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Journal entry — FASB expands project agenda

Published on: Mar 23, 2015

At its last meeting, the FASB discussed the prioritization of projects on its agenda. Tentative agenda decisions reached at the meeting are summarized below.1

Projects Added to FASB Agenda

Disclosures About Interest Income on Purchased Debt Securities and Loans

The Board voted to add to its agenda a project to enhance interest income disclosures for all purchased debt securities and loans. Possible enhancements discussed included requiring disclosure of:

  • The separate components of the effective yield on the purchased debt securities and loans, specifically (1) the contractual interest and (2) the accreting premium or discount.
  • The outstanding amounts of principal and premiums or discounts of the purchased debt securities and loans, with separate disclosure of those amounts subject to call options.

Simplifying the Equity Method of Accounting

The Board voted to add to its agenda a project to simplify the equity method of accounting. It tentatively voted to remove (1) the requirement for an investor to account for the amount by which its cost of acquiring an equity method investment exceeds its proportionate interest in the equity of the investee (“basis difference”) as if the investee were a consolidated subsidiary and (2) the related disclosures. The Board also tentatively decided to require entities to apply the new guidance to existing equity method investments on a modified prospective basis (i.e., to “cease amortization of all remaining basis differences as of the effective date of the change”) and to provide transition disclosures.2

In addition, the Board voted to (1) remove the requirement to retroactively account for an investment that becomes newly qualified for use of the equity method because of an increased ownership interest as if the equity method had been applied during all previous periods in which the investment was held and (2) require prospective application of that guidance. The Board also tentatively decided not to require any disclosures in the period of adoption.

Further, the Board directed its staff to draft a proposed Accounting Standards Update (ASU) for vote by written ballot, with a 60-day comment period.

Accounting for Measurement Period Adjustments in a Business Combination

The Board voted to add to its agenda a project to simplify the accounting for adjustments made during the measurement period to provisional amounts recorded in a business combination. The Board tentatively decided to require that “during the measurement period, an acquirer would recognize adjustments of provisional amounts in the reporting period in which the adjustment amount is determined. The acquirer would record, in that period, the cumulative effect on earnings of changes in depreciation, amortization, or other income effects, as a result of the change to the provisional amount.” Under current U.S. GAAP, entities are required to apply such adjustments retrospectively.

In addition, the Board voted to require entities to (1) apply this proposed guidance prospectively to provisional amount adjustments occurring after adoption and (2) provide transition disclosures.3 The Board also directed its staff to draft a proposed ASU for vote by written ballot, with a 45-day comment period.

New EITF Issues

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

The FASB voted to add to the EITF’s agenda a new Issue that would address whether the novation of a derivative designated as the hedging instrument in an existing hedging relationship, in which one counterparty is legally replaced by another, would trigger the dedesignation of that hedging relationship and the discontinuation of hedge accounting. The Board also directed its staff to perform additional research related to the scope of the Issue and to provide examples for the EITF and the Board to consider.

Accounting for Embedded Put and Call Options in Debt Instruments

The FASB voted to add to the EITF’s agenda a new Issue that would clarify how to determine whether an embedded put or call option is clearly and closely related to its debt host. Such a determination is needed to assess whether the embedded derivative must be bifurcated from its host contract and accounted for separately. Under current guidance, ASC 815-15-25-41 states that “[f]or contingently exercisable call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk, not some extraneous event or factor.” The Issue would focus on clarifying whether “indexed only to” refers only to the option’s payout or also to the contingency (i.e., whether a contingency triggered by something other than a change in interest rates or credit would make the embedded option not clearly and closely related to the debt host even if the option’s payout is based on interest rates or credit).

Other Agenda Decisions

The FASB voted not to address the following issues:

  • Income statement presentation of credit card and other payment processing costs.
  • Accounting for reacquired rights in a business combination.
  • Balance sheet offsetting of payables and receivables arising from securities lending transactions that are cleared through a regulated central counterparty and subject to a master netting arrangement.

Further, the Board directed its staff to perform additional research on simplifying the measurement of asset retirement obligations “to evaluate the effects and costs associated with various measurement alternatives.”

____________________

1 Unless otherwise indicated, all quotations are from the FASB staff’s summary of tentative decisions reached at the Board’s March 18, 2015, meeting. For additional background information, refer to the FASB staff's handout for the March 18, 2015, Board meeting, which will be available for approximately 30 days on the FASB’s Web site.

2 In addition to the disclosures required under ASC 250-10-50-1(a) and ASC 250-10-50-2, entities would disclose the “amortization of basis differences recognized in the comparable prior period.” (For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”)

3 Refer to the disclosure requirements of ASC 250-10-50-1(a) and ASC 250-10-50-2.

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