FASB MEETING HELD MARCH 13
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.
On March 13, the Board reached tentative decisions on two projects, investment companies and discontinued operations, which are summarized below.
Investment companies
After considering the results of the staff's outreach to constituents, the Board agreed to exclude from the final standard the disclosure requirements for when an investment company invests in another investment company. Instead, the Board will focus on that guidance after the final standard has been issued.
The Board directed the staff to draft a final Accounting Standards Update for a vote.
Discontinued operations
Reacting to stakeholders' concerns, the Board tentatively decided to amend the proposed definition of a "discontinued operation" in order to replace the cash-generating unit concept with the current U.S. GAAP definition of a component. Accordingly, an entity would be able to apply the discontinued operations reporting guidance to a component (or group of components) that represents a separate major line of business or major geographic area of operations.
EITF MEETING HELD MARCH 14
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 March 14, the EITF discussed four issues and reached two final consensuses and one consensus-for-exposure, as summarized below.
The FASB will consider ratification of the consensuses and consensus-for-exposure at its March 29 meeting. Board-ratified consensuses will be issued as Accounting Standards Updates (ASUs) and will be incorporated into the FASB Accounting Standards Codification® (ASC). A Board-ratified consensus-for-exposure will be posted to the FASB website for comment as a proposed ASU.
Final consensuses
Issue 12-B, "Not-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Charge the Recipient NFP"
Background
Many not-for-profit entities (NFPs) have arrangements whereby services are provided to the NFP by the personnel of an affiliate. Long-standing guidance in ASC 958-605, Not-for-Profit Entities: Revenue Recognition, calls for the recognition of contributed services at fair value if the services require specialized skills. The guidance does not stipulate, however, whether personnel costs incurred by an affiliate on behalf of an NFP should be recognized in the financial statements of the NFP receiving the services. As a result, practice has been diverse on this matter, with some NFPs recognizing only affiliate services that meet the specialized skills criterion, while others recognize all services provided by an affiliate.
Current developments
The Task Force reached a final consensus on Issue 12-B, affirming its consensus-for-exposure that an NFP must recognize as contributions services that are provided by the personnel of an affiliate and for which the affiliate does not charge the recipient NFP. The consensus applies regardless of whether the affiliate is a for-profit or not-for-profit entity.
Recipient NFPs would be required to measure the contributed services at cost, except in unusual circumstances where the cost significantly overstates or understates the value of the services received, in which case the entity would be permitted to measure the contribution at fair value. Such unusual circumstances could arise if, for example, a highly compensated CFO of a for-profit entity that sponsors a private not-for-profit foundation provides basic bookkeeping services to the foundation. The fair value measurement basis in these circumstances would be optional, and could be applied service by service.
The EITF also affirmed the proposed presentation and disclosure requirements in its consensus-for-exposure. Therefore, recipient NFPs within the scope of ASC 954, Health Care Entities, would report increases in net assets associated with services received from personnel of an affiliate at no charge as equity transfers. The consensus includes no presentation requirements for other recipient NFPs, other than a prohibition from presenting such increases in net assets as a contra-expense or contra-asset.
No incremental recurring disclosures would be required. The Task Force affirmed that the guidance must be applied prospectively, with an option for modified retrospective application that would include prior-period adjustments but no adjustment to the beginning balance of net assets in the earliest period presented. Early adoption is permitted.
The guidance will be effective for annual periods beginning after June 15, 2014 and for interim and annual periods thereafter.
Issue 12-G, "Accounting for the Difference between the Fair Value of the Assets and the Fair Value of the Liabilities of a Consolidated Collateralized Financing Entity"
Background
Issue 12-G addresses the diversity in practice associated with a reporting entity's measurement of assets and beneficial interests in a consolidated collateralized financing entity (CFE). A CFE is a variable interest entity that holds financial assets and issues beneficial interests that are financial liabilities having recourse only to the CFE's financial assets.
Reporting entities are sometimes required to consolidate a CFE under the guidance on consolidating variable interest entities (VIEs) in ASC 810-10, Consolidation. For example, although a reporting entity holds neither beneficial interests nor equity in a CFE, it might qualify as the primary beneficiary because it manages the CFE under a subordinated fee structure.
Upon adopting the guidance in ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (formerly FASB Statement 167, Amendments to FASB Interpretation No. 46(R)), the primary beneficiaries of CFEs often elected the fair value option to measure the CFE's assets and beneficial interests. Due to variances in inputs, such as liquidity discounts, duration, and principal markets, the fair value of the CFE's assets might have differed from the fair value of its liabilities (beneficial interests).
As reporting entities implemented the guidance in ASU 2009-17, they either (a) recognized the initial difference between the fair value of a CFE's assets and liabilities in comprehensive income, but allocated the amount to the noncontrolling interest holders and then reclassified it to appropriated retained earnings in the statement of changes in equity, or (b) recorded the difference as a direct adjustment to appropriated retained earnings.
Under ASC 810-10, subsequent gains and losses resulting from changes in the fair value of a consolidated CFE's assets and liabilities must be recorded in the reporting entity's net income. However, after adopting the guidance in ASU 2009-17, some reporting entities recognized these changes in fair value through earnings, but then attributed them to noncontrolling interest holders—excluding the changes from income available to common shareholders—and then reclassified them to appropriated retained earnings in the statement of changes in equity.
