United States: On the Horizon - January 22, 2013

FASB

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

Board proposes improvements to accounting for repurchase agreements

The FASB recently issued proposed Accounting Standards Update (ASU), Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings, to clarify the difference between sales and secured borrowings of financial assets in a repurchase agreement. The proposed changes are expected to better reflect the transferor's obligations and risks under these transactions.

The proposed guidance would remove the distinction between repurchase agreements that settle before the transferred asset matures and those that settle on the same date the transferred asset matures (repurchase-to-maturity agreements). For both types of transactions, effective control would be maintained by the transferor when all of the following conditions are met:

• The repurchased assets are identical or substantially the same assets as the financial assets initially transferred or when the agreement is settled in cash upon maturity of the transferred assets.
• The repurchase price is fixed or readily determinable.
• The agreement to repurchase the transferred financial asset is entered into simultaneously with, or in contemplation of, the initial transfer.

If the transferor does not maintain effective control because one or more of the above criteria are not met, the transferor would apply the conditions in FASB Accounting Standards Codification® (Codification or ASC) 860-10-40-5, Transfers and Servicing, to determine whether the transfer would be accounted for as a secured borrowing or as a sale and a forward purchase agreement.

During the term of both types of transactions, the transferor typically retains exposure to the credit risk of the transferred assets and to certain benefits of the transferred assets. Transactions in which the transferor of the financial assets maintains effective control over the transferred assets are accounted for as secured borrowings.

The proposals would also clarify the characteristics of assets that qualify as "substantially the same" and would add new disclosures for transfers of financial assets with forward agreements to repurchase transferred assets.

Finally, the proposed guidance would change the current guidance on accounting for the transfer of a financial asset and the simultaneous refinancing of the transferred asset between the same counterparties (repurchase financings). Entities would be required to account for the initial transfer and the repurchase financing as two separate transactions rather than on a combined basis under current U.S. GAAP.

The FASB has not proposed an effective date for this guidance. For transfers with forward purchase agreements that settle when the financial asset matures and for repurchase financings that involve such agreements, entities would apply the proposed amendments through a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is effective. For all other transactions, entities would apply the proposed amendments prospectively to transactions entered into or modified after the effective date.

The Board has published FASB In Focus, " Proposed Accounting Standards Update – Transfers and Servicing (Topic 860) – Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings," to provide additional information regarding this proposal.

The comment period ends March 29.

FAF completes post-implementation review of segment guidance

The Financial Accounting Foundation (FAF) recently completed its post-implementation review of FASB Statement 131, Disclosures about Segments of an Enterprise and Related Information, which is codified in ASC 280, Segment Reporting. An independent team, overseen by the FAF Board of Trustees, obtained feedback from stakeholders, including financial statement users and preparers, accounting practitioners, and academics, on the application, usefulness, and effectiveness of Statement 131.

The review team concluded that the disclosure requirements in Statement 131 have generally improved the way public companies report financial information about their business segments in interim and annual financial statements.

However, the review team also identified several areas for potential improvement in the guidance, including

• Requiring additional segment information, for example, gross margin and cash flow
• Providing guidance to increase consistency in the presentation of segment information across entities
• Clarifying the guidance on determining and aggregating segments

The IASB is also conducting a post-implementation review of IFRS 8, Operating Segments, which is expected to be completed in 2013. The guidance on operating segments in IFRS 8 is consistent with the guidance in U.S. GAAP. The FASB plans to consider the results of the IASB's review of IFRS 8 prior to determining how to address the comments received on Statement 131.

SEC

CorpFin updates Financial Reporting Manual

The Financial Reporting Manual does not contain rules, regulations, or statements of the SEC and has not been approved by the Commission. It is not intended to be published views of the Division of Corporation Finance or of the Office of the Chief Accountant, such as a Staff Accounting Bulletin. The manual is designed as an internal reference document for Division of Corporation Finance staff and should not be relied on as authoritative.

