GAAP Dynamics sure has been busy hosting webinars lately! We’ve written recently about our SEC Update and Hot Topics webinar with Parker + Lynch and about what we think makes our webinars different from the rest.
In this blog, we want to talk about our latest webinar, which provided over 500 people with 1.5 hours of informative, fun, and free CPE: ASUs Effective in 2020. We’ll take a look at a few of the topics covered in that session, including a look at the questions other financial statement preparers and auditors, just like you, are asking!
The dual-bucket model introduced by the FASB
Our webinar kicked off with a reminder of the overall standard-setting landscape of the FASB, including a review of the effective dates of the big standards, including:
- ASC 842, Leases
- ASC 815, Derivatives and Hedging; and
- ASC 326, Financial Instruments – Credit Losses.
The FASB recently deferred the effective dates of these big standards for non-SEC filers, including private companies, and, in some instances, emerging growth companies (EGCs) and smaller reporting companies (SRCs). This new dual-bucket approach essentially gives non-SEC filers (the 2nd bucket) an additional two years to implement these big standards. You can learn more about this dual-bucket approach in this blog post from Chris Brundrett!
Questions from the audience
Q: Didn't the FASB just move the date for leases for private companies to 2022?
A: They sure are trying to! On April 21st, the FASB issued an exposure draft for comment that aims to provide certain private companies and not-for-profit organizations with an optional, one-year effective date delay of the leases standard. Stakeholders will have a 15-day comment period from the time of issuance to review and provide comments on the proposal. So stay tuned for more on the effective date. However, be aware that the FASB issued a Q&A document offering some relief to accounting for lease concessions. You can find that document here.
Q: How does being an Emerging Growth Company impact the bucket 1 and 2 deadlines?
A: As a reminder, EGCs have some different and more relaxed financial reporting and disclosure requirements, including the ability to follow the private company effective dates for new standards. This means that EGCs can follow “bucket 2” effective dates. However, this will create additional considerations if an entity loses their EGC status before they would have adopted the new standard. Take for example an entity that loses its EGC status during 2021. They would have to adopt the new credit losses standard as of January 1, 2021 in their 2021 10-K.
Credit losses
Our first newly effective standard was the one at the top of most financial institutions’ minds: the new Current Expected Credit Losses model. SEC filers with calendar year ends were required to adopt the new CECL model (ASC 326) on January 1, 2020. According to the model, entities need to consider in their allowance for credit losses (ACL) historical loss rates updated for current conditions and “reasonable and supportable forecasts.” Obviously, most entities did not consider the impact of the Coronavirus in their ACL estimate at January 1, 2020…but they will have to in the first quarter financial statement filed on Form 10-Q. Unless, of course, the entity decided to be one of the few institutions to take advantage of the “relief” provided by congress as part of the CARES act.
Questions from the audience
Q: Has the FASB provided any updated guidance on the "double counting" issue that has come up with banks going through mergers post-CECL? This issue is a result of bringing acquired banks down to fair value, but then also adding in CECL reserves to the purchased loan portfolios.
A: CECL requires entities to forecast expected credit losses for financial assets measured at amortized cost and record those losses at Day 1 – regardless of whether that Day 1 is through origination or purchase! According to ASC 805, we know that the purchaser is required to record any purchased assets and liabilities at their fair value, as defined in ASC 820, which is based on market-participant assumptions. Post-acquisition, the entity will also be required to adjust their ACL to reflect the addition of these new assets. An entity’s CECL estimate is based on entity-specific assumptions. Additionally, it does not consider things like contract extensions or renewals and does not require an entity to discount cash flows. As you are starting to see, this is a complex area, and to the extent your entity participates in M&A activity, you should do the research in advance to make sure you have properly considered it in your pre- and post-merger accounting! For a bit more information on the considerations, check out this great article from KPMG.
Q: Can you please expound on how CECL could impact lessors?
A: The CECL impairment model is not just for banks! It also applies to net investments in leases for sales-type leases and direct financing leases held by lessors. Therefore, ASC 326-20 requires that an ACL be recorded on Day 1 of the sales-type lease or direct financing lease – regardless of whether that Day 1 is through origination or purchase. Sound familiar? And remember, the CECL model requires measurement on a collective, or pool, basis…not at an individual lease level. So you’ll need to consider how to aggregate your leases into pools based on similar risk characteristics. For more information, check out this publication from PwC that has an entire chapter dedicated to evaluating how CECL should be applied to lessors!
Q: When recovering the asset after it's been written off, you would Dr the asset and Cr the P&L or something different?
A: Recoveries of financial instruments should be recorded when received. Recoveries can be credited directly to earnings or to the ACL. The entity has a choice (that should be applied consistently, of course)! The FASB noted some industries prefer different treatment, however, both result in the same net effect to earnings overall. (Financial institutions typically credit the ACL when recoveries are received.)
Q: How does CECL apply to AR and contract assets?
