CURRENT PRACTICE ISSUE

Venezuela currency devalued

On February 8, 2013, Venezuela's government announced that it is devaluing the country's currency. Effective February 13, the fixed exchange rate changed from 4.30 bolivars to the U.S. dollar to 6.30 bolivars to the U.S. dollar. Under FASB Accounting Standards Codification® (ASC) 830-20-35-8, Foreign Currency Matters, an entity should not adjust its financial statements for a rate change that occurs after the reporting date. For example, a calendar-year reporting entity would not reflect the devaluation in its December 31, 2012 financial statements. Management should consider, however, whether it needs to disclose the impact of the devaluation in the 2012 financial statements or in MD&A.

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.

ASU proposed on recognition and measurement of financial assets and liabilities

Recently the FASB issued proposed Accounting Standards Update (ASU), Recognition and Measurement of Financial Assets and Financial Liabilities, to improve financial reporting by providing a comprehensive measurement framework for classifying and measuring financial instruments. All entities that hold financial assets or owe financial liabilities would be affected by the proposed guidance. The comment period on the proposed ASU ends May 15, 2013.

The main provisions of the proposed guidance are discussed below.

Financial assets

At initial recognition, an entity would first determine whether the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest, defined as the contractual cash flow characteristics criterion. A financial asset with cash flows that are not solely principal and interest would be measured at fair value, with all changes in fair value recognized in net income.

The classification and measurement of a financial asset would be based on the asset's contractual cash flow characteristics and on the entity's business model for managing the asset, rather than on its legal form—that is, whether the asset is a loan or a security. Accordingly, financial assets would be classified into one of three categories:

  • Amortized cost (AC): For financial assets that pass the contractual cash flow characteristics criterion and are managed along with other financial assets within a business model whose objective is to hold assets for collection of contractual cash flows
  • Fair value with qualifying changes in fair value recognized in other comprehensive income (FV-OCI): For financial assets that pass the contractual cash flow characteristics criterion and are managed along with other financial assets within a business model whose objective is both to hold assets to collect contractual cash flows and to sell assets
  • Fair value with all changes in fair value recognized in net income (FV-NI): For financial assets that do not qualify for either of the two categories above

Instruments that would subsequently be measured at AC and FV-OCI would initially be measured at transaction cost, while instruments that would be subsequently measured at FV-NI would initially be measured at fair value.

If the business model changes, an entity would be required to reclassify a financial asset. The reclassification would be accounted for prospectively, and the entity would recognize the reclassification on the last day of the reporting period in which the business model changes.

Equity investments

Under the proposed guidance, equity investments (excluding those accounted for under the equity method of accounting) would be measured at FV-NI.

A practicability exception would be provided for equity investments without readily determinable fair values that do not qualify for the net asset value per share expedient to estimate fair value in accordance with ASC 820-10-35-59, Fair Value Measurement. An entity that elects the practicability exception would be permitted to measure equity investments without readily determinable fair values at cost, adjusted for both impairment and changes that result from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The proposed guidance would also simplify the method for assessing the impairment of equity investments that qualify for the practicability exception and for investments accounted for under the equity method of accounting.

The existing fair value option for investments accounted for under the equity method of accounting would be eliminated. Under the proposed guidance, when an equity investment first qualifies for the equity method, an entity would be required to consider specified indicators to determine whether it holds the investment for sale. Held-for-sale investments would be measured at FV-NI. The proposed guidance would retain the separate, portfolio-wide option for not-for-profit entities, other than health care entities, to account for their equity method investments at fair value.

Financial liabilities

Financial liabilities would be measured at AC unless the entity's business strategy when it incurs the liability is to subsequently transact at fair value or the liability results from a short sale. Those liabilities would be recognized at FV-NI. In addition, when financial assets are used to settle nonrecourse financial liabilities, an entity would measure those financial liabilities on the same measurement basis as the related financial assets.

Hybrid instruments

The proposed guidance would eliminate the existing embedded derivative bifurcation requirements for hybrid financial assets and would require an entity to classify and measure hybrid financial assets that give rise to cash flows that are not solely payments of principal and interest at FV-NI. A hybrid nonfinancial asset would be measured at FV-NI if certain conditions are met. However, the proposed guidance would retain the embedded derivative bifurcation requirements for hybrid financial liabilities, requiring an entity to first apply the appropriate existing U.S. GAAP guidance on bifurcation and separation for a particular instrument before applying the proposed classification and measurement model.

Fair value option

The unconditional fair value option that currently permits an entity to elect to measure many financial instruments at FV-NI would be replaced with the following conditional fair value options:

  • An entity could elect to measure at FV-NI groups of financial assets and financial liabilities for which it manages the net exposure on a fair value basis.
  • An entity could elect a fair value option for certain qualifying hybrid financial liabilities to avoid bifurcating and separating an embedded derivative.
  • An entity could elect a fair value option for financial assets that qualify for the FV-OCI business model.

The fair value option would be eliminated for hybrid nonfinancial instruments, and a new fair value option for hybrid nonfinancial liabilities would be provided.

Presentation

A public entity would be required to present parenthetically on the face of the statement of financial position the fair value of financial assets and financial liabilities (except for demand-deposit liabilities) that are measured at amortized cost. The fair value amounts presented parenthetically would be measured consistent with the requirements in ASC 820. However, a nonpublic entity would not be required to present or disclose fair value amounts.

If a financial liability is measured at FV-NI under one of the conditional fair value options, an entity would be required to present separately in other comprehensive income the portion of the total change in the fair value of the liability that results from a change in the instrument-specific credit risk.

Effective date and transition requirements

The FASB has not proposed an effective date. The proposed guidance would be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Early adoption would be permitted of only the presentation guidance related to changes in instrument-specific credit risk for hybrid financial liabilities that qualify for the fair value option under the proposed model.

