FASB

Board discusses revenue recognition at March 20 meeting

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 20, the Board resumed its discussion of the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED), concentrating on the disclosure, transition, and effective date requirements for nonpublic companies, which are discussed below.

Disclosures

The Board tentatively decided not to specify interim disclosure requirements for nonpublic entities. In addition, the Board tentatively decided, or affirmed previous tentative decisions, that the following disclosure requirements would be optional for nonpublic entities:

Quantitative disclosures about disaggregated revenue in paragraphs 114 and 115 of the 2011 ED

  • Disclosures about contract balances and assets recognized from the costs to obtain or fulfill a contract with a customer
  • The amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue
  • For performance obligations satisfied over time, an explanation of why methods used to recognize revenue over time are a faithful depiction of the transfer of goods or services
  • For performance obligations satisfied at a point in time, significant judgments made in evaluating when the customer obtains control of promised goods or services
  • Information about methods, inputs, and assumptions used to
  • Determine the transaction price
  • Estimate stand-alone selling prices of promised goods or services
  • Measure obligations for returns, refunds, and other similar obligations

Transition

The Board tentatively decided that nonpublic entities would not be afforded an alternative transition method. Refer to the February 26 edition of On the Horizon for a summary of the tentative transition guidance.

Effective date

The Board also tentatively agreed that nonpublic entities would apply the proposed guidance for annual reporting periods beginning after December 15, 2017 and for interim and annual periods thereafter.

Nonpublic entities could early adopt the proposed guidance, but no earlier than public entities.

Public entities would be required to apply the proposed guidance for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. Earlier application would be prohibited.

FASB selected to join IASB advisory forum

The FASB will be among 12 inaugural members to serve on the newly formed advisory committee to the IASB, called the Accounting Standards Advisory Forum (ASAF).

Established earlier this year by the IFRS Foundation, the ASAF aims to improve cooperation among global accounting standard setters and will advise the IASB in developing international standards.

SEC

"No-action" letter permits certain loans to executives and directors

In a March 4 "no-action" letter, the SEC Office of Chief Counsel in the Division of Corporation Finance (CorpFin) stated that an issuer's particular equity-based incentive compensation arrangement involving loans to executive officers and directors would not violate Section 13(k) of the Securities Exchange Act of 1934, which prohibits "issuers," as defined in Section 2 of the Sarbanes-Oxley Act of 2002, from directly or indirectly extending credit in the form of a personal loan to any director or executive officer or the equivalent thereof.

Under the particular incentive compensation arrangement in question, participating employees receive restricted shares of the issuer's stock, and the recipient transfers those shares to a trust administered by an independent trustee, who obtains term loans from a third-party banking institution using the granted shares as collateral. The loan proceeds are distributed to the award recipient as a loan to cover tax obligations arising from the award, which are generally incurred at the grant date under this program rather than at the vesting date. At the maturity of each loan, the trustee will sell sufficient shares to repay the loan and will distribute the remaining shares and any residual cash to the employee participant debt-free. The issuer has some ministerial or administrative duties under this arrangement, but otherwise does not support the program through guarantees or extending credit, and neither encourages nor discourages employee participation.

The letter cautions that the position expressed therein is based on the representations described in the issuer's letter, and that different facts or conditions might require CorpFin to reach a different conclusion.

SEC staff addresses reporting issues encountered by smaller issuers

The SEC staff recently released its updated 2012 slide presentation, "SEC CF Staff Review of Common Financial Reporting Issues Facing Smaller Issuers," which provides staff guidance on common issues encountered by the CorpFin staff when reviewing filings of smaller reporting issuers.

The presentation highlights three issues that did not appear in the 2011 presentation:

  • Inappropriately treating recent economic conditions as an aberration when evaluating the realizability of deferred tax assets
  • "Cheap stock" and disclosure requirements for share-based payment awards
  • Audit reports referring to "auditing standards of the PCAOB" instead of "the standards of the PCAOB"

Many of the issues addressed in the presentation are carried forward from the prior year, including

  • Complexities in reporting reverse mergers and "backdoor" registrations, including an illustration of a backdoor registration accounted for as a recapitalization
  • Pitfalls in identification, valuation, and presentation of embedded conversion features and free-standing warrants
  • Determination of the fair value of equity instruments issued to consummate certain transactions, such as compensation arrangements and business combinations

These slides were presented at the Forums on Auditing in the Small Business Environment hosted by the PCAOB during 2012 and are accompanied by detailed notes that provide additional guidance from the SEC staff.

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