What’s new this month?

The FASB issued two Accounting Standards Updates in March 2017.

ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

Prior to this ASU, under U.S. GAAP, defined benefit cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Furthermore, U.S. GAAP does not give guidance as to where net benefit cost should be presented in the income statement and does not require the disclosure by line item of the amount of net benefit cost that is included in the income statement or capitalized.

The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable.

The amendments in this ASU are effective for public business entities for annual periods beginning after 15 December 2017, including interim periods within those annual periods. For other entities, the amendments in this ASU are effective for annual periods beginning after 15 December 2018, and interim periods within annual periods beginning after 15 December 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.

The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.

ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.

The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. Current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.

The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after 15 December 2018. For all other entities, the amendments are effective for fiscal years beginning after 15 December 2019, and interim periods within fiscal years beginning after 15 December 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

An entity should apply the amendments in this ASU on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.

Carve-Out Financials – Do you know how?

There is currently no detailed accounting guidance on preparing carve-out financial statements. Those that have been engaged in such projects have an appreciation for the challenges involved. Identifying the carve-out operations can be complex as often times services are shared and assets/liabilities are held jointly. Legal form and structure could further complicate the project. If management were to incorrectly identify the operations to be included in the carve-out, financial statements would be misstated regardless of whether the appropriate revenues/expenses and assets/liabilities were reasonably allocated. Once the carve-out operations are defined, the historical financial information to be included should be determined by considering operating and financial reporting structure, legal structure, practical aspects, and past performance.

To assist companies with its historical presentation of financial results, the Securities Exchange Commission (“SEC”) staff has indicated that if the carve-out entity, for example, is a registrant or will undergo an IPO, the carve-out financial statements should include all relevant activities that have been a part of the history of the business and that can be expected to repeat as the business continues in the future. For example, leaving behind only unprofitable and negative operations or segments from the carve-out would not be appropriate as illustrated below by the SEC staff1:

“A company has 75 restaurants encompassing a certain theme, in a certain region of the country, and 25 of those restaurants have not been very successful perhaps because of their location, location of competitors, inability to hire good employees, type of labor market, or some other reason. The company is now going to put the 50 successful restaurants in a Newco and take it public. The staff would expect all 75 restaurants to be included in the historical carve-out financial statements until the other 25 have been sold or discontinued even though investors will only have an interest in the 50 successful restaurants since all of the restaurants (including the 25 unsuccessful) have been part of management’s track record. It is expected that in the future Newco will expand by opening new restaurants and not all of them will be successful.”

What’s been proposed?

On 7 March 2017, the FASB issued a proposed ASU, Compensation – Stock Compensation (Topic 718). The FASB issued this proposed ASU as a part of its Simplification Initiative to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. Comments are due to the FASB by 5 June 2017.

We can help

To have a more detailed assessment on how these standards, including the concepts surrounding carved out financials, will impact your organization, please contact our team below.

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1Remarks by Leslie Overton, SEC Division of Corporation Finance, at the 2001 AICPA Annual National Conference on Current SEC Developments.