FASB Pitches GAAP Improvements Covering Income, Derivatives
In what the Financial Accounting Standards Board (FASB) calls a “perpetual project,” a proposed Accounting Standards Update has been issued that will make technical corrections, clarifications and other minor improvements to generally accepted accounting principles (GAAP) on certain topics including comprehensive income, debt and derivatives.
The update, Codification Improvements, “should eliminate the need for periodic agenda requests for narrow and incremental items,” the board states. There are 18 proposed amendments — of which 13 include clarifications.
Comments are due Dec. 4 in one of three ways described in the update.
The amendments would apply to all reporting entities within the scope of the affected accounting guidance.
While all of the amendments are listed in the update, the board specifically points out the following proposals to guidance that may have been incorrectly or inconsistently applied by certain entities:
- Subtopic 718-740, Compensation—Stock Compensation—Income Taxes, clarifies that an entity should recognize excess tax benefits or tax deficiencies in the period when the tax deduction for compensation expense is taken. This includes deductions taken on the entity’s tax return in a different period from when the event resulting in the tax deduction occurred and the uncertainty about whether the entity will receive a tax deduction and the amount of the tax deduction is resolved.
- Subtopic 805-740, Business Combinations—Income Taxes, removes three methods for allocating the consolidated tax provision to an acquired entity after acquisition that is inconsistent with guidance in Topic 740.
- Subtopic 820-10, Fair Value Measurement—Overall, clarifies the board’s decisions about the measurement of the fair value of a liability or instrument classified in a reporting entity’s shareholder’s equity from the perspective of a market participant that holds an item identical to an asset at the measurement date.
- Subtopic 220-10, Comprehensive Income – Overall, clarifies the guidance in paragraph 220-10-45-10B(b), which states that taxes not payable in cash are required to be reported as a direct adjustment to paid-in capital. This requirement conflicts with other guidance in Topic 740, Income Taxes, Subtopic 805-740, Business Combinations—Income Taxes, and Subtopic 852-740, Reorganizations—Income Taxes, which generally states that income taxes and adjustments to those accounts upon a business combination or a bankruptcy that is eligible for fresh-start reporting must be recognized in income. The phrase taxes not payable in cash was codified from FASB Statement No. 130, Reporting Comprehensive Income. Without the proper context, the phrase could be interpreted to mean any tax expense that is not payable in cash, including the utilization of a deferred tax asset. The amendment would clarify the guidance in paragraph 220-10-45-10B by removing the generic phrase taxes not payable in cash and adding guidance that is specific to certain quasi-reorganizations.
- Subtopic 470-50, Debt – Modifications and Extinguishments, clarifies guidance in paragraph 470-50-40-2 that requires that the difference between the reacquisition price of debt and the net carrying amount of extinguished debt be recognized in income in the period of extinguishment. The guidance in that paragraph was not amended by FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments, or FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities; therefore, it does not specifically address extinguishments of debt when the fair value option is elected. The amendments would clarify that when the fair value option has been elected on extinguished debt, the net carrying amount of the extinguished debt equals its fair value at the reacquisition date; and that related gains or losses in other comprehensive income must be included in net income upon extinguishment of the debt.
- Subtopic 480-10, Distinguishing Liabilities from Equity—Overall, conforms the guidance in paragraph 480-10-55-59 with the guidance in Statement 150. Paragraph 480-10-25-15 prohibits the combination of freestanding financial instruments in the scope of Subtopic 480-10 with noncontrolling interest, unless the combination is required by Topic 815, Derivatives and Hedging. The example in paragraph 480-10-55-59 conflicts with that guidance by stating that freestanding option contracts with the terms in Derivative 2 should be accounted for on a combined basis with the noncontrolling interest. The source of the example in paragraph 480-10-55-59 is from EITF Issue No. 00-4, “Majority Owner’s Accounting for a Transaction in the Shares of a Consolidated Subsidiary and a Derivative Indexed to the Noncontrolling Interest in That Subsidiary.” Issue 00-4 was nullified by FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and a conforming amendment to the example in paragraph 480-10-55-59 was not made to align it with the guidance in Statement 150.
- Subtopic 815-10, Derivatives and Hedging – Overall, clarifies paragraphs 815-10-45-4 through 45-5 the circumstances in which derivatives may be offset. Under certain specific conditions, derivatives may be offset if three of the four criteria in paragraph 210-20-45-1 are met. One of the criteria—the intent to set off—may not be required to offset derivative assets and liabilities for certain amounts arising from derivative instruments recognized at fair value and executed with the same counterparty under a master netting agreement. The guidance in paragraph 815-10-45-4 is potentially misleading because it specifically references the criteria in paragraph 210-20-45-1, which states that derivatives may only be offset when all four of the conditions in paragraph 210-20-45-1 are met. The proposed amendments would modify the reference in paragraph 815-10-45-4 so that the reader is directed to the full guidance of Subtopic 210-20, Balance Sheet—Offsetting, and clarify the guidance in paragraph 815-10-45-5 for the exception of the intent to set off criteria for derivatives.
- Subtopic 940-405, Financial Services—Brokers and Dealers—Liabilities, simplifies the codification by removing redundant guidance, which would make the guidance on offsetting consistent.
- Subtopic 962-325, Plan Accounting – Defined Contribution Pension Plans – Investments – Other, removes the stable value common collective trust fund from the illustrative example in paragraph 962-325-55-17 to avoid the interpretation that such an investment should always be measured using the net asset value per share practical expedient. Rather, a plan would need to evaluate whether a readily determinable fair value exists.
FASB says that after it has completed its deliberations and issued a final Accounting Standards Update, the proposed amendments to the Taxonomy will be made available for public comment on its website and will be finalized as part of the annual release process.
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Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.