A: The new guidance does indeed require entities with trade receivables to recognize an ACL for expected credit losses, just like for other types of financial assets measured at amortized cost. However, the guidance does not prescribe a methodology for arriving at this estimation. While this seems like a big deal, the reality is that for most organizations, this may not result in a material change to the financial statements, because the expected lifetime of most trade receivables is so short! Many entities will likely continue to use their provision matrices as a basis for their CECL estimates and simply layer on adjustments for current conditions and reasonable and supportable future forecasts. For contract assets (rights to consideration in exchange for transferred goods or services in which the right to receive consideration is conditioned on something other than the passage of time), it could potentially be more complicated. Are these contract assets more akin to trade receivables? Or loans? How long is the expected life of the contract asset? For more information about CECL and trade receivables and contract assets, please check out this publication from KPMG.
The learning continues
Are you curious about COVID-19’s impact on an entity’s ACL? Make sure you check out this blog written by Rachel Klein!
Want to learn more about CECL and how it will impact both financial institutions AND nonfinancial institutions as you prepare to implement? Take a look at the future of reporting expected credit losses in this interactive and engaging eLearning course!
Goodwill impairment
Next, we moved on to cover ASU 2017-04, which eliminated step 2 of the goodwill impairment test under ASC 350, Goodwill and other. As you’ll recall, prior to this new guidance, preparers generally followed the flowchart above, which required entities to first perform a qualitative assessment or to compare the carrying amount of the reporting unit to its fair value. If the fair value of the reporting unit was below the carrying amount, step 2 was required. In this step, the entity was required to perform hypothetical purchase price accounting to compute the implied fair value of goodwill to compare to its carrying amount. Any amount by which the carrying amount exceeded fair value would be recorded as an impairment charge. This is the step that was eliminated, which means under the new guidance, the amount by which the carrying amount of the reporting unit exceeds the fair value of the reporting unit will now be recorded as an impairment charge against goodwill!
Questions from the audience
Q: Is it possible to have 2 impairment tests in less than 1 year?
A: Absolutely! And, in fact, we would not be surprised to see most companies considering whether or not that was a necessity this year in light of COVID-19. Remember, the guidance requires that an entity perform an impairment test of goodwill at least once each year, but more often if there are triggering events – and an unexpected pandemic would certainly qualify as just that!
Q: If your impairment charge should be $200 but goodwill is only $100, doesn’t that become an indicator for your consideration of the recoverability of assets?
A: Absolutely. This brings up two important points. First, the ordering of your impairment tests is important! Always make sure you are testing at the lowest level for impairment first! In other words, test your intangible assets, or other individual assets for impairment first. Then, move on to PP&E and asset groups. Goodwill, which is based on the fair value of the reporting unit, should always be tested last! This ensures that the values for all assets and liabilities that have been assigned to the reporting unit are valid, and do not have unrecognized impairment issues, before testing begins! Remember the old saying, “Garbage in, garbage out”? Make sure you aren’t starting with garbage!
The learning continues
You can read more about the changes brought about by this ASU in this funny yet informative blog post by Mike Walworth! Want to dig deeper? Check out this eLearning course on our online learning platform, the Revolution.
Non-employee Share-based payment awards
The FASB issued ASU 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under this revised guidance, awards to non-employees will be recognized and measured using the principles under ASC 718, except when it comes to cost attribution. The old guidance for cost attribution remains, meaning that the award will be expensed in the same manner as if the company had paid cash for the good or service. We also discussed ASU 2019-08 which further clarified the accounting for a share-based payment award granted to a customer.
Questions from the audience
Q: Could ASU 2018-07 apply to company directors receiving options or stock?
A: Yes, and in fact, the guidance in ASC 718 has applied to company directors receiving options or stock! The key consideration will now be whether the award to the director was in the auspice of services performed as an employee or a non-employee. Now the key difference based on that answer will be how and when the expense is recognized in the financial statements! You can read more on this in KPMG’s Handbook on share-based payment.
Q: Does ASU 2019-08 allow early adoption for non-Public Business Entities (non-PBEs)?
A: Yes it does! BUT, you have to have adopted ASC 606 first!
Other topics covered
We covered several other topics throughout the course of the session, including:
- Fair value disclosures: ASU 2018-13 was part of the FASB’s disclosure framework project, which aims to simplify and improve disclosures while maintaining the integrity of the financial statements. As a result of this ASU, certain disclosures were amended, others were removed, and some were added! For a synopsis of the changes, check out this blog post by Mike Walworth.
- Cloud-computing arrangements: ASU 2018-15 allows all cloud computing arrangements classified as a service contract to capitalize certain implementation costs in accordance with internal-use software guidance (ASC 350-40). You can read more about that in this blog by Jenny Lukac.
- Collaborative arrangements: The amendments clarify that transactions in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer for a distinct good or service (i.e., a unit of account). You can read more about the changes in this blog post.
- Reference rate reform: The London Interbank Offered Rate (LIBOR) is being phased out by 2021. This could have major implications on accounting for debt modifications and hedge accounting as contracts are renegotiated to swap out LIBOR for an alternative reference rate, like the Secured Overnight Financing Rate (SOFR). To address this issue, the FASB issued ASUs 2018-16 and 2020-04 to provide relief for financial statement preparers. You can read more about ASU 2020-04 in this Defining Issues from KPMG.
Ready for more?
Want the see the full webinar? Make sure you check out the playback here!
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Disclaimer
This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.
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