2011 Accounting Standards Updates in a Nutshell—a Primer
During the period from January to June 2011, the Financial Accounting Standards Board (FASB
or the Board) has issued five accounting standards updates (ASUs). A synopsis of each of those
accounting standards updates is provided below in a chronological order.
I.
ASU No. 2011-01: Receivables (Topic 310) Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20
Applicability and Effective Date
The amendments in ASU No. 2011-01 apply to all public-entity creditors that modify
financing receivables within the scope of the disclosure requirements about troubled debt
restructurings in ASU No. 2010-20. Nonpublic entities are not affected by the
amendments in this ASU.
ASU No. 2011-01 became effective upon issuance in January 2011.
The Rationale
Issued in January 2011, ASU No. 2011-01 is intended to address concerns raised by
stakeholders that the introduction of new disclosure requirements about troubled debt
restructurings (pursuant to ASU No. 2010-20) in one period followed by a change in
what constitutes a troubled debt restructuring (see ASU No. 2011-02 below) shortly
thereafter would be burdensome for preparers and may not provide financial statement
users with useful information. The Board heeded the call to defer the effective date of
the disclosure requirements for public entities about troubled debt restructurings in ASU
No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, to be concurrent with the
effective date of the guidance for determining what constitutes a troubled debt
restructuring, as presented in the then proposed ASU, Receivables (Topic 310):
Clarifications to Accounting for Troubled Debt Restructurings by Creditors (now ASU
No. 2011-02, Receivables (Topic 310):.A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring (as summarized below ASU No. 201101).
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II.
ASU No. 2011-02: Receivables (Topic 310) A Creditor’s Determination of Whether
a Restructuring Is a Troubled Debt Restructuring
Applicability and Effective Date
The amendments in ASU No. 2011-02 apply to all creditors, both public and nonpublic,
that restructure receivables that fall within the scope of Subtopic 310-40,
Receivables—Troubled Debt Restructurings by Creditors.
For public entities, ASU No. 2011-02 is effective for the first interim or annual period
beginning on or after June 15, 2011, and should be applied retrospectively to the
beginning of the annual period of adoption, except for receivables that are newly
considered impaired, in which case the entity apply the amendments prospectively for the
first interim or annual period beginning on or after June 15, 2011. In addition, an entity
should disclose the information required by ASU No. 2010-20 (paragraphs 310-10-50-33
through 50-34), which was deferred by ASU No. 2011-01 (as summarized above).
For nonpublic entities, ASU No. 2011-02 is effective for annual periods ending on or
after December 15, 2012, including interim periods within those annual periods.
Early adoption is permitted for both public and nonpublic entities. A nonpublic entity
may early adopt the amendments for any interim period of the fiscal year of adoption. A
nonpublic entity that elects early adoption should apply the provisions of ASU No. 201102 retrospectively to restructurings occurring on or after the beginning of the fiscal year
of adoption.
The Rationale
Issued in April 2011, ASU No. 2011-02 is intended to address the existing diversity in
practice in identifying restructurings of receivables that constitute troubled debt
restructurings for creditors, and promote consistent application of U.S. GAAP for debt
restructurings.
Key Provisions
In identifying restructurings of receivables that constitute troubled debt restructurings,
creditors are REQUIRED to separately conclude that BOTH of the following exist:
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a) The restructuring constitutes a concession.
i.
If a debtor does not otherwise have access to funds at a market rate for
debt with similar risk characteristics as the restructured debt, the
restructuring would be considered to be at a below-market rate, which may
indicate that the creditor has granted a concession. In that circumstance, a
creditor should consider all aspects of the restructuring in determining
whether it has granted a concession. If a creditor determines that it has
granted a concession, the creditor must make a separate assessment about
whether the debtor is experiencing financial difficulties to determine
whether the restructuring constitutes a troubled debt restructuring.
ii.
A temporary or permanent increase in the contractual interest rate as a
result of a restructuring does not preclude the restructuring from being
considered a concession because the new contractual interest rate on the
restructured debt could still be below the market interest rate for new debt
with similar risk characteristics. In such situations, a creditor should
consider all aspects of the restructuring in determining whether it has
granted a concession. If a creditor determines that it has granted a
concession, the creditor must make a separate assessment about whether
the debtor is experiencing financial difficulties to determine whether the
restructuring constitutes a troubled debt restructuring.
iii.
