GAIN INSIGHT

NEWS

News
Color Block
Lisa Trundy, CPA

The latest and greatest from FASB – ASUs you need to know, and possibly implement now

2016-02-29

Three new standards have been released by the Financial Accounting Standards Board. To help you get a quick understanding of them and the ramifications they may have for you and your organization, we have summarized them below.

2014-02 Intangibles-Goodwill and Other (Topic 350)

ASU 2014-02 provides for an accounting alternative for the subsequent measurement of goodwill, which will likely make impairment testing less frequent. Currently, entities must evaluate goodwill for impairment annually. Unfortunately, the goodwill impairment test provides limited useful information and is costly and complex.

With the new standard in place, the goodwill amortization should reduce the likelihood of impairments, since the testing will be triggered by a precipitating event, such as:

  • Deterioration in economic conditions or in the environment in which the entity operates
  • Overall financial performance or declining cash flows
  • Events affecting reporting units such as sale or disposition of a reporting unit
  • Changes in management, key personnel or customers

If you select this alternative you should:

  1. Amortize goodwill on a straight-line basis over 10 years, or less if appropriate.
  2. Make an accounting policy election to test goodwill for impairment only when a triggering event occurs at the entity level or the reporting unit level.

Who is affected?
This ASU applies to all entities except public businesses and not-for-profit organizations. Entities should adopt it prospectively for:

  • Goodwill existing at the beginning of the adoption period
  • New goodwill recognized in annual periods beginning after December 15, 2014
  • Interim periods within annual periods beginning after December 15, 2015

Is early adoption permitted? Yes, for any period for which an entity’s annual or interim financial statements have not yet been available for issuance. The ASU does not provide for any disclosure requirements to present changes in goodwill in a tabular reconciliation and has eliminated step two of the current impairment test.

2014-07 Consolidation (Topic 810)

ASU 2014-07 allows for private company lessees to elect an accounting alternative without applying variable interest entity (VIE) guidance. Current GAAP requires a reporting entity to consolidate an entity in which it has a controlling financial interest and includes two primary models for assessing whether there is a controlling financial interest: the voting interest model; and the VIE model.

In the VIE model, a reporting entity has a controlling interest if it has both the power to direct activities that significantly affect the economic performance of the entity and the obligation to absorb losses or the right to receive benefits of the entity.

The changes under ASU 2014-07 permit private company lessees to elect an accounting alternative to not apply VIE guidance to a lessor entity if the following conditions are true:

  1. The lessee and the lessor are under common control
  2. The lessee has a lease arrangement with the lessor
  3. Substantially all of the activities between the lessee and the lessor are related to leasing activities
  4. Any lessee guarantees or provisions of collateral for any obligation of the lessor related to the asset leased relate only to obligations that do not exceed the fair value of the leased property at inception of the guarantee/collateral arrangement

Who is affected?
This ASU applies to all entities except

  • Public business entities
  • Not-for-profit entities
  • Benefit plans

Businesses should adopt it retrospectively, and early adoption is permitted. It is effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015.

If you elect an accounting alternative, it should be considered an accounting policy election and be applied to all current and future lessor entities under common control that meet the criteria. The required disclosures are:

  1. The amount and key terms of liabilities of the lessor that expose the lessee
  2. A qualitative description of the circumstances not recognized by the lessor that expose the lessee
  3. Any disclosures required by other Topics about the lessee’s relationship with the lessor

Consolidation guidance other than VIE guidance should continue to be applied.

If an entity previously took a GAAP departure in the audit, review or compilation report for failing to consolidate a VIE when required, and now is no longer required to consolidate the VIE under the new rule, the report will include a notation that the report on the prior year comparative information has changed as a result of adoption of the new rule.

ASU 2014-15 Management’s Evaluation Requirements for a Going Concern (Subtopic 205-40)

With calendar year 2016 upon us, it’s important that management in companies that may evaluate themselves as a going concern, understand the requirements of ASU 2014-15. The update offers guidance on how an entity evaluates itself as a going concern and requires management to determine, for each reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statements being issued (for public entities, including conduit debt obligors) or within one year of the date the financial statements were available to be issued (for nonpublic entities).

ASU 2014-15 also provides guidance on the footnote disclosures required, both when management believes they have a plan to alleviate the substantial doubt and when management’s plan does not alleviate the substantial doubt.

This new guidance provides a step-by-step approach. Management should:

  1. Evaluate each reporting period, based on relevant conditions and events
  2. Consider whether its plans intended to mitigate those relevant conditions will alleviate the substantial doubt
    a. Probable that the plans will be effectively implemented
    b. Probable that the plans will mitigate the conditions or events

If management’s plans DO alleviate substantial doubt, the following must be disclosed in the notes to the financial statements:

  1. The principal conditions or events that raise substantial doubt before consideration of management’s plans
  2. Management’s evaluation of those conditions or events
  3. Management’s plans that alleviated substantial doubt

If management’s plans DO NOT alleviate substantial doubt, the following must be disclosed in the notes to the financial statements:

  1. A statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued)
  2. The principal conditions or events that raise substantial doubt before consideration of management’s plans
  3. Management’s evaluation of those conditions or events
  4. Management’s plans that are intended to alleviate the conditions that raise substantial doubt

ASU 2014-15 applies to all entities and is effective for annual and interim periods ended after December 15, 2016 — early adoption is permitted.

While these updates may or may not be immediately relevant to your organization, the rules and approaches continue to change.