What’s new this month?

The FASB issued two Accounting Standards Updates in February 2017.

ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets was issued to clarify and add guidance for partial sales of nonfinancial assets and expand on the scope and definition of the derecognition of an in-substance nonfinancial asset. This update differs from current GAAP primarily for the real estate industry but may affect other industries such as power and utilities, alternative energy, life sciences, and shipping.

ASU No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting was issued to improve the usefulness of the information reported to users of employee benefit plan financial statements and to provide clarity to preparers and auditors. This update relates primarily to the reporting by an employee benefit plan (a plan) for its interest in a master trust.

New lease accounting standard (ASC 842) – Have you assessed the impact?

Entities that have not started to assess the impact of ASU 2016-02, the new lease standard, should not delay this assessment any longer. For public business entities the standard is effective for annual periods beginning after December 15, 2018 (calendar periods beginning after January 1, 2019) and interim periods therein. For all other entities, the standard is effective for annual periods beginning after December 15, 2019 (calendar periods beginning after January 1, 2020), and interim periods after December 15, 2020. Early adoption would be permitted for all entities.

Under this new lease guidance, lessees will be required to recognize assets and liabilities for leases with terms of more than 12 months. Consistent with current guidance, the lessee’s recognition, measurement, and presentation of expenses and cash flows arising from a lease will primarily depend on its classification as a finance or operating lease. However, unlike the current guidance – which requires only capital leases to be recognized on the balance sheet – the new guidance requires both types of leases to be recognized on the balance sheet.

Lessees will now need to recognize a right-of-use asset and a lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases will result in straight-line expense (similar to operating leases under current guidance) while finance leases will result in a front-loaded expense pattern (similar to capital leases under current guidance). Classification will be based on criteria similar to those applied in current lease accounting, except with no explicit bright lines.

The new lease standard will affect a significant number of entities since most enter into lease agreements to support their business operations. The new guidance will likely require operational and system changes. One of the first steps to achieving compliance is deciding on the technology to support the effort. Companies may choose either to manage the data, calculations, and reporting in the same system that is used for day-to-day management of real estate and equipment leases (integrated) or use a standalone system for calculations that sit between the lease management and accounting systems.

Deciding on either a standalone or an integrated solution will depend on the existing resources, systems, and infrastructure to address the technology integration challenges.

What’s been proposed?

The FASB proposed ASU, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The guidance is intended to simplify determining whether debt should be classified as current or noncurrent in a classified balance sheet.

Comments are due to the FASB by 5 May 2017.

The FASB also proposed ASU, Inventory (Topic 330): Disclosure Framework – Changes to the Disclosure Requirements for Inventory. The guidance would modify the disclosure requirements for inventory by introducing additional disclosure requirements to reporting entities.

Comments are due to the FASB by 13 March 2017.

We can help

To have a more detailed assessment on how these standards, including the new lease accounting standard, will impact your organization please contact our team below.

pdf Download the PDF