The staff of the SEC's Division of Corporation Finance (CorpFin) has updated its Financial Reporting Manual as of September 30, 2012. The manual does not yet reflect potential changes that are necessary for emerging growth companies (EGCs) as a result of the Jumpstart Our Business Startups Act, however, and should be read in conjunction with the act and staff guidance related to EGCs.

Changes to the manual include clarification of the following topics:

• Section 1180.2: Auditor responsibility for cumulative period from inception amounts
• Section 1340.3: Effect of filer status change on period filings
• Section 2020.8-.10: Significance testing for related businesses
• Section 2305.5: Significance thresholds for triple net leased properties
• Sections 4110.5, 4140.4-.5, and 4210.4: PCOAB requirements for auditors of non-issuer financial statements
• Section 14410.2: Financial information requirements for foreign private issuer bidders in a tender offer

EITF meeting held January 17

Because consensuses and consensuses-for-exposure are subject to ratification by the FASB and some of the details of conclusions reached at an EITF meeting are determined during the process of developing the minutes of the meeting, the following descriptions are preliminary.

At its meeting on January 17, the EITF discussed seven issues and reached two final consensuses and two consensuses-for-exposure, as summarized below.

The FASB will consider ratification of the consensuses and consensuses-for-exposure at its January 30 meeting. Board-ratified consensuses will be issued as ASUs and will be incorporated into the Codification. Board-ratified consensuses-for-exposure will be posted to the FASB website for comment as proposed ASUs.

Final consensuses

Issue 11-A, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity"

The Task Force reached a final consensus on Issue 11-A, affirming the consensus-for-exposure issued for public comment in the proposed ASU, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.

The proposed guidance addresses the timing of an entity's release of a cumulative translation adjustment (CTA) from accumulated other comprehensive income into net income. According to the consensus, an entity would distinguish between sales of investments in a foreign entity and sales of investments within a foreign entity as follows:

• When an entity sells all or part of an investment in a foreign entity, it would recognize all the CTA associated with that foreign entity in net income if the sale results in a loss of control of the foreign entity, consistent with the guidance in ASC 810-10, Consolidation.
• When an entity sells a subsidiary or a group of assets that is either a nonprofit activity or a business (other than sales of in-substance real estate or conveyances of oil and gas mineral rights) within a foreign entity, it would recognize the CTA associated with that foreign entity in net income if the sale results in a complete or substantially complete liquidation of the foreign entity, consistent with the guidance in ASC 830-30, Foreign Currency Matters: Translation of Financial Statements.

The consensus also addresses the accounting for a CTA in a step acquisition, clarifying that upon obtaining control of a foreign entity, an acquirer would recognize in net income the CTA associated with its equity method investment in the acquiree.

The consensus would not amend the current guidance in ASC 830-30-40 that requires proportional recognition of a CTA when an entity sells a portion of its equity method investment in a foreign entity.

The proposed ASU includes a flowchart in the summary section, illustrating a decision process for applying the proposed guidance, which the Task Force decided to include in the summary section of the final ASU but not in the Codification.

In addition, the Task Force decided that the Basis for Conclusions in the final ASU should include a discussion explaining how the consensus was reached in light of the contrast between the current guidance in ASC 810-10 and ASC 830-30.

Effective date and transition

If the consensus is ratified by the Board, public companies would be required to apply the guidance for events occurring in fiscal years, and in interim periods within those years, beginning on or after December 15, 2013.

Nonpublic entities would be required to apply the consensus for events occurring in the first annual period beginning on or after December 15, 2014 and in interim and annual periods thereafter.

Entities would be required to apply the guidance prospectively, and early adoption would be permitted.

Issue 12-D, "Accounting for Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation is Fixed at the Reporting Date"

The Task Force reached a consensus on Issue 12-D, modifying the guidance exposed for public comment in the proposed ASU, Obligations Resulting from Joint and Several Liability Arrangements, based on the FASB staff's consideration of comments received from stakeholders.

According to the proposed ASU, an entity would measure its obligation under a joint and several liability arrangement where the total amount of the obligation is fixed at the reporting date using the guidance in ASC 450-20, Contingencies: Loss Contingencies, unless its primary role in the arrangement is that of a guarantor, in which case it would apply the guidance in ASC 460, Guarantees.

Although respondents to the proposed ASU requested that the guidance include indicators to determine when an entity's primary role is that of a guarantor, the FASB staff was unable to identify broadly applicable indicators. As a result, the Task Force decided to remove the reference to guarantors from the proposed guidance, and the consensus would therefore require all parties to joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date to refer to the guidance in ASC 450-20 for measuring their obligations under those arrangements. An entity's obligation would consist of both (1) the amount it has agreed to pay as part of an agreement among the co-obligors, if any, and (2) the amount it expects to pay on behalf of the other co-obligors.

The Task Force stressed that for joint and several liability arrangements, entities should apply only the measurement, and not the recognition, guidance from ASC 450-20, because an entity's obligation under a joint and several liability arrangement relates to a contractual obligation, such as a note payable to a lender, rather than to a contingent liability.

The Task Force decided not to address the accounting for recoveries under joint and several liability arrangements, as such guidance is beyond the scope of the issue. However, it decided that the Basis for Conclusions in the final ASU would remind preparers to consider individual facts and circumstances in developing expectations about amounts to be recovered from other parties to a joint and several liability arrangement.

The Task Force further affirmed the recurring disclosure requirements from the consensus-for-exposure, which include the following:

• The nature of the arrangement
• The total amount outstanding
• The carrying amount of the entity's obligation and, if applicable, a recovery receivable
• The nature of recourse provisions
• The entry for initially recognizing or subsequently remeasuring the liability and where it is recorded in the financial statements

The Task Force decided to permit the disclosures to be aggregated for groups of similar liabilities, and to include a reference in the final guidance to the related-party disclosure requirements in the Codification, since many joint and several liability arrangements involve related entities.

Effective date and transition

For public entities, the consensus would be effective for fiscal years and for interim periods within those years beginning after December 15, 2013. Nonpublic entities would be required to apply the consensus in fiscal years ending on or after December 15, 2014. Early adoption would be permitted.

Entities would be required to apply the guidance retrospectively to all prior periods presented for obligations resulting from joint and several liability arrangements existing as of the beginning of the fiscal year of adoption. Entities would be permitted to use hindsight in retrospectively applying the consensus.

Consensuses-for-exposure

Issue 13-A, "Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes"

The Task Force reached a consensus-for-exposure on Issue 13-A, which would add the Fed Funds Effective Swap Rate as a benchmark interest rate to the guidance in ASC 815, Derivatives and Hedging. Currently, ASC 815 identifies only U.S. Treasury rates and LIBOR as benchmark interest rates for purposes of applying hedge accounting.

Under ASC 815, an entity is permitted to specify the designated risk being hedged as the risk of changes in fair value or cash flows attributable to a benchmark interest rate. This provision is intended to allow an entity to account for a hedge of interest rate risk. The FASB has deemed U.S. Treasury rates and LIBOR to be acceptable benchmarks for hedging interest rate risk because they approximate a risk-free rate, are widely used as a basis for determining interest rates in financial instruments, and are commonly referenced in interest-rate-related transactions.

Since the benchmark interest rate guidance in ASC 815 was written, derivative instruments referencing an Overnight Indexed Swap (OIS) rate have become more prevalent, as has the use of an OIS rate for estimating the fair value of derivative contracts. The OIS rate, also referred to in the United States as the Fed Funds Effective Swap Rate, is a measure of the rate paid between financial institutions for short-term (overnight) financing.

Given the prevalence of the Fed Funds Effective Swap Rate in the terms and valuation of interest rate derivative contracts, and because it satisfies the criteria of a "benchmark interest rate" as described in the ASC Master Glossary, the Task Force tentatively decided that it would be identified in the Codification as a benchmark interest rate.

