Accounting — New Standards and Exposure Drafts

Debt Issuance Costs

FASB Issues Proposed ASU on Simplifying the Presentation of Debt Issuance Costs

Affects: All entities.

Summary: On October 14, 2014, the FASB issued a proposed ASU that would change the presentation of debt issuance costs in the financial statements. Under the proposal, an entity would present such costs in the balance sheet as a direct deduction from the debt liability in a manner consistent with its accounting treatment of debt discounts. Amortization of the issuance costs would be reported as interest expense.

The FASB’s project on the presentation of debt issuance costs is part of the Board’s simplification initiative. Launched in June 2014, the simplification initiative is intended to reduce the cost and complexity of current U.S. GAAP while maintaining or enhancing the usefulness of the related financial statement information.

Next Steps: Comments on the proposed ASU are due by December 15, 2014.

Other Resources: Deloitte’s October 14, 2014, Heads Up.

EITF

FASB Issues Two Proposed ASUs in Response to EITF Consensuses-for-Exposure

Affects: All entities.

Summary: On October 30, 2014, the FASB issued the following two proposed ASUs in response to consensuses-for-exposure reached at the EITF’s September 19, 2014, meeting:

• Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (Issue 14-A) — Under this proposal, upon the occurrence of a dropdown transaction occurring after initial formation of an MLP and accounted for as a reorganization of entities under common control, an MLP would allocate “the net income (loss) of the transferred business prior to the date of the dropdown transaction entirely to the [general partner] as if only the [general partner] had rights to that net income (loss).“ As a result, there would be no adjustment to historical earnings per unit reported for limited partner units.
• Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (Issue 14-B) — Under this proposal, entities would no longer categorize within the levels of the fair value hierarchy table all investments that they have measured under the NAV practical expedient. Instead, entities would be required to include investments measured at NAV under the practical expedient in a reconciling line item in arriving at the amounts measured at fair value in the balance sheet.

Next Steps: Comments on both proposals are due by January 15, 2015.

Other Resources: Deloitte’s September 2014 EITF Snapshot.

Financial Instruments

FASB Issues ASU on Hybrid Financial Instruments

Affects: All entities.

Summary: On November 3, 2014, the FASB issued ASU 2014-16 in response to the EITF’s final consensus on Issue 13-G. The ASU requires entities to “determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances.“

When assessing the substance of the relevant terms and features, an entity should consider:

• “The characteristics of the terms and features themselves.“
• “The circumstances under which the hybrid financial instrument was issued or acquired.“
• “The potential outcomes of the hybrid financial instrument.“

Next Steps: The ASU is effective for annual periods beginning after December 15, 2015, and interim periods thereafter. Early adoption is permitted.

Other Resources: Deloitte’s September 2014 EITF Snapshot.

Pensions and Other Postretirement Benefits

FASB Issues Proposed ASU to Provide Practical Expedient for Measurement Date of Retirement Benefits

Affects: All entities.

Summary: On October 14, 2014, the FASB issued a proposed ASU as part of its simplification initiative. Under current U.S. GAAP, an employer that sponsors a defined benefit retirement plan (for pension or other postretirement benefits) is required to measure its retirement benefit obligations and plan assets as of its fiscal year-end (with the exception of plans sponsored by a consolidated subsidiary or equity method investee that has a fiscal year-end different from that of the parent or investor). The proposed ASU contains a practical expedient that would allow an employer whose fiscal year-end does not fall on a calendar month-end (e.g., an entity that has a 52- or 53-week fiscal year) to measure retirement benefit obligations and related plan assets as of the month-end that is closest to the employer’s fiscal year-end. The expedient would need to be elected as an accounting policy and be consistently applied. Because third-party plan asset custodians often provide information about fair value and classes of assets only as of the month-end, such an accounting policy would relieve the employer from adjusting the asset information to the appropriate fair values as of its fiscal year-end.

Next Steps: Comments on the proposed ASU are due by December 15, 2014.