A restructuring that results in a delay in payment that is insignificant is not
a concession. However, an entity should consider various factors in
assessing whether a restructuring resulting in a delay in payment is
insignificant. The following factors, when considered together, may
indicate that a restructuring results in a delay in payment that is
insignificant:


The amount of the restructured payments subject to the delay is
insignificant relative to the unpaid principal or collateral value of
the debt and will result in an insignificant shortfall in the
contractual amount due.
The delay in timing of the restructured payment period is
insignificant relative to any one of (1) the frequency of payments
due under the debt (2) the debt’s original contractual maturity or
(3) the debt’s original expected duration.
b) The debtor is experiencing financial difficulties.
i.
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A creditor may conclude that a debtor is experiencing financial
difficulties, even though the debtor is not currently in payment default. A
creditor should evaluate whether it is probable that the debtor would be in
payment default on any of its debt in the foreseeable future without the
modification.
III.
ASU No. 2011-03: Transfers and Servicing (Topic 860) Reconsideration of Effective
Control for Repurchase Agreements
Applicability and Effective Date
The amendments in ASU No. 2011-03 apply to all entities (public and nonpublic) that
enter into agreements to transfer financial assets that both entitle and obligate the
transferor to repurchase or redeem the financial assets before their maturity. The
amendments do not affect other transfers of financial assets.
ASU No. 2011-03 is effective for the first interim or annual period beginning on or after
December 15, 2011, and should be applied prospectively to transactions or modifications
of existing transactions that occur on or after the effective date. Early adoption is not
permitted.
The Rationale
Issued in April 2011, ASU No. 2011-03 is intended to improve the accounting for
repurchase agreements (repos) and other agreements that both entitle and obligate a
transferor to repurchase or redeem financial assets before their maturity. During the
global economic crisis, capital market participants questioned the necessity and
usefulness of the collateral maintenance guidance for the transferor’s ability criterion1as
one of the criteria when determining whether a repo should be accounted for as a sale or
as a secured borrowing.
The Board determined that the criterion pertaining to an exchange of collateral should not
be a determining factor in assessing effective control. The Board concluded that the
assessment of effective control should focus on a transferor’s contractual rights and
obligations with respect to transferred financial assets, not on whether the transferor has
the practical ability to perform in accordance with those rights or obligations. The Board
also concluded that the remaining criteria are sufficient to determine effective control.
Consequently, the amendments remove the transferor’s ability criterion from the
1
In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash
with an agreement for the counterparty to return the same or equivalent financial assets for a fixed
price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not
recognize a sale upon the transfer of financial assets subject to repurchase agreements. That
determination is based, in part, on whether the entity has maintained effective control over the
transferred financial assets. One of the relevant considerations for assessing effective control is the
transferor’s ability to repurchase or redeem financial assets before maturity. Under this criterion, an
entity must consider whether there is an exchange of collateral in sufficient amount so as to reasonably
assure the arrangement’s completion on substantially the agreed terms, even in the event of the
transferee’s default. That is, in order for the transferor to assert that it maintained effective control over
the transferred assets, the transferor must have the ability to repurchase the same or substantially the
same assets.
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consideration of effective control for repos and other agreements that both entitle and
obligate the transferor to repurchase or redeem financial assets before their maturity.
In addition, the consideration of a transferor’s ability to repurchase or redeem financial
assets transferred on substantially agreed terms, even in the event of default by the
transferee, is not required under International Financial Reporting Standards (IFRSs). The
amendments in ASU No. 2011-03 improve convergence by eliminating from U.S. GAAP
the need to consider this criterion.
Key Provisions
The amendments in ASU No. 2011-03 remove from the assessment of effective control
(1) the criterion requiring the transferor to have the ability to repurchase or redeem the
financial assets on substantially the agreed terms, even in the event of default by the
transferee, and (2) the collateral maintenance implementation guidance related to that
criterion.