FASB In Focus

The Board has published FASB In Focus, "Proposed Accounting Standards Update – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", to provide additional information regarding this proposal.

Meetings held February 12 and 13

The FASB held a meeting on February 12 to discuss its project on leases and again on February 13 to discuss its projects on insurance contracts, liquidation basis of accounting, and disclosure framework. Highlights of these meetings are discussed below.

Leases

Although the current guidance in ASC 840, Leases, excludes licensing arrangements from its scope, the guidance in ASC 350, Intangibles – Goodwill and Other, directs preparers to analogize to existing leases guidance when determining the asset acquired in a software arrangement. Since the Board, as part of its joint leases project with the IASB, is proposing to change the accounting model for leases, the FASB decided that a consequential amendment would be made to remove the guidance in ASC 350 that requires entities to analogize to ASC 840 when determining the asset acquired in a software arrangement.

Insurance contracts

The FASB continued its discussions on the proposed guidance on accounting for insurance contracts and reached the following tentative decisions.

Measurement of investment components and the aggregate insurance contracts revenue

Board members tentatively agreed that the amount allocated to investment components and excluded from the premium presented in the statement of comprehensive income would be equal to the cash flows that an insurer estimates it will be obligated to pay its policyholders or their beneficiaries, regardless of whether an insured event occurs. The cash flows at each reporting date would be re-estimated based on current assumptions utilized in the measurement of the insurance contract liability, with any effect on insurance contract revenue allocated prospectively to periods in proportion to the insurer's estimate of the value of coverage (and any other services) to be provided in those periods.

Transition and effective date

When determining the margin at contract inception, insurers can measure the insurance contract liability and the margin using the insurer's determination of the portfolio immediately prior to transition. Contracts written or substantially modified after the transition date would be grouped into portfolios in accordance with the proposed guidance.

The FASB is not proposing an effective date; however, the effective date for nonpublic entities would be a minimum of one year after the effective date for public entities. Insurers would be required to restate all comparative periods presented. Early adoption would not be allowed.

The forthcoming Exposure Draft would include a 120-day comment period.

Liquidation basis of accounting

The Board discussed the liquidation basis of accounting project and reached the following tentative decisions.

Scope

The standard would apply to all entities except investment companies regulated under the SEC's Investment Company Act of 1940. In addition, the Board affirmed its previous decision that differential requirements for nonpublic companies would not be necessary.

Recognition and measurement

The standard would provide specific recognition and measurement guidance only for an entity's assets and the accruals of expected future income and expenses. An entity would therefore recognize and measure its liabilities under other current GAAP requirements. The entity might adjust the balance of a liability to reflect changes in the entity's assumptions about the timing and amount of repayments of the liability; however, the entity would not anticipate legal release.

The Board discussed how an entity would apply its previous decisions on recognition and measurement to items that the entity had not previously recognized as assets but which the entity plans to sell in liquidation. Those items would be recognized in the statement of net assets in liquidation separately from the accrual of expected income and expenses, and an entity would not deduct estimated disposal costs from the cash it expects to receive in exchange for those items.

Presentation

The Board clarified that the standard would not require an entity to present information about any of its activities that precede the date when liquidation becomes imminent.

Effective date and transition

The standard would be effective for entities that enter liquidation during reporting periods beginning after December 15, 2013, with early adoption permitted.

An entity would apply the liquidation basis of accounting from the date when liquidation becomes imminent. In addition, the first statement of changes in net assets would present only changes in net assets that occurred during the period since liquidation became imminent. An entity that is already applying the liquidation basis of accounting as of the effective date of the standard would be required to apply a cumulative-effect adjustment.

The staff was directed to draft a final Accounting Standards Update for vote by written ballot.

Disclosure framework

The Board discussed comments received on the Invitation to Comment, Disclosure Framework, but no decisions were reached.

Private Company Council meeting held February 12

At its meeting on February 12, the Private Company Council (PCC) decided to add the following three projects to its agenda:

  • Consolidation of variable interest entities, specifically with respect to related-party arrangements
  • Accounting for "plain vanilla" interest rate swaps with single counterparties, which are used to convert variable interest rates on loans to fixed interest rates
  • Recognition and measurement of identifiable intangible assets acquired in business combinations, including Level 3 fair value measurements and disclosures

The PCC did not add to its agenda accounting for uncertain tax positions, since specific practice issues that require immediate attention were not identified. However, the Council directed the FASB staff to prepare preliminary background information on the following two topics for consideration at the next PCC meeting:

  • Stock-based compensation
  • Development-stage enterprises

The PCC and the FASB also decided to seek additional public input on the FASB's Invitation to Comment, Private Company Decision-Making Framework. The proposal is expected to be re-exposed in March, with a 90-day comment period.

The next meeting of the PCC is May 7.

New series of XBRL guides issued

Implementation guide

The FASB recently issued FASB U.S. GAAP Financial Reporting Taxonomy Implementation Guide Series, Subsequent Events, to demonstrate the modeling for required disclosures for events occurring subsequent to the end of a public company's reporting period.

Style guide

The Style Guide is not an implementation guide for U.S. Securities and Exchange Commission (SEC) filers. While various users may find the information in this guide useful, users looking for guidance to conform with SEC XBRL filing requirements should look to the SEC EDGAR Filer Manual and other information provided on the SEC website.

The FASB also recently issued FASB U.S. GAAP Financial Reporting Taxonomy Style Guide Series, Definition Components & Structure, to provide guidance for creating useful and consistent element definitions as contained in documentation labels within the U.S. GAAP Financial Reporting Taxonomy.

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.