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FASB endorses private-company alternatives

Nov 27, 2013

At its meeting on Monday, the FASB voted to endorse for final issuance two alternatives to U.S. GAAP for private companies put forth by the Private Company Council (PCC).

The Board endorsed the following decisions that the PCC made at its meeting on September 30 and October 1, 2013:

  • PCC Issue No. 13-01B, "Accounting for Goodwill": This alternative will allow private companies to elect to amortize goodwill recognized from a business combination over 10 years (or, alternatively, a period less than 10 years if more appropriate). It will also simplify the goodwill impairment process by allowing private companies to test goodwill (1) only when impairment indicators are present (rather than at least annually) and (2) at an entity-wide level (rather than at the reporting-unit level).
  • PCC Issue No. 13-03A, “Accounting for Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach”: This alternative will allow private companies that are not financial institutions to apply, in certain circumstances, a simplified hedge accounting method to hedging relationships involving variable-rate debt and a pay-fixed, receive-floating interest rate swap. The simplified approach assumes no hedge ineffectiveness in the hedging relationship, thereby resulting in an income statement impact similar to what would have occurred had the private company simply entered into a fixed-rate borrowing. In addition, the simplified approach allows private companies to measure the hedging interest rate swap at its settlement value, rather than at fair value, and gives private companies more time to put hedge documentation in place. The alternative also provides certain private companies with relief from fair value measurement disclosure requirements.

Public Business Entities and Not-for-Profit Entities

The Board added a project to its agenda to consider changes to the accounting for goodwill for public companies and not-for-profit entities (NFPs). The Board did not add a project to its agenda on the simplified hedge accounting approach for public business entities and NFPs because it plans to consider the matter as part of its hedging project.

For more information, see Deloitte's Accounting Journal Entry or the meeting minutes on the FASB's Web site.

GASB issues Statement No. 71, which amends its new pension standard

Nov 27, 2013

On Monday, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 71, "Pension Transition for Contributions Made Subsequent to the Measurement Date—an amendment of GASB Statement No. 68," which resolves transition issues in GASB Statement No. 68, "Accounting and Financial Reporting for Pensions."

Statement 71 eliminates a potential source of understatement of restated beginning net position and expense in a government’s first year of implementing Statement 68, which was issued in June 2012.

To correct this potential understatement, Statement 71 requires that when a state or local government is transitioning to the new pension standards, that it "recognize a beginning deferred outflow of resources for its pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation. This amount will be recognized regardless of whether it is practical to determine the beginning amounts of all other deferred outflows of resources and deferred inflows of resources related to pensions."

Statement 71 is effective concurrent with Statement 68 for fiscal years beginning after June 15, 2014.

For more information, see the press release and Statement 71 on the GASB's Web site.

FASB and IASB discuss leases and classification and measurement

Nov 22, 2013

At the November 20, 2013, joint meeting, the FASB and IASB redeliberated the leases project and topics related to the boards’ respective projects on classification and measurement of financial instruments.



The boards discussed feedback received from outreach meetings and comment letters on the leases exposure draft. In addition, the boards reviewed the staffs’ views on the main topics for redeliberation and tentatively decided which items to be discussed at future meetings.

For more information, please see Deloitte’s Accounting Journal Entry or the meeting minutes on the FASB's Web site.


Financial instruments: Classification and measurement

The boards redeliberated the business model assessment (overall, hold-to-collect business model, fair value categories) and next steps for their respective classification and measurement projects.

Tentative decisions made included:

IssueTentative decisions
Overall business model The boards provided additional clarifications on financial assets used in a business model assessment and how a business model and a change in the business model should be assessed.

The FASB converged its guidance on the reclassification date reflected in financial statements with the guidance in IFRS 9.

The IASB provided additional clarifications on business activities, relevant and objective information, and cash flows.
Hold-to-collect business model The boards clarified the application guidance for the hold-to-collect business model.
Fair value categories The boards will retain two fair value measurement categories (fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVPL)). In addition, the boards' clarified the application guidance for the FVOCI and FVPL measurement categories.
Next steps The boards will redeliberate other areas of their proposals at later meetings.

For more information, please see Deloitte’s Accounting Journal Entry or the meeting minutes on the FASB's Web site.

IASB clarifies accounting for employee contributions to defined benefit plans

Nov 21, 2013

The IASB has issued "Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 'Employee Benefits')." The amendments clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service. The amendments are effective for annual periods beginning on or after July 1, 2014, with earlier application being permitted.


