Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.Wednesday, December 13, 2017 FASB Board Meeting
Financial instruments—credit losses implementation. The Board discussed general implementation activities associated with Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as well as the following three specific issues:
- Troubled debt restructurings (TDRs): Transition for entities that elect to use a prepayment-adjusted effective interest rate (EIR) in a discounted cash flow (DCF) method to measure credit losses
- Variable-rate financial assets: Projections of changes in the independent factor or factors that determine the contractual interest rate on a variable-rate financial asset for the purposes of determining the EIR and estimating expected future cash flows
- Subsequent events: Consequential amendments made to Topic 855, Subsequent Events.
The Board decided to provide transition relief for entities that elect to use a prepayment-adjusted EIR in a DCF approach to measure credit losses on TDRs that exist as of the adoption date. As a result of this relief, entities would not be required to calculate the prepayment-adjusted EIR for each TDR as of the date preceding the asset restructure in accordance with the consensus reached by the Transition Resource Group (TRG) at the June 12, 2017 public meeting. Instead, entities may calculate the prepayment-adjusted EIR based on the original contractual terms of the loan and prepayment assumptions as of the date of adoption. An addendum to the June 12, 2017 TRG meeting minutes will be posted to the TRG website to reflect this decision.
Variable-Rate Financial Assets
The Board decided to allow entities to determine the EIR and expected cash flows (including expected prepayments and defaults) using their own expectations (projections) of future interest rate environments when estimating credit losses on variable-rate financial assets using a DCF method provided those expectations are reasonable and supportable. However, the use of projections will not be required. To reflect this decision, an amendment to the FASB Codification will be drafted as a part of the ongoing Codification improvements project.
The Board decided that when determining an estimate of credit losses, an entity should not recognize in the financial statements the effects of any events that occur after the balance sheet date but before financial statements are issued or are available to be issued. However, subsequent events should be reflected in the estimate of credit losses if an entity determines an error correction is necessary under Topic 250, Accounting Changes and Error Corrections.
Nonemployee share-based payment accounting improvements. The Board discussed feedback received on the proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The Board decided to:
- Retain the requirement to measure nonemployee share-based payment transactions by estimating the fair value of the equity instruments that an entity is obligated to issue.
- Include a rebuttable presumption that the contractual term would be an input to the option-pricing model for nonemployee share-based payment transactions unless an entity can support the use of an expected term. Use of an expected term would be allowed on an award-by-award basis.
- Require an entity, at transition, to measure unsettled nonemployee awards at fair value as of the adoption date. This requirement would not apply to vested equity-classified awards.
- Not permit an entity, at transition, to retrospectively adjust the basis of assets that include nonemployee share-based payment costs.
- Address a technical improvement to Topic 606, Revenue from Contracts with Customers, as part of the Codification Improvements project.
The Board decided that the amendments in the final Accounting Standards Update will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For nonpublic entities, the Board decided that the amendments in the final Update will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
Analysis of Costs and Benefits
The Board concluded that it has received sufficient information and analysis to make an informed decision on the issues presented and that the expected benefits of the amendments justify the expected costs.
The Board directed the staff to draft a final Accounting Standards Update for a vote by written ballot.
Revenue recognition of grants and contracts by not-for-profit entites. The Board discussed a summary of comments received on the proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. No decisions were made.
Distinguishing liabilities from equity (including convertible debt). The Board discussed the project plan for this project. The meeting was informational and no technical decisions were made.
Segment reporting. The Board discussed the project plan for the segment reporting project. The Board also discussed additional information that it would like the staff to include in its research and analysis for discussion at future Board meetings, including (1) the effect of removing the aggregation criteria on goodwill impairment testing and (2) the effect of requiring additional segment information on audit costs.
The Board also discussed the interaction between the segment reporting project and the project on disclosure framework: disclosure review, inventory. The Board had previously decided in that disclosure project to require that a public business entity disclose, in annual and interim periods, inventory by reportable segment or by component for each reportable segment if that information is regularly provided to the chief operating decision maker.
The Board discussed including this previous decision on inventory disclosure within the segment reporting project, rather than making a standalone change to the Topic 280, Segment Reporting, disclosure requirements within the project on disclosure framework: disclosure review, inventory.
Financial performance reporting—disaggregation of performance information. The Board discussed the staff’s research on the common presentation practices of private company financial statements and the project plan for the financial performance reporting project. The project plan discussed different ways to approach disaggregating functional lines into natural components.
The Board discussed how to identify and describe the functional expenses lines that the project should target for disaggregation, those being Cost of Goods Sold and Selling, General, and Administrative expense. Because of the limited presentation guidance for private companies, the Board directed the staff to first focus on public companies and the SEC’s reporting regulations. The presentation requirements in Regulation S-X could be used as a basis for describing the meaning of Cost of Goods Sold and Selling, General, and Administrative expense (or similar terms).
After evaluating the merits of this approach, the project would then consider whether and how to disaggregate other common functional expenses, such as research and development expense. The Board would later decide whether this type of disaggregation would be useful for private company users and, if so, how to adapt this approach for private companies.
The Board also discussed how to approach defining natural expense classification and directed the staff to start with the existing definition of natural expense classification in the Master Glossary of the Codification.