September 24, 2020
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Thursday, September 24, 2020. The following topics were discussed:
Accounting Standards and Financial Statements in the Current Environment: FASAC members discussed various topics that are important in the current environment.
Government Assistance: Overall, Council members indicated that there is not an urgent need for the Board to develop specific guidance for government assistance and acknowledged the difficulty involved in developing new guidance in this area. Some users and other investors noted that they are currently receiving the information necessary to understand the impact government assistance may have on their analysis of a company. Some preparers and practitioners indicated that the application of the guidance within Subtopic 958-605 on conditional contributions can be difficult to apply.
Impairment of Nonfinancial Assets: Overall, Council members indicated that current GAAP is sufficient when determining whether an asset is impaired. Some Council members highlighted the increased potential for a company to have impairments of nonfinancial assets as a result of the current environment. As a result, some companies have incurred an increase in costs and complexity in applying GAAP, including the audit process, given the significant judgment involved in the impairment analysis. Concerns were raised by some Council members about how to consider temporary declines in the value of nonfinancial assets when performing a going concern assessment. Some users and other investors noted that the recognition of impairments of nonfinancial assets may not provide decision-useful information—in particular when the value of those assets has temporarily declined and is expected to increase in future periods. Some preparers stated that a triggering event for impairment could be the accumulation of multiple factors over time, which can cause some challenges in applying the current impairment guidance. Some Council members noted that the guidance is unclear whether private companies that do not prepare interim financial statements should consider subsequent developments in their impairment test.
Accounting for Research and Development: FASAC members discussed whether improvements to the accounting for research and development (R&D) should be a priority for the FASB.
Council members were strongly aligned in the view that while the topic of R&D has received more focus given the current environment, the accounting for R&D is not a significant issue that should be given high priority for the Board’s agenda at this time. If the Board did consider adding a project on R&D, some Council members indicated that the Board could pursue a broad project on the recognition of intangible assets. Other Council members suggested a narrower objective (such as improving consistency in the accounting for purchased R&D). Other Council members, including users and other investors, suggested that the Board consider a project focused on improving the disclosures about R&D. Preparers expressed concerns about disclosing information about R&D that is proprietary and that could result in a competitive disadvantage.
Some Council members noted that the current differences in the accounting for R&D may be warranted because the nature of the acquired R&D can be different than internally generated R&D. Other Council members stated that the current accounting is inconsistent and that there are complexities in applying the guidance. Some users and other investors indicated that they are primarily focused on cash flows and less focused on whether R&D-related assets are capitalized or whether R&D costs are expensed. Council members discussed the international accounting guidance in IAS 38, Intangible Assets, for R&D. Some Council members raised concerns about the costs, complexity, and operationality of that guidance.
Implementation of Credit Losses: FASAC members participated in the first of a series of discussions on the FASB’s post-implementation review of Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (the credit losses standard), focusing on the initial costs and benefits of the standard. In particular, the discussion focused on the application of the credit losses standard to trade receivables.
Overall, FASAC members stated that the adoption of the standard had an insignificant overall financial impact on the allowance for credit losses related to trade receivables. Some preparers and practitioners indicated that there were initial implementation costs to develop process changes and to understand how to apply the guidance to trade receivables in comparison to financing receivables; however, the initial costs were relatively insignificant. Others indicated concern about the ongoing costs of applying the guidance to trade receivables, in particular for private companies. Some Council members noted the complexity of determining the applicability of the standard, specifically to nonfinancial companies. Some preparers indicated that initial benefits of the standard included: homogenizing their writeoff policy, increasing controls around their customer credit risk analysis, and improving the classification of financial assets as trade receivables or financing receivables. Some users and other investors indicated that trade receivables are generally insignificant in their analysis of a company.
Given that the credit losses standard had a relatively insignificant impact on the allowance for credit losses related to trade receivables, Council members discussed whether the credit losses standard should be amended to either exclude trade receivables or to provide an option to not apply the guidance to trade receivables. Council members expressed mixed views. Some Council members supported an option to not apply the guidance to trade receivables. Others supported retaining the existing guidance given (a) that it has been implemented by many companies and may be similar to prior practices and (b) concerns about having different accounting guidance for trade receivables and other receivables. Another Council member noted that there may be a benefit for private companies applying the credit losses standard to trade receivables as it could provide more standardization in how entities calculate their allowance for credit losses related to trade receivables.The FASB chair provided highlights on FASB activities that were not otherwise on the agenda for the Council meeting and SEC and PCAOB staff members commented on current issues and activities.