In outlining the accounting requirements for employee benefits, IAS 19 Employee Benefits mandates that an entity has to consider contributions from employees (or third parties) when accounting for defined benefit plans. Contributions that are linked to service must be attributed to periods of service as a reduction of service cost.

In 2012, the IFRS Interpretations Committee received submissions seeking clarification regarding the accounting for employee contributions set out in the formal terms of a defined benefit plan. The submitters requested additional guidance on the accounting of employee contributions related to service and also expressed concerns about the complexity of the requirements when applied to simple contributory plans.

The Interpretations Committee referred the matter to the IASB and suggested simplifying the requirements in IAS 19 for these plans. The IASB came to the conclusion that contributions from employees or third parties reduce the ultimate cost of a defined benefit and should therefore be accounted for consistently with the accounting for the defined benefit. The conclusions were published as ED/2013/4 Defined Benefit Plans: Employee Contributions (Proposed amendments to IAS 19) in March 2013.



With Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 Employee Benefits) the IASB has amended the requirements in IAS 19 for contributions from employees or third parties that are linked to service:

  • If the amount of the contributions is independent of the number of years of service, contributions may be recognized as a reduction in the service cost in the period in which the related service is rendered (note: this is an allowed but not required method). 
  • If the amount of the contributions depends on the number of years of service, those contributions must be attributed to periods of service using the same attribution method as used for the gross benefit in accordance with paragraph 70 of IAS 19.

The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. This was common practice before the 2011 amendments to IAS 19. In those cases the impact of retrospective application would be minimal.


Effective Date

The amendments are effective for annual periods beginning on or after July 1, 2014. Earlier application is permitted but corresponding disclosures are required. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

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FAF adopts GASB scope of authority policy

Nov 20, 2013

The Financial Accounting Foundation (FAF) Board of Trustees has adopted a new policy, “GASB Scope of Authority: Consultation Process Policy,” which outlines the GASB and FAF’s Standard-Setting Process Oversight Committee’s pre-agenda consultation process when determining whether information may be considered in the GASB’s standard-setting activity.

The policy provides three groups of classification for governmental financial accounting and reporting information.

  • “Group 1: Information that the GASB assesses is clearly within its standard-setting authority that meets the objectives, and has the characteristics, of governmental financial reporting currently described in GASB Concepts Statement No. 1, Objectives of Financial Reporting, and GASB Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements;
  • Group 3: Information that the GASB assesses as clearly outside GASB’s standard-setting authority (such as information that has no relationship to information presented in general purpose external financial reporting, or does not meet at least one of the objectives of governmental financial reporting as defined in GASB Concepts Statement 1 and GASB Concepts Statement 3); and
  • Group 2: Information that does not clearly possess the characteristics of Groups 1 or 3, but that meets at least one of the objectives of governmental financial accounting currently set forth in the GASB’s existing Concepts Statements 1 and 3.”

For additional information, please see (links to FAF’s Web site):

Nancy Kopp appointed to the FAF Board of Trustees

Nov 19, 2013

The Financial Accounting Foundation (FAF) has announced the appointment of Nancy K. Kopp to the FAF Board of Trustees. Ms. Kopp will begin her term on January 1, 2014, when she will replace retiring Trustee Cynthia P. Eisenhauer.

Currently, Ms. Kopp is Maryland’s state treasurer and holds leadership positions on various state financial planning committees, such as chair of the legislative committee of the National Association of State Treasurers and president of the National Association of State Auditors, Comptrollers and Treasurers. Before her selection as state treasurer, Ms. Kopp represented the Bethesda, Maryland, region in the Maryland House of Delegates for 27 years.

For additional information, please see the press release on the FAF’s Web site.

FAF concludes post-implementation review of Statement 109

Nov 19, 2013

The Financial Accounting Foundation (FAF) has issued its report on the post-implementation review (PIR) on FASB Statement No. 109, “Accounting for Income Taxes.” The PIR report summarizes research results, conclusions, and provides recommendations based on its review. The overall outcome of the PIR was that Statement 109 was working as intended.

The key objectives of the PIR included:

    1. Determining if Statement 109 accomplished its stated purpose.
    2. Evaluating the implementation, continuing compliance costs, and related benefits.
    3. Providing recommendations on the standard-setting process.

To complete these objectives, the PIR team received input from a diverse set of stakeholders by conducting various outreach events, research, and surveys.

