Newsletter

August 2017

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Financial Accounting Standards Board ('FASB') Accounting Standard Updates

The FASB’s recently released standards (‘ASU’) that may affect our non public company clients during the upcoming reporting period are summarized below. The summary is intended only as general information and should not be relied upon as being definitive or all-inclusive. All final Financial Accounting Standards Board (‘FASB’) guidance can be accessed at their website at www.fasb.org.

Please see APPENDIX for list of other ASUs that were released by FASB.

Accounting Standards Update 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force)

Issued: May 2015

Summary: Under ASU 2015-07, investments measured at net asset value (‘NAV’), as a practical expedient for fair value, are excluded from the fair value hierarchy. Currently, these investments are categorized within the fair value hierarchy level in LEVEL 2 or 3 based on the investment’s liquidity. It is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. Although classification within the fair value hierarchy is no longer required, an entity must disclose the amount of investments measured using the NAV practical expedient in order to permit reconciliation of the fair value of investments in the hierarchy to the corresponding line items in the balance sheet. For entities that elect the practical expedient, it is still required to make certain disclosures about the nature and risks of the investments.

Effective date: Fiscal years beginning after December 15, 2016 and interim periods within those fiscal years.

 

Accounting Standards Update (‘Update’) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

Issued: September 2015

Summary: ASU 2015-16 requires adjustments to provisional amounts, used by the acquirer in a business combination, that are identified during the measurement period, to be recognized in the reporting period in which the adjustment amounts are determined. Measurement period begins on the acquisition date and ends on the date the information is received, but may not extend beyond one year after the acquisition date. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

In addition, the Update would require an entity to disclose (either on the face of the financial statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this Update should be applied prospectively to measurement-period adjustments that occur after the effective date of this Update.

Effective date: Fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017.

 

Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory

Issued: July 2015

Summary: ASU 2015-11 simplifies the current “lower of cost or market” test by eliminating the multiple measures of ‘market’. Inventory within the scope of the ASU (e.g. FIFO or average cost) would be measured as the lower of cost or net realizable value (“NRV”). NRV retains its current definition, “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”.

Inventory excluded from the scope of the ASU (i.e., LIFO or the retail inventory method) will continue to be measured at the lower of cost or market.

Effective date: Fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017.

 

Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis

Issued: February 2015

Summary: ASU 2015-02 (“Standard”) changes the consolidation analysis for all reporting entities. The changes primarily affect the consolidation of limited partnerships (“LP”) and their equivalents (e.g., limited liability corporations). Existing consolidation guidance for corporations that are not variable interest entities (VIE) is unchanged. Highlights of the Standard include but not limited to:

  • The consolidation model specific to limited partnerships is eliminated and the requirement for a general partner to consolidate a limited partnership no longer exists;
  • Greater emphasis is placed on the risk of loss with regard to the evaluation of a VIE. Consolidation is not driven by majority voting rights;
  • Certain legal entities may no longer be required to be consolidated on the basis of fee arrangements;
  • Changes how related party relationships affect the consolidation of VIEs, thus reducing the application of related-party guidance;
  • Certain money market funds will no longer be subject to the consolidation guidance;
  • One step closer to IFRS which has only one consolidation model.

Effective date: Fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.

 

Accounting Standards Update 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

Issued: March 2016

Summary: ASU 2016-07 requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, i.e., the date the investor obtains significant influence over the operating and financial policies of an investee or increase in the level of ownership. The ASU eliminates the previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment had been held, but did not qualify for the equity method of accounting. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method.

Effective date: Fiscal years and interim periods within those fiscal years, beginning after December 15, 2016.

Conclusion:

The standards explained in the newsletter are just samples that must be considered when preparing your financial statements. We expect FASB to be active in introducing new standards as the complexities of business transactions grow and accounting practice adapts to keep up with these changes. We view the goals of the FASB are to bring greater transparency to financial statement and to provide investors and other financial statements users with better tools for evaluating the quality of reported earnings and future performance. It also aims to simplify the reporting for impacted entities and develops a reporting methodology that is consistent across all reporting entities. Lastly, we do see a visible trend of FASB attempting to implement these changes to more closely align U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).

At Kakimoto & Nagashima LLP., each professional are experts in their field of knowledge and exercise their judgment in interpreting how these standards apply to different companies. The implementation of the standards can vary according to the type of industry and even between companies in the same industrial sector. In order to ensure the best possible interpretation, we need to have a good understanding of the client’s business and industry sector. It is our genuine intent to work closely with each of our clients in assuring that standards are appropriately and timely implemented. Should you have any questions pertaining to the new standards, please contact your account professional or the office at (310) 320-2700.

Appendix: Other ASUs Effective in 2017 for Calendar Year - End Non Public Companies

  • ASU 2015-04: Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
  • ASU 2015-09: Financial Services - Insurance (Topic 944) Disclosures about Short-Duration Contracts
  • ASU 2016-17: Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
  • ASU 2017-02: Not-for-Profit Entities-Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity
  • ASU 2017-03: Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures(Topic 323)
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