On the Horizon

Balance Sheet Classification of Debt


In Q1 2019 the FASB expects to issue a final Accounting Standards Update (ASU) that simplifies current guidance around determining whether debt should be classified as current or noncurrent in a classified balance sheet.

Many stakeholders told the Board that current guidance in this area is overly complex. To address this issue, the new ASU will replace current, fact-specific guidance with an overarching, cohesive principle for determining whether debt, or other instruments within the scope of the ASU, should be classified as a noncurrent liability as of the balance sheet date. The principle is that a company or organization should classify an instrument as noncurrent if either of the following criteria is met as of the balance sheet date:
  1. The liability is contractually due to be settled in current assets or through the creation of current liabilities more than one year (or operating cycle, if longer) after the balance sheet date or
  2. The company or organization has a contractual right to defer settlement of the liability for a period greater than one year (or operating cycle, if longer) after the balance sheet date.
The Board expects the amendments in the ASU will reduce the cost and complexity for preparers and auditors when determining whether debt should be classified as current or noncurrent in the balance sheet while providing more consistent and transparent information to financial statement users.

For public companies, the ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other companies and organizations, the ASU will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption will be permitted.  More information about effective dates and transition will be available in the final standard.

 

Codification Improvements—Financial Instruments

 
In November, the FASB will issue a proposed ASU that would clarify and improve areas of guidance related to the recently issued standards on Credit Losses, Hedging, and Recognition and Measurement.
 
Since issuing the three final ASUs, the FASB staff has been working with stakeholders to address inquiries and obtain feedback on the guidance through the formal Credit Losses Transition Resource Group and informally through other stakeholder communications. The potential corrections, clarifications, and improvements to the amendments in each ASU were suggested through these stakeholder interactions.

 

EITF 18-B: Improvements to Accounting for Episodic Television Series


In November, the FASB will issue a proposed ASU that would align the accounting for production costs for films and episodic content produced for television and streaming services. The proposed ASU is based on an EITF consensus-for-exposure.

Current accounting guidance provides different capitalization requirements for entertainment industry content production depending on the type of content being produced. For films, production costs are capitalized. For episodic content (for example, a TV series that airs a new episode each week), production costs are capitalized subject to a constraint based on contracted revenues in the initial and secondary markets.

The entertainment industry has experienced a significant change in production and distribution models in recent years. For example, online streaming services and new participants into the industry have introduced different business models, such as subscription-based revenue models. As a result, some stakeholders have questioned whether the constraint in the capitalization guidance for episodic content still provides relevant information to investors considering these changes.

The proposed ASU would converge the capitalization guidance for films and episodic content. It would also address when a company or organization should assess films and license agreements for program material for impairment at the film-group level.

The proposed ASU would amend the presentation and disclosure requirements for films and episodic content. Furthermore, it would make conforming amendments to Subtopic 920-350, Entertainment—Broadcasters—Intangibles—Goodwill and Other, to align its impairment and presentation and disclosure guidance with the Task Force’s decisions.

 

Facilitation of the Effects of the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) Transition on Financial Reporting


The FASB recently added to its agenda a project to consider changes to GAAP necessitated by the market-wide transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) and other alternative reference rates.

On October 25, the FASB issued an ASU that expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. It added the Overnight Index Swap Rate based on SOFR as a U.S. benchmark interest rate to facilitate the transition from LIBOR to SOFR and to provide sufficient lead time for organizations to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes.

The Board decided to limit the scope of the ASU to newly designated hedging relationships to avoid delaying a company or organization’s ability to apply hedge accounting for new hedging relationships based on SOFR. However, the new project will consider implications of the transition of existing LIBOR-based financial instruments to SOFR and the specific hedge accounting issues that should be addressed.

As part of the new project, the Board also will consider more broadly how the LIBOR to SOFR transition may affect other areas of accounting, and what changes to GAAP will be necessitated by the market-wide transition.