Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
March 26, 2014 FASB Board MeetingGoing Concern. The Board continued its redeliberations of its June 2013 proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption (Exposure Draft).
The Exposure Draft proposed that entities would begin disclosures of going concern uncertainties when certain early-warning disclosure criteria were met. In addition to early-warning disclosures, SEC filers would assess whether there is substantial doubt about the entity’s ability to continue as a going concern for a period of 24 months after the balance sheet date.
In light of the feedback received on the Exposure Draft, the Board decided not to require the proposed early-warning disclosures. Instead, the Board decided to pursue an approach that would require disclosures when there is substantial doubt similar to disclosures provided today under existing auditing standards.
Definition of Going Concern Presumption
The Board decided not to define the term going concern presumption, but rather to specify that the going concern basis of accounting would be used until an entity’s liquidation is imminent, which is consistent with the provisions of Subtopic 205-30 on the liquidation basis of accounting.
Substantial Doubt Definition, Assessment Period, and Frequency of Assessment
The Board decided that the definition of substantial doubt would incorporate a likelihood component defined using the term probable, as used in Topic 450 on contingencies. In addition, the Board decided that the assessment period for substantial doubt would be one year from the date the financial statements are issued (or, for nonpublic entities, the date financial statements are available for issuance). The Board affirmed the proposed Update’s requirement to assess substantial doubt at each annual and interim reporting period.
Information to Be Assessed Including Management’s Plans
The Board decided that information about conditions and events would be assessed as of the financial statement issuance date (or, for nonpublic entities, the date financial statements are available for issuance). The Board also decided that management should consider the mitigating effect of its plans to the extent it is probable that:
- Those plans will alleviate the adverse conditions within the assessment period.
- Those plans will be effectively implemented.
Disclosures in Periods When Substantial Doubts Exist
The Board decided that when there is substantial doubt about an entity’s ability to continue as a going concern, the notes to the financial statements should disclose:
- A statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern
- The principal conditions and events giving rise to substantial doubt
- Management’s evaluation of the significance of those conditions and events
- Any mitigating conditions and events including management’s plans.
The Board decided to require management to disclose in the financial statements when substantial doubt about an entity’s ability to continue as a going concern has been alleviated primarily by management’s plans. Those disclosures would include the principal conditions and events that initially raised the substantial doubt, and management’s plans that alleviated the substantial doubt, unless the information is disclosed elsewhere in the financial statements.
The Board decided that the disclosures would apply to both public entities and nonpublic entities.
The Board directed the staff to perform outreach on its tentative decision to make the assessment period one year from the financial statement issuance date as compared with the alternative of one year from the balance sheet date. The Board also directed the staff to discuss the assessment period decision with the Private Company Council and the Small Business Advisory Committee to better understand the implication of that decision on nonpublic entities. The Board expects to continue redeliberations in May 2014.
FASB Ratification of an EITF Consensus and a Tentative Conclusion. The Board ratified the following consensus reached at the March 13, 2014 EITF meeting and approved issuance of the resultant Accounting Standards Update.
Issue 13-D, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”
The amendments in the Update resulting from this Issue apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.
A performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 on stock compensation as it relates to awards with performance conditions that affect vesting to account for such awards. That is, compensation cost attributable to the period in which requisite service has been rendered should be recognized when it is probable that the performance condition will be achieved. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.
No incremental disclosures will be required to those already required by Topic 718.
For all entities (both public business entities and all other entities), the amendments will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption will be permitted. Entities may apply the amendments either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If the amendments are applied retrospectively, the cumulative effect as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance in that period. Additionally, if the amendments are applied retrospectively, entities may use hindsight in measuring and recognizing compensation cost.
FASB Ratification of an EITF Consensus-for-Exposure
The Board also ratified the following consensus-for-exposure reached at the March 13, 2014 EITF meeting and decided to expose the resultant proposed Update for public comment for a period of 90 days.
Issue 12-F, “Recognition of New Accounting Basis (Pushdown) in Certain Circumstances”
The amendments in the proposed Update resulting from this Issue would apply to an entity that is a business or nonprofit activity, both public and nonpublic, when an acquirer obtains control of the entity. While the recognition and measurement provisions of the proposed amendments are elective, to comply with the disclosure provisions, all entities would be required to assess at each reporting date whether an acquirer has obtained control of the entity.
An entity whose control has been obtained by an acquirer would be provided with an option to apply pushdown accounting in its separate financial statements. The option to apply pushdown accounting would be evaluated and can be elected by the acquired entity for each individual acquisition separately. If the acquired entity elects the option to apply pushdown accounting, it would follow the initial recognition and measurement guidance in Topic 805 on business combinations to recognize and measure its assets, including goodwill, liabilities, and equity. However, if the application of Topic 805 results in a bargain purchase gain, the acquired entity would not recognize that gain in its income statement.
The acquisition-related debt incurred by the acquirer would not be recognized in the acquired entity’s separate financial statements unless the acquired entity is required to recognize a liability for such debt in accordance with other applicable U.S. GAAP. For subsequent measurement, the acquired entity would follow the guidance in Topic 805 and other applicable U.S. GAAP to account for its assets, including goodwill, liabilities, and equity instruments.
The acquired entity applying pushdown accounting would be required to provide the disclosures required in Topic 805 (except Subtopic 805-50), as applicable, as if the acquired entity were the acquirer. If the acquired entity does not elect to apply pushdown accounting, it would disclose (1) that the entity has undergone a change in control event whereby an acquirer has obtained its control during the reporting period and (2) its decision to continue to prepare its financial statements using its historical basis that existed before the acquirer obtaining control of the entity.
Pushdown accounting would be applied prospectively to an event in which an acquirer obtains control of the entity for which the acquisition date is on or after this Issue's effective date, which will be determined after the Task Force considers stakeholder feedback on the proposed Update.
Accounting for Identifiable Intangible Assets in a Business Combination (PCC Issue 13-01A). In preparation for the April 29, 2014 Private Company Council (PCC) meeting, the Board continued its discussion from the January 22, 2014 Board meeting about accounting alternatives relating to PCC Issue No. 13-01A,"Accounting for Identifiable Intangible Assets in a Business Combination," for public business entities, private companies, and not-for-profit entities. The meeting was educational; no decisions were made.
Accounting for Goodwill for Public Business Entities and Not-for-Profits. The Board continued its discussion of how a public business entity and not-for-profit entity would account for goodwill after a business combination. The Board is considering the following alternatives:
- Amortize goodwill over 10 years or less than 10 years if an entity demonstrates that another useful life is more appropriate. An entity would make an accounting policy election to test goodwill for impairment at the entity level or at the reporting unit level. It would test goodwill for impairment only when a triggering event occurs. An impairment loss would be measured as the difference between the carrying value of the entity and its fair value (if goodwill is tested for impairment at the entity level) or the carrying value of the reporting unit and its fair value (if goodwill is tested for impairment at the reporting unit level). This alternative is consistent with the alternative available for private companies.
- Amortize goodwill with impairment tests over its useful life, not to exceed a maximum number of years.
- The direct writeoff of goodwill at the acquisition date.
- A nonamortization approach that uses a simplified impairment test.
The Board made no decisions at this meeting. It deferred any further discussion until after the IASB has completed and issued findings on its post-implementation review of IFRS 3, Business Combinations (expected later in 2014).