Other Resources: Deloitte’s October 15, 2014, journal entry.

Accounting — Other Key Developments

Revenue Recognition

FASB Announces Outreach Plan to Assess Effective Date of New Revenue Guidance

Affects: All entities.

Summary: At the October 31, 2014, meeting of the joint FASB/IASB transition resource group for revenue recognition, FASB Vice Chairman James Kroeker announced that the Board and staff plan to conduct further outreach with both public and private companies over the next several months to gauge their progress in preparing to implement the guidance in ASU 2014-09. Mr. Kroeker emphasized that the Board is considering whether to defer the effective date of the new revenue guidance and noted that a decision will be made no later than the second quarter of 2015.

Auditing Developments

AICPA

AICPA Clarifies and Recodifies SSARSs

Affects: Entities that perform accounting and review services.

Summary: In October 2014, the AICPA issued SSARS 21, which supersedes all AR sections in the AICPA’s Professional Standards except for AR Section 120 (which is expected to be revised in 2015). SSARS 21 is part of the AICPA’s ARSC Clarity Project “to clarify and revise the existing standards for reviews, compilations, and engagements to prepare financial statements“ and comprises the following four sections:

• AR-C Section 60 — Contains “the general principles for engagements performed in accordance with SSARSs.“
• AR-C Section 70 — Prescribes requirements for engagements in which financial statements are prepared.
• AR-C Section 80 — Includes guidance on compilation engagements.
• AR-C Section 90 — Generally consists of a redraft of SSARS 19 “with few changes“ and includes requirements for review engagements.

Next Steps: SSARS 21 “is effective for reviews, compilations, and engagements to prepare financial statements for periods ending on or after December 15, 2015.“ Early adoption is permitted.

Other Resources: For more information, see the executive summary of SSARS 21 on the AICPA’s Web site.

PCAOB

PCAOB Auditing Standard 18 Approved by SEC

Affects: Registered public accounting firms.

Summary: On October 21, 2014, the SEC issued an order approving PCAOB Auditing Standard 18, which contains “amendments to certain PCAOB auditing standards regarding significant unusual transactions, and other amendments to PCAOB auditing standards, including required procedures to obtain an understanding of a company’s financial relationships and transactions with its executive officers.“

Next Steps: Auditing Standard 18 is effective “for audits of financial statements for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years.“

PCAOB Considering New Form for Reporting Engagement Partner

Affects: Registered public accounting firms.

Summary: The PCAOB announced that its staff is currently drafting a supplemental request for comment on a new form (also known as “Form 5“) in which the name of the engagement partner would be disclosed. The proposed creation of a new form would mark a departure from the PCAOB’s December 2013 reproposed rules, under which the engagement partner’s name would be disclosed in the auditor’s report on Form 10-K. One of the main reasons for this proposed change would be to decrease the potential liability for auditors.

Other Resources: For more information, see the PCAOB’s September 30, 2014, standard-setting agenda.

Governmental Accounting and Auditing Developments

FASAB

FASAB Issues Statement to Defer the Transition to Basic Information for Long-Term Projections

Affects: Entities applying federal financial accounting standards.

Summary: On October 17, 2014, the FASAB issued Statement 46, which “provides a second one-year deferral of the transition of the statement presenting long-term fiscal projections for the U.S. government and related disclosures from required supplementary information . . . to basic information.“ The purposes of the deferral are to (1) allow the AICPA to “develop guidance for audit reports on long-term fiscal projections“ and (2) give preparers enough “time to plan for the audit.“

The requirements in Statement 46 became effective upon issuance.

Other Resources: For more information, see the press release on the FASAB’s Web site.

FASAB Requests Comments on Disclosure Requirements Related to Public-Private Partnerships

Affects: Entities applying federal financial accounting standards.

