In recent years and continuing, there is a lot of discussion regarding the FASB and IASB’s efforts toward convergence as well as IFRS adoption in the U.S. although adoption is looking less likely (based upon recent
SEC staff plan). For some, 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.
Revenue Recognition
The FASB and IASB recently decided to re-expose this converged standard for a period of 120 days in November, 2011. The
Financial Reporting Center Brief has been updated based upon recent Board decisions, and will be updated for information the re-exposed standard contains. Depending upon comments received it is likely the final standard may be issued by the end of 2013. While the period until the standard is effective is expected to be lengthy, the standard is expected to be challenging and time-consuming to implement given its changes.
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. In reality, you need to apply the proposed revenue recognition standard to specific contracts to determine what its effect will be. It is very difficult to truly know the effect without applying it directly to contracts and working through all the principles. You are encouraged to monitor progress of this standard as it will have significant and pervasive effects on any entity—public, private, and not-for-profit—that have contracts with customers.
Leases
Currently, the proposed lease standard is tracking slightly behind revenue recognition. The FASB and IASB have stated they will re-expose the standards in the second half of 2012. As decisions continued to be reached, the
Financial Reporting Center Brief will be updated.
As initially proposed, this standard differs from current U.S. GAAP significantly. Currently in U.S. GAAP leases are separated into two categories:
- Capital leases where an entity recognizes an asset and a liability
- Operating leases where an entity does not recognize an asset and liability
Under the proposed standard, all leases would result in asset and liability recognition, with perhaps a practicability exception for very short term leases. The leasing industry is a significant business globally and thus this proposal has the potential to greatly affect that industry. 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.
Financial Instruments
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 two parts:
- Classification and measurement – the question of fair value or historic cost
- Impairment
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 FASB is still determining its stance on each, the second part, impairment, has a significant effect on banks. The issue of loan losses and loan loss reserves is core to the industry and the positions taken by the Board are being heavily questioned by this community. There is no doubt that during the midst of the economic crises and still today, financial regulators call for earlier recognition of losses, but how and exactly when remain to be determined. As the FASB reaches decisions, the
Financial Reporting Center Brief will be updated.