As year-end approaches, calendar-year public companies are gearing up to prepare annual financial statements that will be included in their Form 10-K filings.
Keeping up to date with the current reporting standards is essential for all filers. While some standards are widely covered because they have onerous requirements and apply to most filers (like ASC 842 Leases), other standards that do not receive as much publicity can be overlooked. With this article, we intend to shine a light on updates to less common standards.
The major Financial Accounting Standards Board’s (FASB) standards applicable to calendar-year public companies can be grouped in two categories – standards effective in 2019 and standards effective in subsequent years.
Accounting standards updates effective in 2019
*these standards are applicable to 2019 calendar year financial statements and should have been adopted in the interim quarterly financial statements
- ASU 2016-02, Leases (Topic 842). Upon adoption, right-of-use assets and the corresponding lease liabilities for all leases with terms greater than 12 months should be recorded on the balance sheet. This ASU provides guidance for accounting for finance and operating leases and requires extensive disclosures.
- ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features. According to this ASU, down round features will no longer cause certain financial instruments to be accounted for as derivatives. However, when the down round feature of a freestanding equity-linked instrument is triggered, the company has to measure the financial effect and present it as a dividend. Convertible instruments, such as convertible notes payable with down round provisions, still need to be assessed for beneficial conversion features.
- ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU aligns most of the guidance on share-based payments granted to nonemployees with the requirements for share-based payments granted to employees.
Accounting standards updates effective in subsequent years
*these standards are applicable to 2020 interim quarterly financial statements
- ASU 2016-13 Financial Instruments—Credit Losses. This ASU requires the immediate recognition of management’s estimates of current expected credit losses on financial assets ranging from short-term trade accounts receivable to long-term financings. The FASB subsequently issued several ASUs with modifications and improvements to this standard.
- ASU 2017-04, Simplifying the Test for Goodwill Impairment. This standard eliminates step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.”
- ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates details on transfers between Level 1 and Level 2 of the fair value hierarchy and the valuation processes for Level 3 Fair Value measurements. Also, certain disclosure requirements are modified and new disclosures for public business entities are added to improve transparency.
FASB votes to delay the effective dates for certain accounting standards
The FASB voted to delay the effective dates of accounting standards for leases, credit losses, and derivatives and hedging. The Accounting Standards Update (ASU) is expected to be finalized in November.
For most SEC filers, the effective dates would remain unchanged. The exception would be smaller reporting companies whose credit loss effective date would be extended to fiscal years beginning after December 15, 2022.
Due to space limitations, the above information is intentionally brief. Contact your Friedman relationship partner to obtain a full list of the newly issued accounting standards and to discuss their potential impact on your business’ financial reporting.