Summary: On October 1, 2014, the FASAB issued an ED that would require entities within the standard’s scope to provide certain disclosures about public-private partnerships that possess certain “conclusive characteristics“ (listed in the ED). In the words of FASAB Chairman Tom Allen, “this [ED] represents an important step in meeting the federal reporting objectives because the federal government is directly accountable to citizens for the proper administration of its resources to include the disclosure of long-term risks related to its programs and activities.“

Next Steps: Comments on the ED are due by January 2, 2015.

Other Resources: For more information, see the press release on the FASAB’s Web site.

GASB

GASB Issues Proposal on Tax Abatement Disclosures

Affects: Entities reporting under financial accounting and reporting standards for state and local governments.

Summary: On October 20, 2014, the GASB issued an ED of a proposed Statement under which state and local governments would be required to disclose “information about property and other tax abatement agreements.“ The proposal is intended to “provide financial statement users with essential information“ about tax abatement programs.

Next Steps: Comments on the ED are due by January 30, 2015.

Other Resources: For more information, see the press release on the GASB’s Web site.

International

IPSASB Releases Public-Sector Conceptual Framework

Affects: Public-sector entities.

Summary: On October 31, 2014, the IPSASB released its conceptual framework for general-purpose financial reporting by public-sector entities. The new framework establishes the concepts that the IPSASB will use to develop its IPSASs and RPGs, thereby enhancing the consistency and transparency of the organization’s standard setting.

Other Resources: For more information, see the press release on IFAC’s Web site.

Regulatory and Compliance Developments

COSO

COSO Announces Plans to Update Enterprise Risk Management — Integrated Framework

Affects: All entities.

Summary: On October 21, 2014, COSO announced that it is undertaking a project to update its 2004 Enterprise Risk Management — Integrated Framework, “a widely accepted framework used by management to enhance an organization’s ability to manage uncertainty, consider how much risk to accept, and improve understanding of opportunities as it strives to increase and preserve stakeholder value.“ The objective of the project is to improve the relevance and content of the framework given the increasing complexities in the current global business environment.

Next Steps: COSO plans to conduct a survey in the near future to gather feedback on the project.

Other Resources: For more information, see the press release on COSO’s Web site.

SEC

SEC and Other Government Agencies Issue Final Rule on Credit Risk Retention

Affects: Securitizers.

Summary: On October 22, 2014, the SEC and five other federal agencies¹ adopted a final rule that requires securitizers, under certain conditions, to retain a portion of the credit risks associated with the assets collateralizing an asset-based security (ABS). The final rule is being issued in response to a mandate of Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new credit risk retention requirements to Section 15G of the Securities Exchange Act of 1934.

The final rule addresses what some believed to be a critical weakness in the securitization market that led to the financial crisis — namely, that certain meaningful risks need to be retained to ensure that securitizers have the incentives to monitor the quality of the securities. Therefore, under the final rule, securitizers would be:

• Required to retain no less than 5 percent of the credit risk of assets collateralizing an ABS.
• Prohibited from hedging or transferring the credit risk they are required to retain.

In addition, the final rule permits securitizers to select a form of risk retention obligation from a menu of specified options. The options available include (1) an eligible vertical interest, (2) an eligible horizontal residual interest, or (3) a combination of both when the combined interest is no less than 5 percent of the fair value of all ABSs issued.

ABSs that are collateralized solely by “qualified residential mortgages“ (QRMs) are exempt from the risk retention requirements. The final rule alters the definition of a QRM to align it with the Consumer Financial Protection Bureau’s definition of a “qualified mortgage.“

Next Steps: The final rule will become effective one year after the date of its publication in the Federal Register.

Other Resources: For more information, see the press release on the SEC’s Web site.

SEC Updates EDGAR Filer Manual and Technical Specifications

Affects: SEC registrants.

Summary: On October 20, 2014, the SEC issued a final rule updating its EDGAR Filer Manual (Volumes I, II, and III). Updates include the following:

• New submission form types.
• New exhibits on EDGARLink Online.
• Item 6.06 of Form 8-K (“Static Pool“) on EDGARLink Online for additional submission types.
• Removal of references to leased-line filings, since EDGAR no longer supports the leased-line filing method.
• Minor, documentation-only corrections.

