Financial Reporting


  The AICPA’s Financial Reporting Executive Committee (FinREC) commented on FASB’s Proposed Accounting Standards Update, Leases. The exposure draft was developed jointly with the International Accounting Standards Board (IASB). FinREC said it supports the boards’ overall objective to develop a single approach to lease accounting and to require assets and liabilities arising under leases to be recognized in lessees’ statements of financial position. However, FinREC believes there are fundamental application issues not addressed by the ED, and revisions that need to be made to various aspects of the boards’ proposal, including those related to the right-of-use approach to lessee accounting.

 

The FASB proposal would result in a single “right-of-use” approach applied consistently to lease accounting for lessees and lessors. Among other changes, the approach would result in the liability for payments under all lease contracts within the scope of the standard and the right to use the underlying asset being included on the lessee’s balance sheet. The standard setters say the changes would improve the information available to investors and other financial statement users about the economics surrounding lease contracts.

 

Unlike FASB’s discussion paper, Leases: Preliminary Views, published in March 2009, which focused primarily on lessee accounting, the ED, Leases, would result in changes on both sides of a lease transaction. A lessor would apply either a performance obligation approach or a derecognition approach. “The majority of FinREC members do not support the boards’ hybrid (lease classification) approach to lessor accounting—instead they support the derecognition approach as the single lessor accounting model,” FinREC said in its comment letter.

 

The proposal includes simplified accounting for short-term leases—leases having a maximum term of 12 months or less. The simplified accounting would allow lessees to ignore the effects of interest on the recorded assets and liabilities and allow the lessee to record the liability for lease payments at the undiscounted amount for lease payments. The simplified accounting would allow the lessor not to recognize assets or liabilities arising from a short-term lease, nor derecognize any portion of the underlying asset.

 

In its comment letter, FinREC said, “We do not support the boards’ approach to accounting for lease renewal options and contingent rents. We believe that the lease term should be defined as the lessee’s (lessor’s) best estimate of the lease term. We believe contingent rents and expected payments under residual value guarantees should be included in the measurement of assets and liabilities based on management’s best estimate of payments to be made (received) under the lease.”

 

 

  FASB proposed to delay indefinitely the effective date of new disclosures about troubled debt restructurings in Accounting Standards Update (ASU) no. 2010-20 (tinyurl.com/27ok7ug) for public-entity creditors. The new standard was scheduled to become effective for interim and annual reporting periods ending on or after Dec. 15, 2010.

 

The board said the proposal is a response to constituents’ concerns that the introduction of new disclosure requirements (paragraphs 310-10-50-31 through 50-34 of the FASB Accounting Standards Codification) about troubled debt restructurings in one reporting period followed by a change in what constitutes a troubled debt restructuring shortly thereafter would be burdensome for preparers and may not provide financial statement users with useful information.

 

The delay would apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in ASU no. 2010-20. For nonpublic entities, the disclosures would still be scheduled to go into effect for annual reporting periods ending on or after Dec. 15, 2011.

 

The amendments are included in Proposed ASU, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (tinyurl.com/35a75fe). FASB said constituents asked the board to defer the effective date of the disclosure requirements for public entities about troubled debt restructurings in ASU no. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in the Proposed ASU, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors (tinyurl.com/2d3hv25).

 

The board said the delay would give it time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring would then be coordinated. The board said the guidance for determining what constitutes a troubled debt restructuring is likely to be effective for interim and annual periods ending after June 15, 2011.

 

The comment period closed Dec. 24.

 

 

  FASB issued an Accounting Standards Update (ASU) that it said should end a “diversity in practice” in the disclosure of pro forma revenue and earnings for business combinations. The ASU says that, if comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period.

 

The amendments are contained in ASU 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations—a consensus of the FASB Emerging Issues Task Force (tinyurl.com/672zs7s).

 

FASB Accounting Standards Codification paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period, according to ASU 2010-29. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period.

 

In practice, the ASU says, some preparers have presented the pro forma information in their comparative financial statements as if the business combination that occurred in the current reporting period had occurred as of the beginning of each of the current and prior annual reporting periods. Other preparers have disclosed the pro forma information as if the business combination occurred at the beginning of the prior annual reporting period only, and carried forward the related adjustments, if applicable, through the current reporting period.

 

FASB said the amendments improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to business combinations.

 

The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after Dec. 15, 2010. Early adoption is permitted.

 

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