Are you looking for topics for your annual U.S. GAAP Update this year? Well, you’ve come to the right place! In this post we’ll highlight the top 5 Accounting Standards Updates (ASUs) applicable to both private companies and public companies in 2021.
While the “Big Three” (i.e., ASC 606 Revenue from Contracts with Customers, ASC 842 Leases, and ASC 326 Credit Losses) have been implemented by public business entities, many private companies don’t have to worry about adopting Leases or Credit Losses in 2021 thanks to various deferrals issued by the FASB. That said, there’s still plenty of other ASUs too worry about! Here’s our list of the top 5 ASUs applicable for this year.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
Just like Hansel, cloud computing is so hot right now! And with companies spending millions of dollars migrating to the cloud, it’s important to get the accounting right. ASU 2015-05 addressed the issue of evaluating the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement contained a software license. However, this rule did not address the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract, which, let’s be honest, is the vast majority of such arrangements. As a result, the FASB issued ASU 2018-15.
As discussed in this post, entitles must capitalize certain implementation costs associated with cloud computing arrangements (CCAs) in accordance with the guidance within ASC 350-40, which is the guidance related to internal-use software. Curious about this guidance? Check out this post!
While this ASU was effective last year for public business entities, it is effective this year for all other entities.
Collaborative Arrangements: Clarifying the Interaction between ASC 808 and ASC 606 (ASU 2018-18)
If you’re like me, you probably don’t know what a collaborative arrangement is, let alone how to account for them. I wasn’t until I was scheduled to give a training for a large bank headquartered in Virginia, which happened to enter into collaborative arrangements, did I realize that there is actually a separate Codification Topic for them (ASC 808). Good to know!
A collaborative arrangement, as defined by ASC 808, is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. ASC 808 is not new. However, it does not provide comprehensive recognition or measurement guidance for collaborative arrangements. As a result, the accounting for such arrangements is often based on an analogy to other accounting literature or an accounting policy election. Not good!
As a result of the lack of guidance, we had diversity in practice. Now throw ASC 606 Revenue from Contracts with Customers into the mix and you got a giant cluster! Luckily, ASU 2018-15 came to the rescue! Want to learn more about the accounting for collaborative arrangements outlined in ASU 2018-15, check out this recent post.
Similar to ASU 2018-15, this ASU was effective for public business entities last year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
Simplifying the Accounting for Income Taxes (ASU 2019-12)
Only two things scare most people, and one is nuclear war? What’s the other? Income taxes! Many people felt it was too complex, with many different rules and exceptions. Luckily, the FASB undertook a Simplification Initiative to reduce the complexity in accounting standards, which included accounting for income taxes in accordance with ASC 740. ASU 2019-12 was born from this Simplification Initiative.
The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions, as well as adding other clarifications. You can read more about the changes resulting from ASU 2019-12 in last week’s post.
For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
Clarifying the Interactions between ASC Topics 321, 323, and 815 (ASU 2020-01)
While Warren Buffet hates ASC 321, I’m like “OK Boomer!” I know it sounds odd, but I really, really like that rule! It’s simple. If an equity investment has a readily determinable fair value, then you account for it at fair value, with changes in fair value recorded immediately in the P&L. If it does not have a readily determinable fair value, then ASC 321 prescribes a measurement alternative. However, accounting guidance was unclear when an investment in an equity security moved between ASC 321 and ASC 323, which is applicable when an investor has significant influence.
The first issue addressed by this ASU relates to the movement between ASC 321 to 323 or vice versa. Specifically, the issue here deals with when the measurement alternative has been elected. This ASU comes out and tells us that you must consider any current market transactions at the time that you gained significant influence and remeasure your equity security to its fair value or observable fair value right before you begin to apply the equity method. The second issue addressed by ASU 2020-01 is a very technical issue, dealing with the scope of ASC 815: Derivatives and interplay with ASC 321 and to some extent 323.
For public business entities, the amendments in this ASU are effective this year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted.
Practical Expedient for Franchisors Applying Topic 606 (ASU 2021-02)
When ASC 606 Revenue from Contracts with Customers was issued, private company stakeholders in the franchise industry raised concerns about the cost and complexity of applying ASC 606 to determine the amount and timing of revenue recognition for initial franchise fees. Prior to adopting ASC 606, such fees typically were recognized when the franchise location opened in accordance with ASC 952. However, under ASC 606, the franchisor is required to determine whether the pre-opening activities contain any separate performance obligations and, if so, recognize them over time in accordance with the 5-step model within ASC 606. This could require a lot of effort, especially for private company franchisors who presumed that such fees would have to be recognized over the license term.
The amendments in ASU 2021-02 are intended to reduce the cost and complexity of applying ASC 606 to pre-opening services for franchisors that are not public business entities by providing a practical expedient for applying ASC 606 to such fees. The practical expedient permits franchisors that are not public business entities to account for pre-opening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. Additionally, the FASB decided to provide an accounting policy election to recognize the pre-opening services as a single performance obligation.
Assuming the entity has already adopted ASC 606, the amendments in this ASU are effective in interim and annual periods beginning after December 15, 2020. Early application is permitted. For those entities, the guidance should be applied retrospectively to the date ASC 606 was adopted.
Accounting updates are a necessary evil, but that doesn’t mean they have to be mind-numbingly boring! Want to learn more about these ASUs (and receive CPE)? We’d like you to experience the GAAP Dynamics’ difference by inviting you to our 1.5-hour webinar, ASUs Effective in 2021 this Thursday, May 4, 2021 at 11:00 am EST. You can register here.
Need a tailored webinar for your organization? No problem. We do those too! Let’s talk. We’d love to discuss your training needs and see if we can help!
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