The PIR team concluded:

  • “Statement 109 adequately resolved the issues underlying its stated need, but may not have reduced the complexity associated with accounting for income taxes.”
  • "Information resulting from the application of Statement 109 provides investors with decision-useful information, although certain income tax information may not be sufficiently aligned with investor needs.”
  • “Most of Statement 109’s requirements are understandable, can be applied as intended, and enable income tax information to be reported reliably.”
  • “Statement 109 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant unanticipated consequences.”
  • “The nature of the costs incurred by stakeholders to implement Statement 109 (primarily resource related) was consistent with those expected for a standard addressing a complex area of accounting.”

On the basis of these conclusions, the PIR team did not have any standard-setting process recommendations.

The next post-implementation review will be on FASB Statement No. 123(R), Share-Based Payment.

For additional information, please see (links to FAF’s Web site):

IASB finalizes IFRS 9 chapter on general hedge accounting

Nov 19, 2013

The IASB has published an amendment to IFRS 9 "Financial Instruments" incorporating its new general hedge accounting model. This represents a significant milestone because it completes another phase of the IASB’s project to replace IAS 39 "Financial Instruments: Recognition and Measurement." The new general hedge accounting model will allow reporters to reflect risk management activities in the financial statements more closely because it provides more opportunities to apply hedge accounting.


In developing a new model the IASB comprehensively reviewed the hedge accounting requirements of IAS 39. IAS 39 had long been criticized as being too rules-based and viewed by many as unnecessarily preventing hedge accounting from being applied in reasonable circumstances. This has led to more volatility in profit or loss from risk management activities.

In overhauling the hedge accounting requirements, the IASB chose to deal with portfolio (or “macro”) hedge accounting of open portfolios separately from general hedge accounting. The idea behind this was to first set the principles of a general hedge accounting model before considering how this might apply for a macro hedging.

In December 2010, the IASB published the exposure draft ED/2010/13 Hedge Accounting (the "ED") proposing a new general hedge accounting model. That ED contained an objective to align hedge accounting more closely with risk management. To meet this objective the ED proposed to increase the scope of eligible hedged items and hedging instruments. It proposed an objective-based hedge effectiveness assessment starkly different to IAS 39’s 80125 percent hedge effectiveness threshold. To accompany these changes to eligibility and qualification, it also proposed changes to the mechanics of cash flow and fair value hedge accounting, as well as revised hedge accounting presentation and disclosure requirements.

The ED was well received in many respects since it addressed many concerns relating to hedge accounting restrictions in IAS 39. The IASB also received feedback on areas where the proposed new requirements were not well understood, overly complex, or contained restrictions on the application of hedge accounting that constituents did not agree with. This resulted in changes that were included in the IASB’s review draft of its proposals that were posted on the IASB's Web site in September 2012.

The IASB received comments on its review draft that lead to further changes, the most significant of which introduced an accounting policy choice under IFRS 9 to continue to apply the hedge accounting requirements of IAS 39. This policy choice was introduced to alleviate concerns that the proposed general hedge accounting model could not accommodate macro cash flow hedging of interest rate risk in the same way as IAS 39. Also since the macro hedge accounting project is not yet complete, some preparers did not want to change their hedge accounting processes twice (i.e., once to accommodate the general hedge accounting model and then again to accommodate the macro hedge accounting model). 


Summary of key requirements

Increased eligibility of hedged items

IFRS 9 increases the scope of hedged items eligible for hedge accounting. For example:

  • Risk components of nonfinancial items may be designated provided they are separately identifiable and reliably measurable.
  • Derivatives may be included as part of the hedged item.
  • Groups and net positions may be designated hedged items.


Increased eligibility of hedging instruments

The new model allows financial instruments at fair value through profit or loss to be designated as hedging instruments. It also introduces a new way to account for the change in time value of an option when the intrinsic value is designated, resulting in less volatility in profit or loss. The alternative accounting treatment for forward points and currency basis (when excluded from the designated hedge) can also result in less volatility in profit or loss.


New hedge effectiveness requirements

A fundamental difference to the IAS 39 hedge accounting model is the lack of the 80125 percent bright line threshold for effective hedges and the requirement to perform retrospective hedge effectiveness testing. Under the IFRS 9 model, it is necessary for there to be an economic relationship between the hedged item and hedging instrument, with no quantitative threshold. This will allow flexibility in how an economic relationship is demonstrated and for qualifying hedges actual hedge ineffectiveness will be reported.


Increased hedge accounting disclosures

The trade off to increased hedge accounting possibilities is increased disclosures about an entity’s risk management strategy, cash flows from hedging activities, and the impact of hedge accounting on the financial statements.


