MHMMessenger
October 2015
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
Third Quarter Accounting and Financial Reporting Update
While we continue to await final standards for financial
instruments and leasing as well as clarifications to
revenue recognition, the third quarter marked another
period of relatively narrow changes from the Financial
Accounting Standards Board (FASB). The majority of
the sixteen Accounting Standards Updates (ASUs)
that have been finalized during 2015 relate to narrow
scope projects identified by the FASB. ASUs issued
in the third quarter include narrow scope changes
to inventory, derivative instruments, business
combinations and more widely applicable changes to
benefit plan presentations and disclosures.
The deferral of the effective date for the implementation
of Accounting Standards Codification (ASC) Topic
606 was also finalized. Activity at the Public Company
Accounting Oversight Board (PCAOB) consisted of
approval of the reorganization of PCAOB Auditing
Standards and certain requests for comment and
discussion papers.
The following provides a brief overview of these
accounting developments during the third quarter.
A more detailed discussion of these standards and
other proposals is available from our archived webinar
series.
our
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Financial Accounting Standards Board
Inventory Changes
FASB ASU 2015-11, Inventory (Topic 330),
Simplifying the Measurement of Inventory establishes
a streamlined approach for how companies measure
inventory. Upon implementation (effective date for
years beginning after December 15, 2016 with early
adoption permitted), companies will be required to
record inventory at the lower of cost or net realizable
value. This change replaces current U.S. generally
accepted accounting principles (GAAP), which
requires entities to measure inventory at the lower of
cost or market. The change to inventory measurement
does not apply to companies that have adopted a lastin, first-out (LIFO) accounting policy or companies
that use the retail method. See Modifications Coming
to Inventory Measurement for more information.
Employee Benefit Plans
FASB ASU 2015, Plan Accounting: Defined Accounting:
Defined Benefit Pension Plans (Topic 960), Defined
Contribution Pension Plans (Topic 962), Health and
Welfare Benefit Plans (Topic 965): (Part I) Fully
Benefit-Responsive Investment Contracts, (Part II)
Plan Investment Disclosures, (Part III) Measurement
Date Practical Expedient (EITF Issue 15-C) includes
several changes to the presentation and disclosure
requirements for employee benefit plans. The ASU
eliminates the requirement to record fully benefitresponsive investment contracts at fair value,
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reduces plan investment disclosures and creates a
measurement date practical expedient for reporting
periods that do not end on the last day of a calendar
month. The ASU is effective for years beginning
after December 15, 2015, however, early adoption
is permitted. Fully benefit responsive investment
contracts will be recorded at contract value rather
than fair value, therefore, the fair value disclosure
requirements will no longer apply to these instruments.
An important adoption point is to distinguish between
direct investments in fully benefit responsive contracts
and indirect investments, such as through a stable
value fund. The contract value reporting provisions
are only applicable to direct investments in such
contracts. See FASB’s New Employee Benefit Plans
Reporting Simplification Rules for more information.
Derivative Financial Instruments
The Emerging Issues Task Force finalized its project
deliberations on electricity contracts in nodal energy
markets, resulting in the issuance of ASU 2015-13,
Derivatives and Hedging (Topic 815): Application
of the Normal Purchases and Normal Sales Scope
Exception to Certain Electricity Contracts within Nodal
Energy Markets. The ASU clarifies that electricity
contracts for nodal energy markets can qualify for the
normal purchases and normal sales scope exception
to Topic 815. The normal purchases and normal sales
scope exception states that qualifying contracts do not
violate the physical settlement criteria and therefore,
are eligible for application of the normal purchase
and normal sale scope exception, assuming all other
criteria are also met. This clarification is intended to
eliminate diversity in practice for such contracts. As
a reminder, companies must elect to apply the scope
exception to qualifying contracts. See Changes to the
Accounting for Derivatives and Other Updates at the
EITF for additional discussion. The provisions of the
ASU are effective immediately and must be applied
prospectively.
Business Combinations
The FASB addressed concerns regarding the
retrospective application of adjustments related
to provisional amounts originally recorded in the
application of the accounting for business combinations
in ASU 2015-16, Business Combinations (Topic 815):
Simplifying the Accounting for Measurement Period
Adjustments. The amendments require the acquirer
in a business combination to recognize adjustments
to provision amounts that are identified during the
measurement period in the reporting period in which
the adjustment amount is determined. The acquirer
should also recognize the effect of earnings, if any,
that occur because of the change to the provisional
amounts. This effect should be calculated as if the
accounting had been completed at the acquisition
date. The ASU is effective for periods beginning after
December 15, 2015, for public entities and for years
beginning after December 15, 2016, for all other
companies.
Revenue Recognition
During the third quarter, the FASB officially deferred
the effective date of ASU 2014-09, Revenue from
Contracts with Customers (Topic 606) by one year.
The FASB also released exposure drafts to address
narrow scope improvements and principal versus
agent considerations that had been identified by the
Transition Resource Group. The latter clarifies that
the principal versus agent consideration occurs below
the contract level; that is, each specified good or
service must be evaluated to determine whether the
reporting entity is acting as a principal or agent. The
narrow scope improvements clarify collectability and
add a criterion to the alternative recognition model for
situations in which collectability is not probable.
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Coming Soon
Public Companies and Issuers
Derivatives and Hedging
In August 2015, the Securities and Exchange
Commission (SEC) finalized a requirement that
entities must disclose the ratio of the CEO’s total
compensation to the median compensation for all
employees of the company. The rule takes effect for
the 2017 calendar year. Other compensation policies
are also being considered, including a clawback rule
that would require companies to recover erroneously
distributed incentive-based benefits paid to executives
and a pay vs. performance requirement that would
require companies to disclose the relationship between
company performance and executive compensation.
See Final and Proposed SEC Rules Target Executive
Compensation for more information.
The FASB has continued to deliberate its project
on hedging and derivative instruments. Recent final
decisions have included: some additional time to
prepare hedge documentation, an elimination of the
requirement to perform a quarterly effectiveness test,
which is only required if facts and circumstances
change, and the elimination of the requirement to
quantify ineffectiveness (changes in fair value of the
hedging derivative would no longer be required to
be split between effective and ineffective portions).
Besides the effectiveness threshold, the FASB has
also reached decisions related to component hedging,
disclosures, hedge documentation, de-designation,
benchmark interest rates and use of the short cut
method. Further updates are expected in the fourth
quarter.
Materiality
The FASB released an exposure draft related to
assessing the materiality of financial statement
disclosures (Notes to Financial Statements (Topic
235) – Assessing Whether Disclosures are Material).
The materiality evaluation presents challenges
because it is widely considered a local concept, not
one defined by the FASB, and it often appears in an
auditing context—performance materiality, material
weakness, etc. In a recent proposed accounting
standard update, the FASB clarifies that materiality
is applied quantitatively and qualitatively to individual
disclosures or in aggregate to the financial statement
as a whole. An omission of an immaterial disclosure
should not be considered an accounting error.
Comments on the proposed accounting standards
update are due by December 8, 2015.
Additionally, the SEC is weighing revisions to the
audit committee disclosures to give investors a better
understanding of the audit committee’s activities and
evaluate its performance. The SEC is also exploring
the use of audit quality measures to evaluate audit
professionals, the audit process and the audit results.
For specific comments, questions or concerns about
how these final and proposed standards changes
affect your company, please contact Mike Loritz or
Mark Winiarski of MHM’s Professional Standards
Group. Mike can be reached at mloritz@cbiz.com
or 816.945.5611. Mark can be reached at
mwiniarski@cbiz.com or 816.945.5614.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
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