Other criteria applicable to the assessment of effective control are not changed by the
amendments in ASU No. 2011-03. Those criteria indicate that the transferor is deemed to
have maintained effective control over the financial assets transferred (and thus must
account for the transaction as a secured borrowing) for agreements that both entitle and
obligate the transferor to repurchase or redeem the financial assets before their maturity if
all of the following conditions are met:
a) The financial assets to be repurchased or redeemed are the same or substantially
the same as those transferred.
b) The agreement is to repurchase or redeem them before maturity, at a fixed or
determinable price.
c) The agreement is entered into contemporaneously with, or in contemplation of,
the transfer.
IV.
ASU No. 2011-04: Fair Value Measurement (Topic 820) Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs
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Applicability and Effective Date
The amendments in ASU No. 2011-04 apply to all reporting entities that are required or
permitted to measure or disclose the fair value of an asset, a liability, or an instrument
classified in a reporting entity’s shareholders’ equity in the financial statements.
Some of the disclosures required by ASU No. 2011-04 are not required for nonpublic
entities. Those disclosures include (a) information about transfers between Level 1 and
Level 2 of the fair value hierarchy (b) information about the sensitivity of a fair value
measurement categorized within Level 3 of the fair value hierarchy to changes in
unobservable inputs and any interrelationships between those unobservable inputs and (c)
the categorization by level of the fair value hierarchy for items that are not measured at
fair value in the statement of financial position, but for which the fair value of such items
is required to be disclosed.
For public entities, the amendments in ASU 2011-04 are effective during interim and
annual periods beginning after December 15, 2011. For nonpublic entities, the
amendments are effective for annual periods beginning after December 15, 2011. In both
cases, the amendments are to be applied prospectively. Early application by public
entities is not permitted. Nonpublic entities may apply the amendments in ASU 2011-04
early, but no earlier than for interim periods beginning after December 15, 2011.
The Rationale
Issued in May 2011, ASU No. 2011-04 is intended to improve the comparability of fair
value measurements presented and disclosed in financial statements prepared in
accordance with U.S. GAAP and IFRSs, by ensuring that fair value has the same
meaning in U.S. GAAP and IFRSs and that their respective disclosure requirements are
the same except for inconsequential differences in wording and style.
Key Provisions
The amendments in ASU 2011-04 change the wording used to describe many of the
requirements in U.S. GAAP for measuring fair value and for disclosing information about
fair value measurements. For many of the requirements, the Board does not intend for the
amendments to result in a change in the application of the requirements in Topic 820.
Some of the amendments clarify the Board’s intent about the application of existing fair
value measurement requirements. Other amendments change a particular principle or
requirement for measuring fair value or for disclosing information about fair value
measurements.
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The amendments in ASU No. 2011-04 that change the wording used to describe the
requirements in U.S. GAAP for measuring fair value and for disclosing information about
fair value measurements include those (1) that clarify the Board’s intent about the
application of existing fair value measurement and disclosure requirements and (2) that
change a particular principle or requirement for measuring fair value or for disclosing
information about fair value measurements.
In addition, to improve consistency in application across jurisdictions some changes in
wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and
disclosure requirements are described in the same way (for example, using the word shall
rather than should to describe the requirements in U.S. GAAP).
The amendments that clarify the Board’s intent about the application of existing fair
value measurement and disclosure requirements include the following:
a) Application of the highest and best use and valuation premise concepts. The
amendments specify that the concepts of highest and best use and valuation
premise in a fair value measurement are relevant only when measuring the fair
value of nonfinancial assets and are not relevant when measuring the fair value of
financial assets or of liabilities.
The Board decided that the highest and best use concept is irrelevant when
measuring the fair value of financial assets or the fair value of liabilities because
such items do not have alternative uses and their fair values do not depend on
their use within a group of other assets or liabilities. Before those amendments,
Topic 820 specified that the concepts of highest and best use and valuation
premise were relevant when measuring the fair value of assets, but it did not
distinguish between financial and nonfinancial assets. The Board concluded that
the amendments do not affect the fair value measurement of nonfinancial assets
and will improve consistency in the application of the highest and best use and
valuation premise concepts in a fair value measurement.