In addition, on this same date, the Commission released Version 13 of the EDGARLink Online XML Technical Specification and Version 1 of the EDGAR ABS XML Technical Specification.

The final rule became effective on October 29, 2014.

Other Resources: For more information, see the EDGAR page on the SEC’s Web site.

SEC Updates Financial Reporting Manual

Affects: SEC registrants.

Summary: On October 20, 2014, the SEC’s Division of Corporation Finance published an update to its Financial Reporting Manual (FRM). Changes include:

• Deletion of interpretive guidance on development-stage entities (for consistency with U.S. GAAP).
• Clarifications to the definition in Regulation S-X, Rule 3-05, of “individually insignificant acquisitions.“
• Modifications to certain guidance on applying Regulation S-X, Rule 3-14, to real estate acquisitions.

Other Resources: For more information, see the FRM page on the SEC’s Web site.

SEC Releases Analyses Related to Security-Based Swap Information

Affects: SEC registrants.

Summary: On October 17, 2014, the SEC posted to its Web site the following two analyses related to reporting and disseminating security-based swap information:

• Analysis of Post-Trade Transparency Under the CFTC Regime — Explores the impact of the CFTC’s post-trade transparency requirements on the index CDS market.
• Inventory Risk Management by Dealers in the Single-Name Credit Default Swap Market — Examines “[r]ecent single-name CDS transactions and if and how dealers may hedge any large notional exposures that result from executing trades with their customers.“

The analyses, which were performed by the SEC’s Division of Economic and Risk Analysis and Division of Trading and Markets, constitute supplementary material for the Commission and its constituents to use in evaluating the SEC’s proposed rules on regulating the reporting and dissemination of security-based swap information (issued in November 2010 and reproposed in May 2013). Interested parties are encouraged to provide feedback on the analyses via the comment file on the SEC’s Web site.

Next Steps: Comments on the analyses are due by November 14, 2014.

Other Resources: For more information, see the press release on the SEC’s Web site.

SEC Issues Risk Alert and FAQs on Customers’ Sales of Securities

Affects: SEC registrants.

Summary: On October 9, 2014, the SEC issued a risk alert and FAQs regarding broker-dealers’ controls over customers’ sales of securities.

The risk alert details the results of the examinations of 22 broker-dealers that often participate in the sales of microcap securities. The examinations, which are conducted by the staff in the SEC’s Office of Compliance Inspections and Examinations, uncovered “widespread deficiencies“ in broker-dealers’ handling of these transactions, including inadequate controls and insufficient policies and procedures.

The FAQs address issues related to the broker-dealer exemption under Section 4(a)(4) of the Securities Act of 1933. Broker-dealers are reminded that when applying the exemption, they must “conduct a reasonable inquiry when selling securities in an unregistered transaction.“

Other Resources: For more information, see the press release on the SEC’s Web site.

International

CDSB Proposes Expansion of Reporting Framework

Affects: All entities.

Summary: On October 30, 2014, the CDSB issued a consultation draft that updates its reporting framework to “provide guidance on reporting environmental information.“ The framework, which is expected to be finalized in March 2015, is designed to “help companies prepare and present environmental information in mainstream corporate reports in order to provide robust and comparable information to a company’s current and potential shareholders.“

Next Steps: Comments on the consultation draft are due by December 14, 2014.

Other Resources: For more information, see the press release on the CDSB’s Web site.

IAIS Establishes Capital Requirements for Global Systemically Important Insurers

Affects: Insurance entities.

