2019 Accounting Preview (article)
After issuing several major accounting standard changes, Russell Golden, Chairman of the Financial Accounting Standards Board (FASB) said the FASB is focused on providing more guidance that improves existing standards. Speaking at a recent AICPA event, the chairman affirmed that the big accounting standards projects are done, and in that in the short-term, the FASB will be devoting efforts to education on existing standards, issuing accounting updates that address common issues, performing outreach on key projects and considering the potential effects on financial reporting of emerging technologies.
Public and private companies have plenty to work on in the interim. Both have significant accounting changes ahead of them in 2019. Getting a jump start on those updates may make year-end reporting significantly easier.
Leasing: Public business entities must adopt the new leasing standard in 2019. The changes issued under ASU 2016- 02, Leases (Topic 842) affect the balance sheet presentation of leased assets for lessees, and also include updates for lessor accounting. Changes require careful analysis of existing leasing arrangements, so companies will want to work through their necessary modifications early in the year to be prepared. These eight considerations may make transitions easier.
Derivatives & Hedging: ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities goes into effect for public companies in 2019. The update permits entities to designate a cash flow hedge for a contractually specified price component of a nonfinancial item, which will simplify hedges of cash flow risks on goods heavily influenced by commodities prices. It eliminates the requirement to separately measure and report hedge ineffectiveness. Also eliminated is the requirement for a contemporaneous documentation of a hedge designation. The change will make compliance significantly easier for public companies with hedging arrangements because they previously had to have the documentation ready when the hedge was designated.
Other improvements to derivative and hedge accounting include changes to effectiveness assessments, presentation of hedge instrument earnings, and disclosures.
Financial Instruments with Down Round Features: Changes released in ASU 2017-11 affect the classification of financial instruments with down round features. The presence of a down round feature will no longer preclude an instrument from being recognized as equity. Entities will account for the down round feature contained in an equity-classified freestanding instrument when it is triggered, as a dividend and reduction of income available to stockholders in basic earnings per share.
Narrow Scope Improvements: Other accounting updates offer minor simplifications to existing guidance, including:
Revenue Recognition: ASC Topic 606 changes the timing and evaluation of revenue recognition and may result in differences in when an entity recognizes revenue. Timing differences could affect debt covenants, and other financial statement metrics. Although private companies are not subject to SEC regulations, they may want to review some comment letters to ensure they are addressing some of the key areas of risk in the new standard. Based on early SEC feedback, regulators may be paying particular attention to certain areas of reporting, such as those that require significant judgment.
Definition of a Business: ASU Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business narrows the application of business combination accounting by creating a screen for transactions involving asset acquisitions. It also narrows the definition of an “output” and introduces new requirements related to inputs and processes in order for a business to exist. The new definition of a business may affect the scope exceptions in the variable interest entity consolidation guidance and the accounting for the derecognition of assets (and liabilities) that no longer meet the definition of a business.
Entities with partial asset sales, particularly in the commercial real estate sector, will be applying the guidance from ASU 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. The standard should simplify partial asset sale accounting by updating the definition of nonfinancial asset and removing the requirement for companies to consider whether an asset transfer was in substance real estate.
Recognition and Measurement of Financial Assets and Liabilities: Under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, private companies will record equity instruments that did not qualify for the equity method of accounting at fair value with changes in fair value included in net income. Other financial assets and liabilities are presented by measurement category and form on their balance sheet, or in the disclosures to the financial statements.
Presentation of Restricted Cash: Changes released as part of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash require entities to include restricted cash in cash and cash equivalents when reconciling beginning- and end-of-period amounts. Cash flow statements must also explain changes in total cash, cash equivalents, restricted cash and restricted cash equivalents during the reporting period.
Narrow Scope Improvements: Several other updates may have a significantly more narrow scope, including:
Provisions Affecting Employee Benefit Plans
Employee Benefit Plan Interests in Master Trusts: Retrospective changes will be required when ASU 2017-06 takes effect. Employee benefit plans will present their interests in master trusts in their statement of net assets and statement of changes in the net assets as single line items for each interest in a master trust. Defined benefit plans will no longer need to disclose their percentage interest in master trusts for plans with divided interests and instead will disclose the dollar amount of the interest in each of investment type. There also changes to disclosure requirements for defined benefit plans and health and welfare plans. Further details can be found here.
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