The amendments might affect practice for some reporting entities that were using
the in-use valuation premise to measure the fair value of financial assets, as
described below in the section “Measuring the fair value of financial instruments
that are managed within a portfolio.”
b) Measuring the fair value of an instrument classified in a reporting entity’s
shareholders’ equity. The amendments include requirements specific to measuring
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the fair value of those instruments, such as equity interests issued as consideration
in a business combination. Those amendments are consistent with the
requirements for measuring the fair value of liabilities and specify that a reporting
entity should measure the fair value of its own equity instrument from the
perspective of a market participant that holds that instrument as an asset.
Before those amendments, Topic 820 stated that the definition of fair value should
be applied to an instrument measured at fair value that is classified in
shareholders’ equity, but it did not contain explicit requirements for measuring the
fair value of such instruments.
The Board concluded that including requirements on how to apply the principles
of Topic 820 when measuring the fair value of an instrument classified in a
reporting entity’s shareholders’ equity will improve consistency in application
and will increase the comparability of fair value measurements among reporting
entities applying U.S. GAAP or IFRSs. The Board does not expect those
amendments to affect current practice.
c) Disclosures about fair value measurements. The amendments clarify that a
reporting entity should disclose quantitative information about the unobservable
inputs used in a fair value measurement that is categorized within Level 3 of the
fair value hierarchy.
The Board concluded that those amendments do not change the objective of the
requirement but that explicitly requiring quantitative information about
unobservable inputs will increase the comparability of disclosures between
reporting entities applying U.S. GAAP and those applying IFRSs.
The amendments in ASU No. 2011-04 that change a particular principle or requirement
for measuring fair value or disclosing information about fair value measurements include
the following:
a) Measuring the fair value of financial instruments that are managed within a
portfolio. A reporting entity that holds a group of financial assets and financial
liabilities is exposed to market risks (that is, interest rate risk, currency risk, or
other price risk) and to the credit risk of each of the counterparties. The
amendments permit an exception to the requirements in Topic 820 for measuring
fair value when a reporting entity manages its financial instruments on the basis
of its net exposure, rather than its gross exposure, to those risks. Financial
institutions and similar reporting entities that hold financial assets and financial
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liabilities often manage those instruments on the basis of their net risk exposure.
That exception permits a reporting entity to measure the fair value of such
financial assets and financial liabilities at the price that would be received to sell a
net asset position for a particular risk or to transfer a net liability position for a
particular risk in an orderly transaction between market participants at the
measurement date.
Before those amendments, reporting entities that applied U.S. GAAP or IFRSs
reached similar fair value measurement conclusions when measuring the fair
value of such financial assets and financial liabilities. That was the case even
though the requirements in U.S. GAAP and IFRSs for measuring the fair value of
those financial instruments were expressed differently. As a result of the
amendments, U.S. GAAP and IFRSs have the same requirements for measuring
the fair value of such financial instruments.
The Board concluded that the amendments do not change how such financial
assets and financial liabilities are measured in practice for many reporting entities.
However, those amendments might affect practice for reporting entities that have
been applying the in-use valuation premise more broadly than was intended. For
example, if a reporting entity used the in-use valuation premise to measure the fair
value of financial assets when it did not have offsetting positions in a particular
market risk (or risks) or counterparty credit risk, that entity might arrive at a
different fair value measurement conclusion when applying the amendments than
that reached before the amendments were effective.
b) Application of premiums and discounts in a fair value measurement. The
amendments in this Update clarify that the application of premiums and discounts
in a fair value measurement is related to the unit of account for the asset or
liability being measured at fair value. The amendments specify that in the absence
of a Level 1 input, a reporting entity should apply premiums or discounts when
market participants would do so when pricing the asset or liability consistent with
the unit of account in the Topic that requires or permits the fair value
measurement. The amendments clarify that premiums or discounts related to size
as a characteristic of the reporting entity’s holding (specifically, a blockage
factor) rather than as a characteristic of the asset or liability (for example, a
control premium) are not permitted in a fair value measurement.
The amendments might affect practice for reporting entities that apply a premium
or discount when measuring the fair value of an asset or a liability if the reporting
entity applies Topic 820 on the basis of the quantity at which it might transact
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when that quantity differs from the unit of account specified in U.S. GAAP for
fair value measurements categorized within Level 2 or Level 3 of the fair value
hierarchy. The Board does not expect the amendments to affect practice for fair
value measurements categorized within Level 1 of the fair value hierarchy.
c) Additional disclosures about fair value measurements. The amendments expand
the disclosures about fair value measurements as follows:
i.
ii.
iii.
