administrative proceedings. These new rules and amendments are part of a series of initiatives designed to modernize and strengthen the agency's operations.
In the first action, the Commission adopted rule amendments to permit the use of electronic signatures when executing authentication documents in connection with many documents filed with the Commission. Rule 302(b) of Regulation S-T currently requires that each signatory to an electronic filing manually sign a signature page or other document ("authentication document") before or at the time of the electronic filing to authenticate the signature that appears in typed form within the electronic filing. These amendments permit a signatory to an electronic filing who follows certain procedures to sign an authentication document through an electronic signature that meets certain requirements specified in the EDGAR Filer Manual. In addition, the Commission amended certain rules and forms under the Securities Act, Exchange Act, and Investment Company Act to allow the use of electronic signatures in authentication documents in connection with certain other filings when these filings contain typed, rather than manual, signatures. These amendments recognize the widespread use of electronic signatures and technological developments in the authentication and security of electronic signatures, as well as the continuing need to support remote workforces, and follow a rulemaking petition joined by nearly 100 public companies. The rule amendments will be effective upon publication of the adopting release in the Federal Register.
In the second action, the Commission adopted rule amendments to require electronic filing and service of documents in administrative proceedings. These rule amendments also require redaction of sensitive personal information from many of these documents before filing with the Commission. These amendments will become effective 30 days after publication of the adopting release in the Federal Register. However, compliance will not be required until April 12, 2021, and there will be an initial 90-day phase-in period following the compliance date.
SEC Adopts Amendments to Modernize and Enhance Management's Discussion and Analysis and Other Financial Disclosure
On Nov. 19, 2020, the Securities and Exchange Commission announced that it has voted to adopt amendments that will modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. The amendments are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.
"Today's rules will improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly giving investors greater insight into the information management uses to monitor and manage the business," said SEC Chairman Jay Clayton. "The improved approach to these disclosures reflects the broad diversity of issuers in our public markets and will allow investors to make better capital allocation decisions, while reducing compliance burdens and costs and maintaining strong investor protection."
The amendments reflect the Commission's long-standing commitment to a principles-based, registrant-specific approach to disclosure. This approach, as applied to Management's Discussion and Analysis, should yield material information relevant to an assessment of the financial condition and results of operations of the registrant, and allow investors to view the registrant from management's perspective. The amendments are also intended to improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material.
The Commission voted to adopt amendments to modernize, simplify and enhance certain financial disclosures called for by Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide material information to investors. The amendments are also designed to improve the readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information.
The Commission proposed the amendments on Jan. 30, 2020 as part of its ongoing, comprehensive evaluation of disclosure requirements intended to improve the existing disclosure regime for both investors and companies. The amendments reflect the Commission's consideration of comment letters received in response to the proposal, as well as the staff's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K.
The changes to Items 301, 302, and 303 of Regulation S-K sharpen the focus on material information by:
- Eliminating Item 301 (Selected Financial Data); and
- Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A). Specifically, these amendments:
- Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
- Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
- Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
- Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
- Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
- Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
- Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
- Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods
The amendments will become effective 30 days after they are published in the Federal Register. Registrants are required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (the "mandatory compliance date"). Registrants will be required to apply the amended rules in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date. Although registrants will not be required to apply the amended rules until their mandatory compliance date, they may comply with the final amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety.