United States: On The Horizon - February 5, 2013

Board issues scope clarification of disclosure requirements on offsetting

Recently, the FASB issued Accounting Standards Update (ASU) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify that the disclosure requirements in ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, do not apply to trade receivables.

The ASU also clarifies that the disclosure requirements in ASU 2011-11 apply to the following items when they are offset under either FASB Accounting Standards Codification® (ASC) 210-20-45, Balance Sheet: Offsetting, or ASC 815-10-45, Derivatives and Hedging, or are subject to a master netting arrangement or similar agreement:

  • Derivatives within the scope of ASC 815, including bifurcated embedded derivatives

  • Repurchase agreements and reverse repurchase agreements

  • Securities borrowing and securities lending transactions

The amendments apply to annual reporting periods beginning on or after January 1, 2013 and to interim periods within those annual periods, which is consistent with the effective date of ASU 2011-11. An entity should retrospectively provide the disclosures required for all comparative periods presented.

Meetings held January 30 and 31

The FASB and IASB held a joint meeting on January 30 to discuss their revenue recognition, leases, and insurance contracts projects. In addition, the FASB met on January 31 to discuss its projects on going concern and fair value disclosures for nonpublic companies, and to approve the consensuses-for-exposure and consensuses reached by the EITF on January 17. Highlights of these meetings are discussed below.

Revenue recognition

The FASB and the IASB continued discussing comments received on the 2011 Exposure Draft (ED), Revenue from Contracts with Customers, focusing on the following topics.


The Boards tentatively affirmed the scope of the proposed revenue guidance, including the definition of a customer in the ED. The Boards also tentatively decided to clarify that (1) a collaborative arrangement as described in the ED would not be limited to the development and commercialization of a product, and (2) such an arrangement would fall within the scope of the revenue guidance if the counterparty to the arrangement meets the definition of a customer. Finally, the Boards tentatively decided to clarify that if guidance on how to separate and initially measure the transaction exists in other applicable standards, that guidance would be applied first; otherwise, the proposed revenue guidance would be applied.

Repurchase agreements

The Boards tentatively decided the following related to accounting for repurchase agreements in the proposed ED:

  • A sale and leaseback transaction with a put option that has an exercise price less than the original sales price would be accounted for as a financing transaction rather than as a lease if the holder of the put option has a significant economic incentive to exercise the option.

  • The word unconditional as it relates to forwards, call options, and put options would be removed from the implementation guidance in the final revenue guidance.

  • For a product financing arrangement in which an entity sells a product to another entity (such as a contract manufacturer) and later repurchases the product as part of a larger component for a higher price, the processing costs would not be included in the repurchase price when determining the amount of interest.

  • The following implementation guidance would not be amended:

    • The sale of goods to a customer with a guaranteed minimum resale value. The Boards confirmed that such an arrangement would not preclude the transfer of control.

    • The sale of goods to a customer that are subsequently repurchased and leased to the customer’s customer. The Boards affirmed that this type of arrangement is not a repurchase agreement and that an entity would consider the principal versus agent considerations in determining whether the customer had obtained control.

  • An entity would not be required to consider whether a significant economic incentive not to exercise a call option exists when determining if control has been transferred.

Impact of proposed revenue guidance on asset managers

The Boards tentatively decided that the performance-based incentive fees of asset managers would be subject to the requirements for constraint on the amount of revenue recognized and that certain fees would therefore not be recognized until they are no longer subject to significant reversal. The Boards also tentatively decided that the proposed contract costs guidance in the ED would apply to up-front commission costs in asset management arrangements. The FASB also tentatively decided to retain the cost guidance in ASC 946-605-25-8, Financial Services – Investment Companies: Revenue Recognition.

Transfers of assets that are not an output of an entity’s ordinary activities

The Boards tentatively affirmed the revised guidance on transfers of nonfinancial assets that are not part of an entity’s ordinary activities. Those amendments would require an entity to apply the control and measurement requirements in the proposed ED, including the requirements on constraining revenue, in determining when to derecognize the asset and the amount of the consideration to be included in the gain or loss on the transfer. The requirements in the proposed ED to determine when a contract exists would also be applied to those transactions.


The Boards discussed the following questions about the identification of lease components and the classification of leases, which arose while drafting the revised Exposure Draft:

  • Would a contract for a lease of more than one asset be treated as a lease of only one component or as a lease of multiple components that should be accounted for separately?

  • How would an entity apply the classification criteria if a lessee obtains the right to use an asset or assets with both property and nonproperty elements?

  • If a lease includes both land and building elements, would the entity apply the classification criteria to each separate element?

The Boards tentatively reached the following decisions:

  • The guidance for identifying separate lease components in a contract would be based on the guidance in the revised revenue recognition ED. Under that guidance, an entity would consider a right to use the underlying assets to be separate lease components if the lessee could benefit from the use of the asset either on its own or together with other resources that are readily available to the lessee. An entity would account for each separate lease component as a separate lease.

  • When a lease contract includes the right to use more than one asset, an entity would determine the nature of the underlying asset for classification purposes based on the nature of the primary asset in the lease component.

  • When a lease contract includes a lease component with both land and a building, an entity would assess whether the lease term is a major part of the remaining economic life of the building, but would not be required to allocate the lease payments between the land and building.

Insurance contracts

The FASB and the IASB continued their joint discussions on the proposed guidance on accounting for insurance contracts, which focused on the presentation of insurance contract revenue when there are changes in the pattern of expected claims and transition proposals related to insurance contract revenue.

The Boards tentatively decided that if there is a change in the expected pattern of insurance coverage or other services to be provided in the future for a portfolio of insurance contracts accounted for using the building block approach, the remaining contractual revenue would be reallocated prospectively to reflect the latest estimates of the pattern. A change in the expected pattern of future claims could indicate a change in the expected pattern of coverage.

In addition, the FASB tentatively decided that for insurance contracts accounted for under the building block approach that are in force when an entity transitions to the new guidance, contractual revenue earned after the transition would be recognized as follows:

  • When margin is determined through retrospective application: The remaining insurance contract revenue to be earned at the date of transition would be determined retrospectively, based on assumptions applied to the retrospective determination of the margin.

  • When retrospective application is not practicable to determine the margin due to a requirement to make significant estimates not based solely on objective information: Insurance contract revenue would be presumed to equal the amount of the liability for the remaining coverage, excluding any investment components, recorded at the date of transition, including accrued interest. The liability for the remaining coverage at transition would not consist of losses on initial recognition or of changes in the estimate of future cash flows recognized in profit or loss after the inception of the contracts. The remaining insurance contract revenue to be earned would be limited to the total expected cumulative consideration for in-force policies in the portfolio and would be allocated to periods after the transition in proportion to the value of coverage the insurer has provided for the period.

Going concern

At its January 31 meeting, the FASB continued its discussions of a new financial reporting model for an entity’s going concern assessment and related disclosures.

The proposed guidance would require management to assess an entity’s potential to continue as a going concern at each reporting period, including interim periods. Disclosure in the financial statements would be required when existing events or conditions indicate that it is more likely than not that the entity will be unable to meet its obligations within a reasonable time from the date of the financial statements. The Board intends that “more likely than not” would be viewed as a benchmark, not as a bright line threshold, and that only the mitigating effects of management plans that are not outside the ordinary course of business would be considered in the assessment. The proposal would define “outside the ordinary course of business” and would include examples of management plans that meet the definition. The disclosures would provide financial statement users with information regarding the events that led management to conclude that the entity may be unable to meet its obligations, along with the possible effects of those events and management’s plans.

The Board also tentatively decided that nonpublic entities would not be required to state in the financial statements when substantial doubt about an entity’s ability to continue as a going concern exists because it is probable that an entity will be unable to meet its obligations within a reasonable time from the date of the financial statements. Nonpublic entities would be required to apply all other provisions of the going concern model.

The FASB directed the staff to draft a proposed ASU.

Clarification of nonpublic company exemption from fair value disclosures

The FASB affirmed the guidance in the proposed ASU, Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities, which stipulates that nonpublic entities are not required to disclose the level of the fair value hierarchy in which fair value measurements are categorized for items that are disclosed, but not measured, at fair value on the face of the statement of financial position, as required in ASC 825-10-50-10(d), Financial Instruments.

The FASB staff is drafting a final ASU, which will be effective on issuance.

Ratification of EITF decisions

The FASB ratified the following final consensuses reached by the EITF on January 17:

  • 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”

  • 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”

In addition, the Board approved the following EITF consensuses-for-exposure also reached on January 17:

  • Issue 13-A, “Inclusion of the Fed Funds Effective Swap Rate (Or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes”

  • Issue 13-C, “Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists”

The consensuses-for-exposure will be issued as proposed ASUs for a 60-day comment period.