V.
For fair value measurements categorized within Level 3 of the fair value
hierarchy: (1) The valuation processes used by the reporting entity (2) The
sensitivity of the fair value measurement to changes in unobservable
inputs and the interrelationships between those unobservable inputs, if
any.
A reporting entity’s use of a nonfinancial asset in a way that differs from
the asset’s highest and best use when that asset is measured at fair value in
the statement of financial position or when its fair value is disclosed on the
basis of its highest and best use.
The categorization by level of the fair value hierarchy for items that are
not measured at fair value in the statement of financial position but for
which the fair value is required to be disclosed (for example, a financial
instrument that is measured at amortized cost in the statement of financial
position but for which fair value is disclosed in accordance with Topic
825, Financial Instruments).
ASU No. 2011-05: Comprehensive Income (Topic 220) Presentation of
Comprehensive Income
Applicability and Effective Date
The amendments in ASU No. 2011-05 apply to all entities that report items of other
comprehensive income, in any period presented.
For public entities, the amendments in ASU No. 2011-05 are effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. For
nonpublic entities, the amendments are effective for fiscal years ending after December
15, 2012, and interim and annual periods thereafter. In both cases, the amendments are to
be applied retrospectively. Early adoption is permitted, because compliance with the
amendments is already permitted. The amendments do not require any transition
disclosures.
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The Rationale
Issued in June 2011, ASU No. 2011-05 is intended to improve the comparability,
consistency, and transparency of financial reporting and to increase the prominence of
items reported in other comprehensive income. Current U.S. GAAP allows reporting
entities three alternatives for presenting other comprehensive income and its components
in financial statements. One of those presentation options is to present the components of
other comprehensive income as part of the statement of changes in stockholders’ equity.
ASU No. 2011-05 eliminates that option. In addition, current U.S. GAAP does not
require consecutive presentation of the statement of net income and other comprehensive
income. Finally, current U.S. GAAP does not require an entity to present reclassification
adjustments on the face of the financial statements from other comprehensive income to
net income, which is required by the guidance in ASU 2011-05.
In addition, the amendments in ASU No. 2011-05 facilitate convergence of U.S. GAAP
and IFRSs by eliminating the option to present components of other comprehensive
income as part of the statement of changes in stockholders’ equity, among other things.
Key Provisions
Under the amendments to Topic 220, Comprehensive Income, in ASU 2011-05, an entity
has the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In
both choices, an entity is required to present each component of net income along with
total net income, each component of other comprehensive income along with a total for
other comprehensive income, and a total amount for comprehensive income. In a single
continuous statement, the entity is required to present the components of net income and
total net income, the components of other comprehensive income and a total for other
comprehensive income, along with the total of comprehensive income in that statement.
In the two-statement approach, an entity is required to present components of net income
and total net income in the statement of net income. The statement of other
comprehensive income should immediately follow the statement of net income and
include the components of other comprehensive income and a total for other
comprehensive income, along with a total for comprehensive income.
Regardless of whether an entity chooses to present comprehensive income in a single
continuous statement or in two separate but consecutive statements, the entity is required
to present on the face of the financial statements reclassification adjustments for items
that are reclassified from other comprehensive income to net income in the statement(s)
where the components of net income and the components of other comprehensive income
are presented.
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The amendments in ASU No. 2011-05 do not change the items that must be reported in
other comprehensive income or when an item of other comprehensive income must be
reclassified to net income. The amendments do not change the option for an entity to
present components of other comprehensive income either net of related tax effects or
before related tax effects, with one amount shown for the aggregate income tax expense
or benefit related to the total of other comprehensive income items. In both cases, the tax
effect for each component must be disclosed in the notes to the financial statements or
presented in the statement in which other comprehensive income is presented. The
amendments do not affect how earnings per share is calculated or presented.
Contacts
Lutamila Sallu, CPA
Allen DeLeon, CPA
 301-948-9825 Ex 218
 301-948-3220 fax
 sallu@deleonandstang.com
 301-948-9825 Ex 203
 301-948-3220 fax
 al@deleonandstang.com
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