Under the proposed guidance, an entity would be permitted to apply hedge accounting referencing the Fed Funds Effective Swap Rate regardless of whether it has other hedges designated using LIBOR or U.S. Treasury rates at the date of adoption.

The consensus-for-exposure does not include any recurring disclosure requirements, and entities would apply the proposed guidance prospectively, with early adoption permitted.

Issue 13-C, "Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists"

Based on the FASB staff's response to a technical inquiry on implementing guidance on accounting for uncertain tax positions, current practice under U.S. GAAP is to present an unrecognized tax benefit as a liability, unless it is directly associated with a tax position taken in a tax year that results in or has resulted in recognition of a net operating loss (NOL) carryforward, in which case, it would be presented as a reduction to the deferred tax asset for the NOL. In Issue 13-C, the Task Force is reconsidering this position.

The Task Force tentatively decided to require entities to present an unrecognized tax benefit as a reduction to a deferred tax asset for an NOL or tax credit carryforward when the uncertain tax position would, or is available to, reduce the NOL or carryforward under the provisions of the tax law.

The proposed guidance would not include any recurring disclosure requirements.

Entities would be required to apply the guidance retrospectively, although the Task Force noted that the proposed ASU will include a question on whether retrospective application is unduly burdensome.

Other matters discussed

Issue 12-B, "Not-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Seek Compensation"

The Task Force did not reach a final consensus on Issue 12-B, which would provide guidance to not-for-profit entities on accounting for services contributed by personnel of an affiliate. Under the consensus-for-exposure, not-for-profit entities would recognize all contributed services provided by personnel of an affiliate at cost.

The Task Force identified several potential issues with implementing the proposed guidance and, given the potential for unintended consequences, asked the FASB staff to gather input from the Board's Not-for-Profit Advisory Committee. The Task Force will consider the Committee's feedback at a future meeting.

Issue 12-F, "Recognition of New Accounting Basis (Pushdown) in Certain Circumstances"

Under U.S. GAAP, SEC registrants are required to establish a new accounting basis in the financial statements of an entity that becomes substantially wholly owned in a purchase transaction, a practice that is commonly referred to as "pushdown" accounting. There is currently no such requirement in U.S. GAAP for non-SEC registrants.

In Issue 12-F, the Task Force is considering whether to require or permit entities to apply pushdown accounting and, if so, whether the application criterion would be acquiring substantially all of the controlling interest in a reporting entity or obtaining control of a reporting entity.

The Task Force decided that additional input from financial statement users is needed before a consensus-for-exposure can be reached on this issue. Accordingly, the FASB staff will perform this outreach to assess users' preferences regarding the application of pushdown accounting, and the Task Force will discuss the results at a future meeting.

Issue 12-H, "Accounting for Service Concession Arrangements"

U.S. GAAP does not currently include guidance on accounting for service concession arrangements, which are contracts under which a public sector entity grants a private entity the right to operate and/or maintain its infrastructure assets. Common examples of infrastructure assets subject to service concession arrangements include toll roads, hospitals, and prisons.

As a result, there is currently diversity in practice for accounting for service concession arrangements. For purposes of identifying the relevant accounting guidance, entities generally characterize a service concession arrangement as either a lease or as an intangible or financial asset. In Issue 12-H, the Task Force is considering whether to provide guidance that would resolve this diversity in practice.

Although the Task Force expressed support for requiring entities to recognize service concession arrangements as intangible or financial assets, the members decided to delay reaching a consensus-for-exposure until the language in the summary, including the scoping criteria which formed the basis for the discussion at the meeting, is recast as proposed guidance for review.

The Task Force will return to this issue at a future meeting.

Administrative items

The EITF recently added Issue 13-B, "Accounting for Investments in Tax Credits," to its agenda.

The Task Force will hold its next regularly scheduled meeting on March 14.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.