Simplifying the financial reporting process is never an easy task, but the FASB continues to take steps in the right direction. Still, there are a number of outstanding projects looming in the horizon that will require more resources in the future, and the bank regulators continue to weigh in with additional guidance. We’ve highlighted recent accounting updates and future projects that demonstrate the give and take nature of today’s financial reporting process.
Until now there’s been limited guidance on this topic for private companies. Most followed the guidance in SEC Staff Accounting Bulletin (SAB) Topic 5J, which required pushdown accounting when a controlling interest of 95 percent or more in an entity is acquired, encourages pushdown accounting when a controlling interest between 80 and 95 percent is acquired, and prohibits it when a controlling interest of less than 80 percent is acquired. As a result, there was diversity in the application of pushdown accounting practices among private companies.
In October 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU give an acquired entity the option of applying pushdown accounting in its stand-alone financial statements upon a change-in-control event. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs.
An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting isn’t applied in the reporting period in which the change-in-control event occurs, the acquired entity has the option to elect to apply it in a reporting period subsequent to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a later reporting period should be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. Also, the federal banking agencies announced in January 2015 that they reserve the right to require or prohibit pushdown accounting—so companies should be mindful of this additional consideration and the potential need for additional regulatory approval when contemplating merger- and acquisition-related activities.
At a recent conference, SEC staff indicated they intend to take a fresh look at segment reporting and encouraged registrants to do the same. The SEC staff stated that their views have evolved in this area, particularly as it relates to identifying operating segments and when aggregation of those segments is appropriate.
One of the key aspects (or challenges) of Topic 280—which covers segment reporting under US generally accepted accounting principles (GAAP)—is properly identifying the organization’s chief operating decision maker (CODM). The staff called into question the practice of assuming that a registrant’s CEO is by default its CODM based solely on the fact that the CEO has ultimate decision-making authority. The SEC staff also felt that too many companies place overreliance on the CODM report to determine operating segments and noted that other factors should be considered, such as the management structure, basis for budgeting and analysis, and basis for executive compensation.
The SEC staff also commented that the criteria for aggregation of operating segments is intended to be a high hurdle and that organizations need to meet all of the criteria in order to aggregate operating segments. There are no bright lines when assessing whether two or more operating segments have similar economic characteristics. Rather, entities should use judgment that is consistent with the objectives of the standard in determining whether the aggregation criteria have been met.
Preparers of public company financial statements should revisit their accounting policies and related disclosures for segment reporting. A number of other entity-wide disclosures are required regardless of the number of reportable segments. To the extent that there is a change in the composition of the reportable segments resulting from changes in the structure of an entity’s internal organization, registrants are required to restate previously reported information (if practicable).
FASB Financial Instruments Project
The FASB continues to deliberate and redeliberate both components of the financial instruments project, the first being classification and measurement and the second being impairment. The FASB considered additional matters in the classification and measurement portion of the project, rejecting certain core deposit liability disclosures and allowing for prospective application of the practicability exception for nonmarketable securities.
Drafting the final standard will push final issuance of the standard to the end of Q1 or beginning of Q2 2015. The FASB has not yet set an effective date for the final standard.
With regard to the impairment project, it appears that the end of Q2 is the earliest possible time for an issued standard, but Q3 2015 is more likely for a final standard. However, no one’s crystal ball has been effective in estimating the timing of this project. The FASB still has to consider disclosures, transition, and the effective date. In addition, the FASB has yet to complete significant additional drafting of the final standard, with diverse constituencies lobbying for various levels of prescriptiveness in the guidance. Banking regulators appear to be watching the FASB’s process closely and will likely have supplemental or interpretive guidance for banks.
Regulators Weigh In on Accounting
Toward the end of 2014, the federal banking regulators increased their activity surrounding accounting issues. In the third quarter call report instructions, the Federal Deposit Insurance Corporation (FDIC) provided guidance on troubled debt restructurings (TDRs)—the “once a TDR, always a TDR” issue—by creating an interpretation of when a remodified TDR could qualify to have its TDR designation removed. Navigating the complexities of US GAAP definitions and federal law, the FDIC also published preliminary views on which entities could be considered private business entities under the definition established in ASU 2013-12. In the third quarter call report instructions, the FDIC also outlined the process by which it would evaluate the private company alternatives that have recently been added to the Codification and generally permitted the adoption of those alternatives by banks that meet the scope criteria of a private company. The NCUA also intends to release a document permitting the use of the private company alternatives for credit unions. Finally, the Office of the Comptroller of the Currency updated its Bank Accounting Advisory Series in December 2014 with over 20 revised or newly added questions and answers.
The accounting guidance provided by banking regulators continues to be a double-edged sword. A lack of guidance on remodified TDRs was clearly a practice issue; however, as a nonauthoritative body from an accounting perspective, the bank regulator’s accounting guidance does not allow for transition guidance as would exist in a FASB Update, and preferability of the new accounting policy must be established if adopting the guidance results in a change to a material accounting principle. Also, the FDIC’s third quarter call report instructions imply that most banks subject to the FDIC Improvement Act would be considered public business entities for accounting purposes, since the act requires a bank within its scope to make its financial statements available to the public upon request. If this position remains the final view of the FDIC, many banks that don’t consider themselves public will be treated as such for accounting purposes under US GAAP, requiring accelerated adoption of the revenue and the financial instruments standard.
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If you have questions about any of the accounting matters described here or would like more information on how your organization may be impacted by upcoming regulatory changes, contact your Moss Adams professional.