I’ve often joked that in our world of accounting and auditing, the New Year doesn’t actually ring in until about April or May once all of the prior year financial statements, tax returns and audit opinions have been issued. Well, it’s now May, so Happy Accounting New Year! As you begin to think about 2017, you might be wondering what new accounting standards you will have to consider for this year’s financial reporting cycle. There certainly has been a lot of focus on the “Big 3” new standards (Revenue Recognition, Leasing, and Financial Instruments) over the last few years, but those aren’t effective until 2018 or beyond. Is there anything to worry about 2017? The answer is yes, there is quite a bit of new guidance that becomes effective this year, and in this blog post we will focus on the “top 5” changes which include amendments to ASC 330, ASC 805, ASC 740, ASC 323, and ASC 718.

As we discuss each of the changes, you will notice the use of “simplifying” and “improvements” in almost all of the titles. While one of the five doesn’t use either of these words, it is part of the FASB’s “simplification initiative”, so it qualifies too! It’s nice to know that while we have some new guidance to contend with, it is supposed to “simplify” our accounting lives.

Now for a quick disclaimer: this is my opinion on what makes the “top 5” list. There are many other, albeit smaller and more narrowly focused, standards and amendments that become effective this year. 

Simplifying the measurement of inventory (ASU 2015-11)

Traditionally, U.S. GAAP has required inventory to be measured at “lower of cost or market” (LOCOM). Stakeholders raised concerns with the FASB that this caused unnecessary complexity due to the multiple calculations required to arrive at market. The FASB responded with this ASU that changes the subsequent measurement guidance to lower of cost or net realizable value, with the exception of inventory measured using LIFO or the retail inventory method. For those, the measurement principle remains LOCOM. Net realizable value is the estimated selling price, less reasonably predicable costs of completion, disposal and transportation. This amount is already one of the calculations required when applying LOCOM, and the new guidance doesn’t change that calculation, so transition should be “simple”! This guidance is effective for all entities in 2017.

Simplifying the accounting for measurement-period adjustments (ASU 2015-16)

If business combination accounting is not complete as of the end of the reporting period in which an acquisition occurs, the acquirer records provisional amounts in the financial statements. Subsequently, adjustments can be made to those provisional amounts, but only if the adjustments are related to facts and circumstances that existed at the acquisition dates. This is important because measurement period adjustments impact goodwill and not the P&L. The measurement period ends when the necessary information is received about the facts and circumstances that existed at the acquisition date, but cannot exceed one year.

These measurement period adjustments are no longer required to be made retrospectively by “recasting” prior periods that are presented in the financial statements. Instead, these adjustments are recognized in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. It also updated the presentation requirements.

This ASU is effective prospectively for public entities in 2016 and all other entities in 2017. For more information, see our blog on this topic.

Balance sheet classification of deferred taxes (ASU 2015-17)

Even though “simplify” isn’t in the title, this one is pretty simple! Previously all deferred tax assets and liabilities had to be classified on the balance sheet as current or non-current. Determining the classification involved looking at the classification of the underlying asset or liability that gave rise to the temporary difference, or in absence of an underlying item, the expected reversal date. Netting current deferred tax assets with current deferred tax liabilities and non-current deferred tax assets with non-current deferred tax liabilities was allowed, but only within the same tax jurisdiction. The FASB recognized that all of this was a pain, with very little benefit to financial statement users, so they issued this ASU which requires all deferred taxes to be classified as non-current. No more requirement to assess classification!

This ASU is effective for public entities in 2017 and all other entities in 2018. Early adoption is allowed.

Simplifying the transition to the equity method of accounting (ASU 2016-07)

Companies apply the equity method of accounting when they have significant influence over an investee. But what happens when an investor already has an investment in an investee which is accounted for as a financial instrument, then increases that investment and gains “significant influence”? How does the entity transition to the equity method of accounting? ASU 2016-07 requires that the equity method be applied prospectively from the date the ownership changes, with the cost of the new investment added to the carrying value of the existing investment. If the investment was previously classified as available-for-sale, any unrealized gains or losses in other comprehensive income must be reclassified to the P&L. This is welcome simplification because previous accounting required adjustment to the investment, results of operations, and retained earnings retrospectively as if the equity method had been in effect during all previous periods that the investment was held. Note, however, that this ASU did not change the requirement to account for basis differences between the cost of the investment and the amount of underlying equity in net assets.

This ASU is effective for all entities beginning in 2017. For more information, see our blog on this topic.

Improvements to share-based payment accounting (ASU 2016-09)

This one is a little more involved because it includes multiple improvements to the accounting for share-based payments. Rather than discuss each one in detail, here are the key facts:

• All excess tax benefits and tax deficiencies are recorded as income tax benefit or expense in the income statement, thus eliminating the APIC pool
• An accounting policy election is available to either estimate forfeitures (as is currently required) or account for them as they occur
• Maximum, rather than the current minimum, individual statutory tax rate can be withheld without classifying the award as a liability
• Non-public entities can use a practical expedient to determine expected term of certain share-based payment awards
• Non-public entities can elect to change the measurement basis for liability classified awards to intrinsic value upon adoption of the ASU

For more information, check out our blog about ASU 2016-09. This ASU is effective for public entities in 2017 and for all other entities in 2018.

Well, there you have it, my personal “top 5” list of guidance newly effective in 2017. Hopefully this will help you as you are planning for the 2017 financial reporting cycle, and will help simplify your accounting life!

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