Descriptions of these issues and the decisions reached are summarized in the January 22 edition of On the Horizon.


Expiration date extended on exemption for certain security-based swaps

The SEC recently extended the expiration date for the exemption from registering certain security-based swaps from February 11, 2013 to February 11, 2014.

In July 2011, the SEC adopted Interim Final Rules, titled Exemptions for Security-Based Swaps, to exempt security-based swaps that were considered to be “security-based swap agreements” prior to July 16, 2011, but are now defined as “securities” under the Dodd-Frank Act, from the following:

  • The registration requirements of the Securities Exchange Act of 1934

  • All provisions of the Securities Act of 1933, excluding the antifraud provisions in Section 17(a)

  • The provisions of the Trust Indenture Act of 1939

These Interim Final Rules will remain in effect until the SEC finalizes the compliance date for the Proposed Rule, Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies.

CAQ releases highlights from November 2012 IPTF meeting

The highlights of joint meetings between the Center for Audit Quality’s SEC Regulations Committee’s International Practices Task Force and the SEC staff summarize issues discussed. The highlights do not represent official positions of the AICPA, the FASB, or the IASB and are not authoritative positions or interpretations issued by the SEC or its staff.

The CAQ recently issued the highlights of the joint meeting of its International Practices Task Force (IPTF) and the SEC staff on November 20, 2012, which address the following topics:

  • Reapplication of IFRS 1: The IASB amended IFRS 1, First-Time Adoption of International Financial Reporting Standards, to allow for the repeat application of IFRS 1 if a company readopts IFRS. As a result, the definition of a “first-time adopter” in Form 20-F is no longer consistent with that in IFRS 1. The SEC staff indicated that foreign private issuers that wish to reapply IFRS 1 and the related accommodations available in Form 20-F should consult with the SEC staff to determine whether reapplication would be appropriate considering the particular facts and circumstances.

  • One year of significant acquiree financial statements prepared using IFRS: The SEC staff indicated that it would not object to an entity including an audit report that includes an exception under IFRS solely for the absence of the IFRS financial statements in the year of adopting IFRS if the issuer must file only one year of financial statements of a significant acquiree that qualifies as a foreign business to comply with Regulation S-X, Rule 3-05, Financial Statements of Businesses Acquired or to be Acquired. The SEC staff noted that this accommodation is consistent with its policy of allowing an exception for the absence of comparative prior-year financial statements prepared under IFRS as issued by the IASB.

  • Transition guidance related to the adoption of IFRS 10, IFRS 11, and IFRS 12: IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities, require retrospective application to the year immediately preceding the adoption date of the new standards. The SEC staff indicated that foreign private issuers that do not retrospectively apply the standards to other earlier years presented in their SEC filings should clearly identify on the face of the financial statements which periods were not retrospectively adjusted. In addition, similar disclosure and labeling should be included elsewhere in the filing as applicable, for example, accompanying MD&A and the selected financial data table.

  • Monitoring inflation in certain countries: The SEC staff expects that the economies of Belarus, Venezuela, and, starting no later than the first reporting period beginning on or after January 1, 2013, South Sudan should be considered highly inflationary. The staff also expects issuers to cease treating the Democratic Republic of Congo economy as highly inflationary no later than the first reporting period beginning on or after January 1, 2013. The IPTF also noted that data indicates that the highly inflationary threshold could be exceeded in the near future for Ethiopia, Guinea, Islamic Republic of Iran, Yemen, and Sudan.

  • Satisfying the registration statement requirements for restated financial statements with financial information prepared using IFRS as issued by the IASB: The Task Force and the SEC staff discussed the interaction between the requirements of certain SEC registration statements for restated financial statements, and the requirement in IAS 10, Events after the Reporting Period, to have a single authorized issue date for evaluating adjusting and non-adjusting subsequent events for recognition in the financial statements. The IPTF and SEC staff agreed to discuss the issue at a future meeting and to consider various possible alternatives for compliance with registration requirements for restated IFRS financial statements.

  • XBRL for issuers that report using IFRS: The SEC staff reported that the Commission has not yet approved the IFRS XBRL taxonomy and that the staff therefore does not expect that calendar-year IFRS filers will have to comply with XBRL in their 2012 annual reports.

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.

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