While IFRS adoption in the U.S. appears to be less and less likely, the FASB and IASB continue efforts toward convergence. Some of you may track every detail of these discussions, but for others you may not have the opportunity to track these events or may have deemed them too long-term to focus on. Through the AICPA’s Financial Reporting Center, we aim to keep you informed of the hottest issues letting you focus on what you need to know, when you need to know it.
Whether you work in industry or public practice, your work will be affected by upcoming changes to U.S. GAAP. While there were numerous topics the FASB and IASB committed to converge, there are three topics of specific interest at this time. Let’s deem these the “Big 3” because as currently proposed they are major changes to U.S. GAAP and have broad implications to most entities, even not-for-profits:
While you may typically wait until a standard becomes final or even effective before examining it, these are three you simply can’t delay on. They are being heavily debated and you need to understand how they affect your entity or clients you serve early to ensure you’re prepared for implementation.
The FASB and IASB (Boards) will issue a single standard for revenue recognition, expected to be released during the summer of 2013, which would converge U.S. GAAP and IFRS and apply to all industries and transactions. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. This standard has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers.
The Boards tentatively decided that public entities will be required to apply the revenue recognition standard for annual and interim reporting periods beginning on or after January 1, 2017. Early adoption is prohibited for public entities. Nonpublic entities will be required to apply the revenue standard for annual and interim reporting periods beginning after January 1, 2018. Nonpublic entities may also elect to apply the revenue recognition standard for periods beginning after January 1, 2017 (the same as public entities but not earlier).
The Boards tentatively decided that the revenue recognition standard could be applied retrospectively including any combination of practical expedients discussed, or recognize the cumulative effect of initially applying the new revenue recognition standard as an adjustment to the opening balance of retained earnings in the year of initial application.
This project’s intent is to address widespread concern that many lease obligations are not recorded on the balance sheet and that the current accounting for leases does not represent the economics of all lease transactions. The FASB and IASB previously agreed that leases should be recorded on the balance sheet, but have continued to discuss the classification and pattern of expenses in the income statement. In a decision reached June 13, 2012, the Boards decided on an approach in which some lease contracts would be accounted for using an approach similar to that proposed in the 2010 leases Exposure Draft and some leases would be accounted for using an approach that results in a straight-line lease expense. The Boards plan to release an Exposure Draft in the Q4 2012; however, the leasing industry is a significant business globally and it may provide political pressures that affect the final standard. There are already political discussions being held that could raise more questions on the proposed direction of this project. One may expect the debate on this standard to continue to be heated as entities examine the provisions and understand its application. More insight will become available as to when to expect the final standard once the re-exposed standard is posted and comments begin to come in, but many speculate a final standard may be issued in mid-2013. Assuming a 2013 issuance, the earliest effective date is likely 2016.
Accounting for financial instruments has been deemed the highest priority of both the FASB and IASB because of the role it played in the recent financial crisis. However, it is an extremely complex area without an easy solution making it difficult to predict what may happen and when. The topic has been divided into the following parts:
- Classification and measurement
All entities that have financial instruments would be affected by the proposed standard. However, the extent of the effect would depend upon the relative significance of financial instruments to an entity’s operations and financial position as well as the entity’s business strategy. While the Boards are still determining stance on each, impairment and classification and measurement may be re-exposed in Q4 2012. A final standard may be possible sometime in 2013.