Current developments
The Task Force reached a final consensus on Issue 12-G, affirming its consensus-for-exposure stipulating that reporting entities that consolidate a CFE and elect the fair value option under ASC 825, Financial Instruments, must apply the practical expedient in ASC 820-10-35-18D, Fair Value Measurement. This practical expedient allows an entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (or pay to transfer a net short position) for a particular risk exposure in an orderly transaction with a market participant at the measurement date under current market conditions. Accordingly, a reporting entity that consolidates a CFE and elects the fair value option would recognize both the financial assets and beneficial interests of the CFE at either the fair value of the assets or liabilities, whichever is more reliably determinable.
The EITF decided that an entity with a nominal amount of nonparticipating equity could qualify as a CFE and that a CFE temporarily holding nonfinancial assets, such as real estate obtained through foreclosure, would not preclude a reporting entity from applying the practical expedient. Further, the Task Force decided that a reporting entity would not apply the practical expedient to beneficial interests in a CFE that represent compensation for services, such as management fees.
Reporting entities would apply the guidance prospectively with a cumulative effect adjustment in the year of adoption. Reporting entities that did not previously elect the fair value option for measuring the assets and beneficial interests of a consolidated CFE would be allowed to make a one-time election of the fair value option upon adopting the final consensus. Entities that previously elected the fair value option would be permitted to apply the guidance on a full retrospective basis. Early adoption would be permitted.
Reporting entities would be permitted to provide disclosures about inputs to the fair value measurement of CFEs' financial assets only, rather than for both the financial assets and beneficial interests, because the practical expedient allows the financial assets and beneficial interests of a CFE to be measured as a net position. This provision would streamline the disclosure requirements for entities applying the final consensus.
The final consensus would be effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2013. Nonpublic entities would be required to apply the guidance in the first annual period beginning after December 15, 2014 and in interim and annual periods thereafter.
Consensus-for-exposure
Issue 13-B, "Accounting for Investments in Affordable Housing Tax Credits"
Background
For over 25 years the U.S. government has offered the Low Income Housing Tax Credit (LIHTC) as an incentive for investment in the construction and rehabilitation of low income housing. Investors can capture the benefits of LIHTCs through limited partnership investments in entities that either own individual qualified affordable housing projects or invest in multiple operating entities that own qualified affordable housing projects. Investors in a LIHTC investment typically receive most of their return from the tax credits and other tax benefits, including benefits generated from the operating losses of the limited partnership investment.
EITF Issue 94-1, "Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects" (codified in ASC 323-740, Investments – Equity Method and Joint Ventures: Income Taxes), allows reporting entities to account for LIHTC investments using an effective yield method if all of the following criteria are met:
- The availability of the tax credits is guaranteed by a creditworthy entity.
- The projected yield based solely on the cash flows from the tax credits is positive.
- The investor is a limited partner in the affordable housing project for both legal and tax purposes, and its liability is limited to its capital investment.
Under the effective yield method, an LIHTC investor recognizes the tax credit net of the amortization of the limited partnership investment as a component of income taxes attributable to continuing operations, and therefore does not recognize pre-tax losses in the financial statements.
For those LIHTC investments that are not accounted for using the effective yield method, the equity method of accounting is generally required. This method separates the reporting of the investment performance and the tax credits, resulting in the investment performance being reported within pre-tax income and the tax credits within after-tax (net) income. Since the investment performance is typically a loss because the tax benefits are presented separately from the investment performance, the after-tax net benefit from the investment is not displayed as a single line item in the investor's financial statements.
The Task Force has been considering whether to amend the criteria for applying the effective yield method based on feedback from constituents indicating that the criteria are too restrictive and result in accounting that does not adequately convey to financial statement users the economic characteristics of most LIHTC investments.
Current developments
The Task Force tentatively decided that an entity could elect to use the effective yield method if it satisfies all of the following criteria:
- It is probable that the tax credits will be available to the investor.
- The investor retains no operational influence over the investment, and substantially all of the projected benefits result from tax credits and other tax benefits, such as deductible operating losses.
- The investor's projected yield based on the cash flows from the tax credits and other tax benefits is positive.
- The investor is a limited partner (or a member if the investment is structured as a limited liability company) in the affordable housing project for both legal and tax purposes, and its liability is limited to its capital investment.
Entities that do not qualify for or elect not to apply the effective yield method would account for LIHTC investments under ASC 970-323, Real Estate – General: Investments – Equity Method and Joint Ventures.
The proposed guidance would be applied on a retrospective basis according to the guidance in ASC 250-10-45-5 through 45-10, Accounting Changes and Error Corrections, and early adoption would be permitted.
Other matter discussed
Issue 12-F, "Recognition of New Accounting Basis (Pushdown) in Certain Circumstances"
Background
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.
Current developments
After discussing the results of the FASB staff's outreach regarding preferences in applying pushdown accounting, the EITF asked the staff to research a model that would either require or provide the option to apply pushdown accounting when an acquirer obtains control of the reporting entity. The Task Force will discuss the results of the staff's research at a future meeting.
SEC
NASDAQ proposes internal audit requirement
NASDAQ recently notified the SEC of a proposed rule change that would require companies listed on its exchange to establish and maintain an internal audit function. Companies would be permitted to outsource their internal audit function to satisfy the proposed requirement.
The audit committee would have the responsibility to oversee the internal audit function and would be required to discuss the responsibilities, budget, and staffing of the internal audit function with its external auditors. The proposal would ensure that NASDAQ-listed companies have a mechanism to regularly review and assess their systems of internal control, identify weaknesses, and develop remedial measures, and that management and audit committee members receive ongoing information about risk management processes and systems of internal control.
Under the proposed rule, companies listed on NASDAQ on or before June 30, 2013 would be required to establish an internal audit function no later than December 31, 2013. Companies listed after June 30, 2013 would be required to establish an internal audit function prior to listing.
Comments on the proposed rule must be submitted to the Commission by March 29, 2013.
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