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NEWS DIGEST

Financial reporting

 

February 2013

 The cumulative amount of revenue entities recognize under a new converged standard should not be subject to a significant revenue reversal or downward adjustment under guidance tentatively approved by FASB and the International Accounting Standards Board (IASB).

The boards met to discuss elements of the revenue recognition standard, which is scheduled to be released in the first half of 2013.

The boards’ tentative decisions were posted on FASB’s website. They decided that an entity would meet the objective of the constraint if the entity possesses experience or evidence supporting its assessment that the cumulative amount of revenue recognized should not be subject to a significant revenue reversal.

A reversal is a downward adjustment that might arise from subsequent changes in the estimate of the amount of variable consideration to which the entity is entitled. The standard would require an entity to reassess this objective as changing facts and circumstances come to light.

The assessment the entity would perform would be qualitative.

More information, including additional tentative decisions on consumer credit risk and licenses for intellectual property with respect to revenue recognition, is available at tinyurl.com/b4y78xu.


 A new proposal would narrow the definition of financial instruments in FASB’s recently implemented standard on disclosures about offsetting assets and liabilities.

FASB issued a Proposed Accounting Standards Update (ASU), Balance Sheet (Topic 210): Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities. Comments from stakeholders were due Dec. 21. The proposal is available at tinyurl.com/cv7zfcu.

Disclosures will apply to derivatives, repurchase agreements, and reverse purchase agreements, as well as securities borrowing and securities lending transactions that are offset in accordance with FASB criteria or subject to a master netting arrangement or similar agreement.

In December 2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities (available at tinyurl.com/ckchc5f). The standard was the result of a joint FASB project with the IASB and was created to improve transparency and comparability between U.S. GAAP and IFRS.

The standard requires enhanced disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or a similar agreement.

After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement. As a result, FASB decided to narrow the definition of financial instruments in ASU No. 2011-11 to prevent unnecessary compliance costs for situations where disclosures would provide minimal value to users.


 FASB directed its staff to prepare an ED of an ASU on presentation of items reclassified out of accumulated other comprehensive income (OCI), according to the board’s website.

During a meeting, the board discussed feedback from stakeholders on the ED issued in August, Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income.

FASB made key decisions, which will become effective only after a formal written vote by the board on the ASU:

  1. The ASU will require an entity to provide enhanced disclosures to present, separately by component, reclassifications out of accumulated OCI.
  2. If U.S. GAAP requires items to be reclassified to net income in their entirety, the ASU would require the entity to disclose the effect of reclassification on the respective line items of net income. For items that U.S. GAAP does not require to be reclassified to net income in their entirety, the ASU would require an entity to provide a cross-reference to other disclosures currently required under U.S. GAAP for those items.

When the information contained in Items 1 and 2 is presented in notes to financial statements, the ASU will not require the entity to present the information in a tabular format as long as all the required information is in a single location.

The ASU would allow the required information in Item 2 to be presented in the notes or parenthetically on the face of the financial statements, as long as all the information is presented in one place. Entities will have the option of voluntarily providing duplicate information in the notes and on the face of the financial statements.

If approved, the ASU will be effective for reporting periods beginning after Dec. 15, 2012, for public entities and for reporting periods beginning after Dec. 15, 2013, for nonpublic entities.

More information is available at tinyurl.com/bunw7ly.


 Going-concern financial reporting in the United States appears headed for new requirements after FASB decided to adopt a new model in a project that still has several issues to be decided before the scheduled release of an ED in the first half of this year.

The model under discussion would put the focus of financial reporting requirements for management’s assessment of going concern on the likelihood of an entity’s potential inability to meet its obligations within a reasonable amount of time as they come due, according to a summary of board decisions posted on FASB’s website. The summary is available at tinyurl.com/at9avwk.

Management would assess the entity’s potential inability to continue as a going concern, and the need for related disclosures, each reporting period.

The triggering circumstance for management to begin disclosing an entity’s financial difficulties comes when it is “near more likely than not” that the entity may be unable to meet its obligations in the ordinary course of business within a reasonable amount of time from the balance sheet date.


 Limited changes to IFRS standards for classification and measurement of financial instruments were proposed in an International Accounting Standards Board (IASB) ED.

The proposal would change IFRS 9, Financial Instruments, as part of a larger convergence project with FASB as the boards reform accounting for financial instruments, which has seen considerable changes in recent years.

The IASB published new classification and measurement requirements for financial assets in 2009 and financial liabilities in 2010. But in January, the board decided to consider limited amendments to clarify a narrow range of application questions and reduce differences with FASB’s developing model. The IASB also wanted to take into account the interaction between the classification and measurement of financial assets and accounting for insurance contract liabilities.

Changes were kept to a minimum because the IASB considers IFRS 9 to be fundamentally sound, and because some entities have already adopted or prepared to adopt the standard as previously published.

The amendments are consistent with the business-model-driven classification structure in IFRS 9. The ED proposes introducing a fair value through other comprehensive income measurement category for debt instruments that would be based on an entity’s business model.

FASB is scheduled to release an ED on classification and measurement of financial instruments in the first half of 2013. In addition, the boards are scheduled to release separate EDs on impairment of financial instruments before the end of the first quarter of this year.

Convergence is expected to be limited in the impairment EDs because FASB decided to develop a “Current Expected Credit Loss” model that is different from the IASB’s “three-bucket” model for credit risk impairment (see “FASB’s Developing Model ‘Totally’ Changes Impairment Concept”).

The ED is available at tinyurl.com/bwbgz9s.

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