Each year, the Financial Accounting Standard Board (FASB) issues a varying amount of accounting standards updates (ASUs) to the accounting standards codification (ASC or codification) covering a wide range of topics with varying degrees of complexity. These ASUs can be major changes in accounting concepts such as what most entities have seen with the adoption of the new revenue recognition standards (Topic 606) and as minor as clarifying updates to the codification. All of these changes can be difficult to understand and, even more so, harder to implement. VonLehman is excited to issue a semi-annual article covering the most significant standards affecting entities that are near or nearing the implementation period in an easy to digest format.
ASU 2018-17 (Topic 810) Targeted Improvements to Related Party Guidance for Variable Interest Entities
Prior to issuance of this standard, private entities had to apply variable interest entity (VIE) guidance for legal entities under common control. A VIE is a legal entity in which an equity holder has controlling interest, but not majority ownership. In addition, the legal entity’s equity also doesn’t support its operations, the equity holders do not have majority control, and the equity holders do not reap the benefits of gains/losses associated with ownership. This essentially meant that if the legal entity met the VIE definition, it must be disclosed in the financials of the reporting entity. If reporting entity was the primary beneficiary (entity that has the most control over economic activities), then the VIE must be consolidated with the reporting entity.
Under Topic 810, reporting entities may elect to not apply the VIE guidance to legal entities under common control if both the parent and legal entity being evaluated for consolidation are not public business entities. To apply this guidance, the reporting entity should make an accounting policy election to not apply the VIE guidance for all current and future legal entities under common control. Detailed disclosures about the parent entity’s exposure to the legal entity under common control are still required with this accounting policy election.
This standard is effective for years beginning after December 15, 2020, and should be applied retrospectively. So, what does this mean for your entity? If you have a VIE that qualifies for this election, you could potentially simplify the reporting required for the reporting entity as the consolidation process can often be tedious. There are many factors to consider before making this election, so be sure to weigh them as this is an all-or-nothing election.
ASU 2016-02 (Topic 842) Leases
Like the ASU for revenue recognition, which was a major change from previous accounting guidance, Topic 842 also represents a major change. Under previous accounting guidance, leases were either of an operating or capital lease nature. Operating leases were recognized only as expenses on the income statement and capital leases were recognized with a capital lease asset, depreciated like other property, plant, and equipment, an entity may hold, and a capital lease liability which was unraveled over time with the lease payments. Topic 842 intends to move most leases to the balance sheet as if they were capital leases.
This standard is effective for years beginning after December 15, 2021. Please refer to this article by Andrew Donohoe for more information on this standard.
ASU 2019-12 (Topic 740) Simplifying the Accounting for Income Taxes
This ASU intends to simplify the accounting for income taxes by removing certain exceptions as well as clarifying certain requirements. The notable exceptions removed include:
- Approach for intraperiod tax allocation when there is an operating loss but gain from other items;
- for foreign subsidiaries that become an equity method investment or for foreign equity method subsidiaries that become subsidiaries removal of the requirement to recognize a deferred tax liability;
- removal of requirement to calculate interim period income taxes when a YTD loss exceeds anticipated loss for year.
In addition to the exceptions that were removed, this ASU also added the following notable requirements:
- Recognition of franchise taxes if based on income;
- specifies that the allocation of current and deferred tax expense of a consolidated entity to an entity that is not subject to tax is not required;
- requirement to reflect the effect of enacted change in tax laws in the annual effective tax rate; and
- added an evaluation to assess if the step up in tax basis of goodwill is part of a business combination or separate transaction.
This standard is effective for years beginning after December 15, 2021, and early adoption is permitted. Since this standard covers many facets of income taxes, how each of these amendments is adopted may vary.
SAS 134 Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements
While the FASB issues overarching accounting standards, there are also Statements on Auditing Standards (SAS) issued by the Auditing Standards Board, part of the AICPA, that also have an impact on how audits are conducted. This new SAS changes the presentation of the independent auditor’s opinion. Stay tuned for our next article which dives into what this means for your audit opinion and how you can prepare.
While there are many ASUs that have been issued and will soon go into effect, we hope this overview will assist you in the timely and successful implementation of any required changes.
For additional information or guidance related to this article, contact Stephanie Allgeyer at sallgeyer@vlcpa.com or 800.887.0434.
Disclaimer: The information discussed herein is intended for use by non-public business entities as public business entities may have varying requirements and implementation dates.
