FASB addresses insurance, convertible instruments, gifts-in-kind

By Ken Tysiac

FASB voted Wednesday to propose delaying the effective date of its standard on long-duration insurance contracts by one year and to approve two new standards.

The board will issue Accounting Standards Updates (ASUs) on:

  • Improving convertible instruments and contracts in an entity’s own equity.
  • Not-for-profit accounting for contributed nonfinancial assets, known as gifts-in-kind.

Both ASUs are expected to be issued in the third quarter of this year.

FASB voted to issue a proposal that would grant insurance companies that issue long-duration contracts an additional year to implement ASU No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The standard affects contracts such as life insurance and annuities.

Convertible instruments standard

Accounting for convertible instruments will be simplified by removing major separation models required under current GAAP. As a result, more convertible instruments will be reported as a single liability or equity with no separate accounting for embedded conversion features.

Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception will be removed, and as a result, more equity contracts will qualify for the scope exception. The new standard also will simplify the diluted earnings-per-share calculation in certain areas.

“The upcoming ASU will address areas of liabilities and equity guidance that stakeholders identified as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” departing FASB Chairman Russell Golden said in a news release after presiding over his final board meeting. “We expect it to result in improved comparability of information for financial statement users and reduced cost and complexity for preparers and auditors.”

The ASU will take effect for public business entities that meet the definition of an SEC filer, excluding smaller reporting companies, for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will take effect for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal years.

Early adoption will be permitted.

FASB plans to explore the possibility of further changes to simplify the accounting for equity contracts in a separate, Phase 2 project.

Gifts-in-kind

Not-for-profits will be required to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other assets. Not-for-profits also will be required to disclose the amount of contributed nonfinancial assets received, disaggregated by category, that depicts the type of contributed nonfinancial assets.

For each category of contributed nonfinancial assets received, not-for-profits will be required to disclose:

  • Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were or are intended to be used is required to be disclosed.
  • The not-for-profit’s policy, if it exists, about monetizing rather than utilizing the contributed nonfinancial assets.
  • A description of any donor restrictions associated with the contributed nonfinancial assets.
  • A description of the valuation techniques and inputs used to arrive at a fair value measure in accordance with FASB ASC Topic 820, Fair Value Measurement, at initial recognition.
  • The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient not-for-profit is prohibited by donor restrictions from selling or using the contributed nonfinancial assets.

The ASU will take effect for annual reporting periods beginning after June 15, 2021.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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