FASB plans two new proposals to simplify accounting

By Ken Tysiac

FASB took steps to simplify accounting in two areas last week when it voted to direct the board’s staff to prepare a pair of proposed Accounting Standards Updates.

Upon written approval by FASB, the proposals would be exposed for public comment.

Equity method

One proposal would be designed to simplify the equity method of accounting. It would eliminate the requirement that an entity account for the difference between the cost of an investment and the amount of underlying equity in net assets of an investee (known as the “basis difference”) as if the investee were a consolidated subsidiary. The related disclosures also would be eliminated.

Under the proposal, an entity would cease amortization of all remaining basis differences as of the effective date of the change.

In the equity method of accounting exposure draft, the board also will propose eliminating the requirement that entities retroactively adopt the equity method of accounting if an investment that was previously accounted for with a different method becomes qualified for use of the equity method by an increase in the level of ownership interest. This proposed change would apply prospectively to ownership level increases occurring after the effective date of the change.

Business combinations

A separate ED would apply to accounting for measurement period adjustments in a business combination. The board plans to propose that during the measurement period, an acquirer would recognize adjustments of the provisional amounts in the reporting period in which the adjustment amount is determined.

The acquirer would record, in that period, the cumulative effect on earnings of changes in depreciation, amortization, or other income effects, as a result of the change to the provisional amount. During the period of adoption, entities would apply this change prospectively to adjustments of provisional amounts occurring after the effective date.

FASB also added a project to its agenda that is intended to enhance the transparency of interest income on purchased debt securities and loans.

Emerging issues

FASB also added two projects to the Emerging Issues Task Force’s agenda:

  • Accounting for embedded put and call options in a debt instrument: This project is expected to clarify the existing guidance for assessing whether the economic characteristics and risks of an embedded put or call option in a debt instrument are clearly and closely related to the economic characteristics and risks of its debt host.
  • Effect of derivative contract “novations” on existing hedge accounting relationships: This project is expected to clarify if and when the novation of a derivative instrument that is part of an existing hedge accounting relationship under ASC Topic 815 should result in a requirement to de-designate that hedging relationship and, as a result, discontinue the application of hedge accounting.

Ken Tysiac is a JofA editorial director.

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