Financial reporting


  FASB updated accounting standards on stock compensation to resolve diverse accounting treatments of awards linked to performance targets, such as an initial public offering or a specific profitability metric, that could be longer-term than the recipient’s employment.

Previously, U.S. GAAP did not contain explicit guidance on how to account for share-based payment awards that require a specific performance target to be achieved for employees to become eligible to vest in the awards.

FASB’s update, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period, is available at tinyurl.com/l7bk7e2.

The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition.

A reporting entity should apply existing guidance on Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award.

Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the service has already been rendered. If it becomes probable that the performance target will be achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.

The total amount of compensation should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

For all entities, the amendments take effect for annual periods and interim periods within those annual periods beginning after Dec. 15, 2015. Earlier adoption is permitted.

Entities may apply the amendments either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.


  New accounting rules approved by FASB are designed to make financial reporting about consolidation more transparent and consistent.

FASB planned to issue the standard following the drafting of the final Accounting Standards Update (ASU).

All public and private companies that apply variable-interest entity (VIE) guidance will be affected by the ASU, as will limited partnerships and similar legal organizations such as limited liability corporations.

The new rules are intended to be less complex for limited partnerships and similar legal organizations. In addition, the rules are designed to simplify the consolidation guidance to focus more on principal risk, and remove the indefinite deferral available to certain investment funds.

The ASU will:

  • Change requirements for when a general partner consolidates a limited partnership.
  • Clarify when fees paid to a decision-maker (such as an asset manager) should be considered for VIEs when evaluating if a decision-maker is required to consolidate the VIE.
  • Reduce the complexity of the guidance for VIEs as it applies to related-party relationships such as affiliates.
  • Exclude certain money market funds from the guidance’s scope.


More information is available on FASB’s website at tinyurl.com/bdt3sf4.


  FASB published proposals that are designed to simplify the measurement of inventory and eliminate the concept of extraordinary items.

The proposals are part of FASB’s simplification initiative, which is designed to reduce cost and complexity in financial reporting while improving or maintaining the usefulness of information to users through narrow-scope projects that could simplify GAAP in a short period.

In the proposal titled Inventory (Topic 330): Simplifying the Measurement of Inventory, FASB proposes measuring inventory at the lower of cost or net realizable value. The proposal is available at tinyurl.com/lnn929j. Current GAAP requires reporting organizations to measure inventory at the lower of cost or market, where market could be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory.

The other proposal, Income Statement–Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, seeks to lower cost and complexity by eliminating the concept of extraordinary items. The proposal is available at tinyurl.com/lphgrr5.

Under current GAAP, organizations are required to evaluate whether an event or transaction is an extraordinary item. If deemed extraordinary, the item is required to be separately presented and disclosed. But, according to FASB, uncertainty arises in the determination of whether items are extraordinary, because it is unclear when an item should be considered both unusual and infrequent.

FASB expects that both proposals, if approved, would be applied prospectively in annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2015. Early adoption would be permitted.

Comments on the proposals can be submitted through Sept. 30 at FASB’s website at tinyurl.com/ybx6fca.


  A lively discussion by a new revenue recognition transition resource group gave FASB and the International Accounting Standards Board (IASB) plenty of views to consider as they ponder how to help preparers with implementation questions related to the revenue recognition standard issued in May.

The resource group does not issue interpretations or guidance. Rather, as a meeting of preparers, auditors, and financial statement users, it is tasked with discussing implementation problems and questions submitted by interested parties.

Following the group’s discussion, FASB and the IASB will decide what action, if any, needs to be taken to address the questions presented in the transition resource group meetings.

Three of the four issues that were discussed at the group’s first meeting in July produced spirited debate and plenty of questions for the boards to consider. Many of the discussions ended with little or no consensus or resolution.

The first topic of conversation was a concern that there may be multiple interpretations of application of the guidance about determining and accounting for whether the entity is a principal or an agent to contracts for certain intangible goods and services.

Other topics discussed included:

Revenue or cost reduction. There is concern that there may be multiple interpretations of the application of the guidance in determining whether to present certain items billed to customers as revenue or as a reduction of costs.

Sales-based and usage-based royalties. Different interpretations exist about applying the new standard to sales-based and usage-based royalties promised in exchange for licenses of intellectual property to a contract that includes a promise to deliver both:

  • One or more licenses of intellectual property, and
  • One or more goods or services that are not licenses of intellectual property.


Impairment of capitalized contract costs. Clarity was sought on impairment testing of the asset recognized from the incremental costs of obtaining a contract or costs incurred in fulfilling a contract with a customer, and the use of the principles for determining the transaction price to ascertain the cash flows that the entity expects to receive in exchange for the goods or services to which the asset relates, especially the question of whether or not the consideration expected to be received during renewal or extension periods should be considered in the impairment analysis. There was little debate on this topic, as the members of the group overwhelmingly agreed on View 2, which states that renewals and extensions may be considered for the impairment test.

FASB Vice Chairman James Kroeker said that after issues are discussed by the transition resource group, the boards hope to be able to provide updates at the following meeting on their assessment of the issues. The next meeting is scheduled for Oct. 31.

More information on the new revenue recognition standard is available on the AICPA’s website at tinyurl.com/q4e9r8z.


  A new international forum is bringing together key players in corporate reporting to promote more coherence, consistency, and comparability between corporate reporting frameworks, standards, and related requirements.

The Corporate Reporting Dialogue was introduced by the International Integrated Reporting Council (IIRC). Along with the IIRC, participants in the Corporate Reporting Dialogue will be:

  • CDP, a not-for-profit international sustainable economy advocate.
  • The Climate Disclosure Standards Board.
  • FASB.
  • The Global Reporting Initiative.
  • The International Accounting Standards Board.
  • The International Public Sector Accounting Standards Board.
  • The International Organization for Standardization.
  • The Sustainability Accounting Standards Board.


Huguette Labelle, the chair of Transparency International and an IIRC council member, will chair the Corporate Reporting Dialogue. She said in a news release that the forum will promote cohesion and efficiency, rebalancing reporting in favor of the reader, and helping to reestablish the connection between a business and its principal stakeholders.

 

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