This week’s GAAP Flash includes articles about recent accounting news relevant to public accounting, such as the new CECL model prescribed by Topic 326, negative interest rates, proposed updates to the COSO framework to reflect the changing business environment, and why Microsoft needs to borrow money for its purchase of LinkedIn.

FASB Releases New Financial Instruments Standard on Accounting for Credit Losses(June 16, 2016) – Accounting Today (@AccountingToday)

On Thursday, the Financial Accounting Standards Board (FASB) released its long-awaited revised guidance on credit losses related to financial instruments. The FASB has been working on this update as part of the convergence project with the IASB for the past eight (yes, eight!) years. The goal of this updated standard is to provide investors with better information regarding the credit risks within an institution. The new guidance, which is effective for SEC filers beginning after December 15, 2019, requires an organization to measure all expected credit losses for financial assets held at the reporting date based on:

• Historical experience,
• Current conditions, and
• Reasonable and supportable forecasts

How It’s Relevant: Companies will now use forward-looking information when determining their expected losses! This means that institutions will likely be recognizing expected losses earlier than they would have under the old guidance. The new guidance will permit companies to use many of their old methods of estimation, but the inputs and assumptions will have to change to consider this forward-looking information. And this isn’t just for financial institutions, as the scope of the standard is all financial assets accounted for at amortized cost. For more information about this new standard, check out this blog post.

Everything You Need to Know About Negative Rates (June 14, 2016) – The Wall Street Journal (@wsj)

As this article puts it, banks like the Bank of Japan and the European Central Bank are “venturing into the once-uncharted territory of negative interest rates.” This may have you scratching your head and wondering what negative rates are. And how did we get here? This is an excellent article, written in a Q&A format that attempts to answer those questions and others, such as:

• How do central banks work?
• What is a negative interest rate?
• What does a commercial bank do when deposit rates are negative?
• Why would a bank need to borrow reserves from another bank?
• Where did the excess reserves come from in the first place?
• What about the Fed? Can it go negative?

And much more!

How It’s Relevant: This article does a wonderful job of explaining what a negative rate is, and how it works, in simple terms. It really should be a must-read for anyone in the financial services sector. But, it’s missing one key piece for accountants and auditors: the accounting implications! No worries, GAAP Dynamics has you covered. Check out this blog post on the matter, written by our very own Bob Laffler back in February.

COSO Proposes Update to Enterprise Risk Management Framework (June 14, 2016) – The Journal of Accountancy (@AICPA_JofA)

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an exposure draft to provide additional clarity on concepts introduced in the 2004 framework. The majority of these updates are in response to the growing complexity and speed of risk in the past decade. According to COSO Chairman, Robert Hirth, risk should not be viewed as a constraint or challenge to executing a strategy, but rather, how that organization copes with risk should offer that organization strategic opportunities.

How It’s Relevant: We talked about risk management in the innovation process in a previous post, and here it is again, front and center. The world is evolving rapidly and businesses must keep pace if they hope to succeed. With change and innovation comes new risk. It is important for the entity to be aware of and respond to these risks, and it is also paramount that the auditors stay constantly vigilant to the changing business environment. Auditors should remember that risk assessment is a continual process and should respond not only to findings in the audit, but also to changes in the business and changes in the macroeconomic environment.

Why Microsoft, With $100 Billion, Wants a Loan for LinkedIn(June 13, 2016) – Bloomberg Technology (@technology)

Earlier this month, Microsoft Corp. announced it had reached an agreement to purchase the business social media site LinkedIn for a whopping $26.2 billion. Microsoft Corp. has more than $100 billion in cash and cash equivalents, which means the software giant could complete the purchase four times over, using just its cash on hand. So why does Microsoft want to take out a loan to finance its purchase?

The answer is…taxes! By taking out a loan, Microsoft will avoid having to pay the 35% U.S. corporate tax rate to repatriate its cash held in overseas accounts. Not only that, but financing the purchase with a loan gives Microsoft another tax advantage by being able to deduct the interest paid on the loan for years to come.

How It’s Relevant: As we’ve said before, Corporations are no different than the individual tax-payer. Corporations are also seeking to minimize their tax liability…especially when the corporate tax rate in the U.S. is so high! Given that interest rates are low, it makes sound business sense for Microsoft to borrow the cash instead of repatriating it and paying corporate taxes. However, as the article states, this move could leave Microsoft U.S.’s offices a bit strapped for cash.

Microsoft is one of the top 5 companies with profits stashed overseas. The fact that Microsoft is now strapped for cash in the U.S. may call into question whether the company can continue to meet the requirements of ASC Topic 740-30 (formerly the APB 23 exception), which allows the company to avoid paying taxes on its foreign earnings as long as it is able to assert that the cash is indefinitely reinvested overseas. Need a refresher of the accounting? Check out our blog post on the issue!