GAAP Flash – CECL, ASC 740 and Changing from ASC 840 – 7.29.2016
gaap-flash-–-cecl,-asc-740-and-changing-from-asc-840-–-7.29.2016

GAAP Flash – CECL, ASC 740 and Changing from ASC 840 – 7.29.2016

This week’s GAAP Flash includes articles about ASU 2016-13 and the new current expected credit losses (CECL) model, the new leasing standard (ASC 842) replacing ASC 840, as well as potential changes to disclosure requirements, including the simplification, and the expansion of disclosures related to income taxes (ASC 740) disclosure requirements.

New credit loss standard manageable for US banks, Fitch says (July 25, 2016) – Journal of Accountancy (@AICPA_JofA)

In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard will require banks to use a current expected credit loss (CECL) model when accounting for credit losses. It is expected that the new model will result in higher reserves for credit losses.

The standard is effective for public companies for fiscal years beginning after December 15, 2019. Because the standard isn’t required to be implemented for approximately 3.5 years, the article states that “the effective date gives banks adequate time for a manageable implementation”. Although the article is hopeful that there is enough time for banks to prepare for the change in credit loss model, it also states that there will be challenges for both smaller and larger banks.

How It’s Relevant: Although the CECL model isn’t effective for a while, there will be challenges when implementing the new model. Banks, both large and small, should start taking steps to implement the new standard so that they are able to address issues and mitigate as many challenges as possible.

Metal In the Cloud: Tech Companies Need to Watch Out for New Leasing Standard (July 26, 2016) – Accounting Today (@AccountingToday)

The new lease standard, ASC Topic 842 – Leases, will have a substantial and undeniable effect on some obvious industries, such as the airlines and retail. The new standard will require these industries, and many others, to move potentially billions of dollars of operating leases onto their balance sheet. However, the new lease standard may have a substantial effect on other, less obvious industries. The severity of the impact to these other industries may be a surprise to analysts and investors. For example, the technology industry will see an increase to their balance sheet due to the new leasing standard, specifically as it relates to cloud computing. Why? Many companies in this industry lease computer servers, which are essential to their businesses and will represent a material addition to balance sheets when the new leasing standard takes effect.

How It’s Relevant: Adopting the new standard may seem like it’s lightyears away, but it’s not, especially for those industries like the technology industry, where the change in accounting may be a surprise for analysts and investors. All companies need to start taking steps to prepare for the adoption of ASC Topic 842 to better understand how they may be affected. This includes not only obtaining an inventory of lease populations and determining necessary changes to IT systems, but also planning and communicating between departments, such as the accounting and IT.

Check out our blog post, Accounting Resources for the New Leasing Standards, for references that can help your company prepare for adoption.

FASB Proposes to Beef Up Disclosures on Business Income Taxes (July 26, 2016) – Accounting Today (@AccountingToday)

A new proposed accounting standards update (ASU) may be coming your way! The FASB issued a proposed ASU, Income Taxes (Topic 740) Disclosure Framework – Changes to the Disclosure Requirements for Income Taxes. The proposed ASU will be applicable for both private and public companies and intends to align the information contained in the footnotes with what users of the financial statements want to know, as well as reduce diversity in practice. The update will make disclosures more robust by adding additional disclosure requirements for all entities who are subject to income taxes. Other changes include modifying existing disclosures, as well as limiting disclosures that may not be important to users of the financial statements.

How It’s Relevant: The proposed ASU will have an impact on most companies, both private and public, in a variety of industries. Modifying the disclosure requirements of ASC Topic 740, will require training and knowledge of the proposed ASU, as well as considerable changes to the footnotes of the financial statements. Make sure you stay on top of the proposed changes to ASC Topic 740!

SEC Proposal Would Simplify Disclosure Requirements (July 20, 2016) – AccountingWEB (@AccountingWeb)

The Securities and Exchange Commissions (SEC) issued a proposed rule to amend disclosure requirements that are “redundant, overlapping, outdated, or superseded”. The SEC’s goal is to align financial statement disclosures with the needs of the users of the financial statements while eliminating unnecessary information.

The proposal addresses the following four concerns:

  1. Disclosures that duplicate what’s already required in US GAAP, IFRS, and other SEC requirements, and whether to delete them
  2. Disclosures that overlap and are related to others – but aren’t identical – in US GAAP, IFRS, or SEC requirements
  3. Disclosures that have been made obsolete by time, technology, or business in regulatory changes.
  4. Disclosures that are inconsistent with current legislation, updated SEC disclosure requirements, or updated US GAAP

How It’s Relevant: Changes in disclosure requirements may affect the information that is required to be included in the financial statements. Although the rule is currently in the proposal process, if finalized, your company’s financial statements may need to change. However, you have a say! The SEC is asking for comments on the proposal. “Instructions on how to submit comments on the proposal can be found here.”

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