New Standards Effective in 2016

While the FASB has been very busy issuing new standards and EDs this year, most of those won’t apply until 2017 or later.  I wanted to take a moment to refresh everyone on the new standards that were required to be adopted in 2016.  In general, for private companies these standards were delayed one year, so many of them are not required to be used by private companies until 2017, although in most cases private companies could chose to early adopt these standards in 2016.

Business Combinations:

  • Companies are no longer required to retrospectively adjust provisional amounts booked at closing.
  • Instead revisions within one year time period are still made and the impact is recognized in the current period (with material impacts disclosed).

Inventory:

  • Companies using the FIFO method for inventory will no longer record inventory at the lower of cost or market; instead inventory will be recorded at the lower of cost or net realizable value.
  • There is no change to the requirements for calculations under the LIFO method.

Cloud computing arrangements:

  • You need to determine if the purchase of a cloud computing arrangement includes a software license. To do so you generally follow the same rules as the provider of the services.  If the company has the
    • Contractual right to take possession of software without significant penalty AND
    • It is feasible for customer to run software on its own or with a unrelated party
  • Then the company has purchased a license and not a service arrangement and the software needs to be recorded appropriately.
  • A key consideration will often be if a significant penalty exists. A penalties exists if
    • The company can take delivery without significant cost (i.e. no extra payment), and
    • There is no significant diminution in utility or value of the software

Debt issuance costs are now presented as a direct deduction from the carrying amount of debt.

Extraordinary items have been eliminated.

Consolidation:

  • In evaluating Voting Interest Entities (VIE), for example a limited partnership, the general partner can consider kick-out rights held by a simple majority of partners in determining if entity is a VIE (and eliminate current presumption that general partner controls partnership in the voting model).
  • If kick-out rights are present then limited partner with controlling financial interest should consolidate.
  • In evaluating Variable Interest Entities (VIE) fees paid to a decision maker that are at market do not represent a variable interest, there at market fees are excluded from VIE economics evaluation.

PCC Effective dates have been removed; private companies can initially adopt the PCC standards at any time without having to prove preferability; applies to goodwill & intangibles, VIEs in leasing, simple interest rate swaps, and business combo intangible assets.

Going Concern:

  • Effective for YE 2016 financial statements, just not interim periods this year.
  • Management must now evaluate if “substantial doubt” about the ability to continue as a going concern exists.
  • Substantial doubt means it is probable the entity will not be able to meet it obligations as they become due.
  • The evaluation should consider plans to mitigate those conditions; mitigation must be probable of implementation and probable of actual mitigation.
  • The evaluation period is 12 months from issuance date (not the balance sheet date as under auditing standards).
  • Disclosures include:
    • Management’s plans to alleviate/mitigate the substantial doubt
    • That substantial doubt exists if it is not alleviated/mitigated
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