FASB Update. FASB Exempts Private Companies from Variable Interest Entity Guidance Affects: Private Companies

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1 FASB Update New Guidance Raises the Threshold for Discontinued Operations On April 10, the FASB issued ASU , Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation. Under the new guidance, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. The primary reason for the change relates to concerns that too many disposals of small groups of assets that are recurring in nature qualify for discontinued operations under current U.S. GAAP. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The ASU is required to be adopted by public business entities (and not-for-profit entities that issue securities or are conduit bond obligors) in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. It is effective for all other entities in annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, However, all entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. FASB Exempts Private Companies from Variable Interest Entity Guidance On March 20, the FASB issued ASU , Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements, which simplifies the accounting for a type of arrangement often used by private companies. The ASU exempts many private companies from applying variable interest entity (VIE) guidance to lessor companies under common control. Under this guidance, private companies that meet certain conditions may opt out of the consolidated reporting requirements for VIEs, which are separate legal entities private companies often set up to house their real estate and other assets. The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is permitted. This means that an eligible private company could elect the option in its 2013 financial statements, as long as those financial statements have not been made available for issuance prior to the release of the ASU. Page 1

2 For more information on this topic, see our thought leadership article: FASB Makes Technical Corrections to the Accounting Standards Codification On March 14, the FASB issued ASU , Technical Corrections and Improvements Related to Glossary Terms. The amendments in this ASU represent changes to clarify the Master Glossary of the Accounting Standards Codification, consolidate multiple instances of the same term into a single definition, or make minor improvements to the Master Glossary that are not expected to result in substantive changes to the application of existing guidance or create a significant administrative cost to most entities. Additionally, the amendments will make the Master Glossary easier to understand, as well as reduce the number of terms appearing in the Master Glossary. The ASU was effective upon issuance for both public entities and nonpublic entities. The amendments in this ASU do not have transition guidance. Service Concession Arrangements On January 23, the FASB issued ASU , Service Concession Arrangements, which specifies that service concession arrangements within the ASU s scope (1) should not be accounted for as leases under FASB Accounting Standards Codification (ASC) 840, Leases, and (2) do not constitute property, plant, and equipment for recognition purposes. The ASU aims to resolve the diversity in practice that has resulted whereby some entities account for these arrangements under leasing guidance and others look to other guidance. It also provides criteria for determining whether an arrangement will qualify as a service concession arrangement and prohibits accounting for these arrangements as leases. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, For entities other than public business entities, the amendments are effective for annual periods beginning after December Page 2

3 15, 2014, and interim periods within annual periods beginning after December 15, Early implementation is allowed. Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure On January 17, the FASB issued ASU , Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which amends FASB ASC 310, Receivables, to clarify when an entity is considered to have obtained physical possession (from an in-substance possession or foreclosure) of a residential real estate property collateralizing a mortgage loan. The ASU attempts to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). It requires a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, For other entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early implementation of the guidance is permitted. The guidance can be implemented using either a modified retrospective transition method or a prospective transition method. Interest Rate Swaps On January 16, the FASB issued ASU , Accounting for Certain Receive-Variable, Pay- Fixed Interest Rate Swaps, which provides a simplified hedge accounting approach for certain interest-rate swaps that private companies other than financial institutions enter to convert variable-rate debt to fixed-rate debt. Under the simplified hedge accounting approach, a private company that is not a financial institution would be able to apply hedge accounting to its receive-variable, pay-fixed interest rate swaps as long as the terms of the swap and the related debt are aligned. Page 3

4 The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is also permitted for any annual or interim period for which an entity s financial statements have not yet been made available for issuance. An entity that elects to apply the simplified hedge accounting approach can apply it to any qualifying swap existing as of that date and to any future qualifying swap. For more information on this topic, see our thought leadership article: Amortization of Goodwill On January 16, the FASB issued ASU , Accounting for Goodwill, which allows a private company to elect to amortize goodwill on a straight-line basis over a period of ten years or over a shorter period if the company demonstrates that another useful life is more appropriate. In addition, goodwill would be subject to impairment testing only upon the occurrence of a triggering event. A company that elects this accounting alternative is required to make an accounting policy decision to test goodwill for impairment at either the company level or the reporting unit level. The ASU is applied prospectively to (1) goodwill existing as of the beginning of the period of adoption and (2) all new goodwill recognized in annual periods beginning after December 15, 2014, and in interim periods within annual periods thereafter. Private companies would commence amortization of goodwill existing as of the beginning of the period of adoption. Early application is permitted for any annual or interim period for which an entity s financial statements have not yet been made available for issuance. For more information on this topic, see our thought leadership article: Page 4

5 Accounting for Investments in Qualified Affordable Housing Projects On January 15, the FASB issued ASU , Accounting for Investments in Qualified Affordable Housing Projects, which amends FASB ASC 323, Investments Equity Method and Joint Ventures, to (1) simplify the amortization method an entity uses and (2) modify the criteria that must be met before an entity can elect to use ASC 323 s measurement and presentation alternative, including the simplified amortization method, for certain investments in qualified affordable housing projects. The ASU provides criteria that must be met in order to apply a proportional amortization method to Low-Income Housing Tax Credit investments and provides guidance on the method used to amortize the investment, the impairment approach, and the eligibility criteria for entities that have other arrangements (e.g., loans) with the limited liability entity. This alternative permits the entity to present the investment s performance net of the related tax benefits as part of income tax expense. The ASU is effective for public business entities for interim and annual periods beginning after December 15, For all other entities, the guidance is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early adoption is permitted in the annual period for which financial statements have not been issued. Page 5