Alternatives to hedge accounting

As part of developing the new model, the IASB introduced some alternatives to hedge accounting as a means to reflect risk management activities in the financial statements. For example:

  • IFRS 9 includes an option to designate a credit exposure as measured at fair value through profit or loss if the credit risk is managed using a credit derivative
  • IAS 39, as amended for application with IFRS 9, includes an option to designate at fair value through profit or loss “own use contracts” if doing so eliminates or significantly reduces an accounting mismatch


Policy options to continue applying hedge accounting under IAS 39

The newly developed general hedge accounting model does not deal with the accounting for hedges of open portfolios (portfolio/macro hedge accounting). To alleviate concerns of preparers having to change their policies twice within a relatively short period of time, the IASB introduced two policy options in the final version of the hedge accounting chapter of IFRS 9:

  • Those entities that currently apply the requirements in IAS 39.81A (the application of fair value hedge accounting to portfolio hedges of interest rate risk) may continue doing so under the new requirements. In that case, the requirements in IFRS 9 would apply to hedges in general, whereas portfolio hedges would continue to be accounted for according to IAS 39.
  • In addition, entities would be given an accounting policy choice to account for all hedges under either IAS 39 or IFRS 9. That option would be all inclusive; i.e., entities could not pick and choose (e.g., entities wishes to continue applying IAS 39 would have to continue testing effectiveness in the narrow 80125 percent corridor, could not benefit from the increased eligibility of hedge items and hedging instruments, etc.).


Effective date and transition

The IFRS 9 amendment to introduce the new hedge accounting model removed the mandatory effective date for IFRS 9 which will be set once the standard is complete with a new impairment model and finalization of any limited amendments to classification and measurement, both of which are due to be finalized in 2014. The standard is available for early adoption (subject to local endorsement requirements), but if an entity elects to apply it it must apply all of the requirements in the standard at the same time. On transition the hedge accounting requirements are generally applied prospectively with some limited retrospective application.

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PCAOB guidance on the quality control remediation process

Nov 18, 2013

The PCAOB’s Division of Registration and Inspections has issued a document that identifies key criteria used by the inspections staff when making recommendations to the Board concerning the sufficiency of firms' remediation efforts.

A firm’s remedial efforts are evaluated by the inspections staff using the following criteria:

  • Change: Does the remedial step represent a change to the firm's system of quality control that was in effect at the time of the conduct that resulted in the quality control criticism? Depending upon the circumstances, relevant change may involve supplementing or replacing previous guidance, policies, or procedures or taking steps to increase the technical competence and proficiency of the firm's personnel.
  • Relevance: Is the remedial step responsive to and does it specifically address the quality control criticism described in the inspection report; and, does it help satisfy compliance with the Board's quality control standards? If the root cause of the underlying quality control criticism is unclear, did the firm perform an appropriate root cause analysis in developing the remedial action?
  • Design: Is the remedial step appropriately designed (either individually or in combination with other actions) to remediate the quality control criticism?
  • Implementation: To what extent was the remedial step put in operation by the close of the 12-month remediation period? If not fully implemented, has the firm demonstrated an appropriate level of diligence and reasonable progress in addressing the criticism during the 12-month period?
  • Execution and Effectiveness: Has the remedial step achieved (or, if sufficient time has not passed to measure results, is it expected to achieve) the proposed effect that it was designed to achieve? If available, what do the subsequent firm monitoring procedures and external inspection results suggest about the effectiveness of the remedial step?”

For more information and examples on the inspections staff quality control remediation process, please see the staff guidance on the PCAOB’s Web site.

EITF discusses six issues at its November meeting

Nov 15, 2013

Yesterday, the Emerging Issues Task Force (EITF) met to discuss six issues.

Issues discussed at the meeting include the following:

  • Issue No. 12-F, “Recognition of New Accounting Basis (Pushdown) in Certain Circumstances.”
  • Issue No. 12-G, “Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity.”
  • Issue No. 12-H, “Accounting for Service Concession Arrangements.”
  • Issue No. 13-B, “Accounting for Investments in Qualified Affordable Housing Projects.”
  • Issue No. 13-E, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.”
  • Issue No. 13-F, “Classification of Certain Government Insured Residential Mortgage Loans Upon Foreclosure by a Creditor.”

For a detailed summary of the meeting, please see Deloitte’s EITF Snapshot and the meeting minutes on the FASB's Web site.

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