Summary: On October 23, 2014, the IAIS issued a standard that establishes basic capital requirements for global systemically important insurers. The IAIS developed the standard in accordance with the following six principles:

• “Major risk categories should be reflected.“
• “Comparability of outcomes across jurisdictions.“
• “Resilience to stress.“
• “Simple design and presentation.“
• “Internal consistency.“
• “Optimise transparency and use of public data.“

Next Steps: This standard represents the first step in a three-step project to “develop risk-based, group-wide global insurance capital standards.“

Other Resources: For more information, see the press release and fact sheet on the IAIS’s Web site.

FSB Releases Framework for “Haircuts“ on Certain Securities Transactions

Affects: All entities.

Summary: On October 14, 2014, the FSB released a regulatory framework that comprises (1) “qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received“ and (2) “numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to entities other than banks and broker-dealers.“ The main purpose of the framework is to reduce the risks associated with “shadow banking“ by strengthening oversight and regulation of these transactions.

The framework also includes a consultative proposal (Annex 4) that requests feedback on “approaches for applying the framework of numerical haircut floors . . . to non-bank-to-non-bank transactions backed by collateral other than government securities.“

Next Steps: Comments on Annex 4 of the framework are due by December 15, 2014. Work on this project is expected to be completed by the second quarter of 2015, with implementation of the framework planned by the end of 2017.

Other Resources: For more information, see the press release on the FSB’s Web site.

Major Global Banks Agree to Sign ISDA Resolution Stay Protocol

Affects: Banking entities.

Summary: On October 11, 2014, the ISDA announced that “18 major global banks (G-18) have agreed to sign a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board to support cross-border resolution and reduce systemic risk.“ In addition to increasing systemic stability, the protocol is intended to lessen the risk that a bank is “too big to fail.“ The stay imposed by the protocol will affect “cross-default and early termination rights within standard ISDA derivatives contracts between G-18 firms in the event one of them is subject to resolution action in its jurisdiction.“

Next Steps: The protocol will become effective on January 1, 2015.

Other Resources: For more information, see the press release on the ISDA’s Web site.

Basel Committee Issues Final Standard on Net Stable Funding Ratio

Affects: Banking entities.

Summary: On October 31, 2014, the Basel Committee issued a final standard that establishes requirements related to the net stable funding ratio, which is “a significant component of the Basel III reforms.“ Under the new standard, banks are required to “maintain a stable funding profile in relation to their on- and off-balance sheet activities, thus reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure and potentially lead to broader systemic stress.“

Other Resources: For more information, see the press release on the BIS’s Web site.

Basel Committee Proposes Revised Principles for Corporate Governance at Banks

Affects: Banking entities.

Summary: On October 10, 2014, the Basel Committee issued a consultation paper that would revise the corporate governance principles for banking entities. Specifically, the proposed guidelines would:

• Enhance risk-governance guidance, “including the risk management roles played by business units, risk management teams, and internal audit and control functions (the three lines of defence) and the importance of a sound risk culture to drive risk management within a bank.“
• Expand “the guidance on the role of the board of directors in overseeing the implementation of effective risk management systems.“
• Highlight the significance of the “collective competence“ of the board of directors in addition to the responsibilities of individual board members to adhere to mandates and keep apprised of current banking developments.
• Help bank supervisors evaluate the processes their entities use to elect senior management and board members.
• Stress that “compensation systems form a key component of the governance and incentive structure through which the board and senior management of a bank convey acceptable risk-taking behaviour and reinforce the bank’s operating and risk culture.“

Next Steps: Comments on the consultation paper are due by January 9, 2015.

Other Resources: For more information, see the press release on the BIS’s Web site.

Basel Committee Proposes Revisions to Approach for Measuring Operational Risk Capital

Affects: Banking entities.

Summary: On October 6, 2014, the Basel Committee issued a consultation paper that would revise its standardized approach for measuring operational risk capital. The revised approach would supersede “current non-model-based approaches,“ including the basic indicator approach and the standardized approach.

Next Steps: Comments on the consultation paper are due by January 6, 2015.

Other Resources: For more information, see the press release on the BIS’s Web site.

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