November 12, 2019
The Investor Advisory Committee (IAC) met on November 12, 2019. At the meeting, the FASB staff delivered updates and IAC members provided input on the following FASB topics:
- IAC Emerging Issues and Trends: IAC members discussed their observations on the adequacy of disclosures for contingent liabilities and interest rate sensitivity. Members also discussed the increasing prevalence of supply chain financing arrangements and recommended that companies provide additional information about these transactions.
- Accounting for Revenue Contracts in a Business Combination: IAC members discussed how they analyze deferred revenue in the context of a business combination. Members generally agreed that the requirement to measure deferred revenue at fair value is not useful. Members explained that the resulting adjustments, often decreases to the preacquisition deferred revenue balance, are challenging to understand, reduce comparability between the preacquisition and postacquisition periods, and that there is usually an attempt to unwind them when performing their analyses. Accordingly, members generally preferred an alternative that would provide an exception to the fair value measurement requirement for deferred revenue in a business combination. However, some members expressed concerns about the implications of providing an additional exception to the accounting for business combinations. Members also discussed enhancing disclosures if fair value measurement of deferred revenue is continued and similar overall concerns with inventory acquired in a business combination.
- Contract Modifications of Licenses of Intellectual Property: IAC members discussed licenses of functional intellectual property that convert to software-as-a-service contracts as part of a contract modification. Members noted that they were unaware of these contract modifications and of the treatment by companies to defer upfront revenue normally recognized at a point in time in anticipation of the modification. Members explained that they generally think of those two arrangements as distinct contracts. Accordingly, members recommended that the conversion to software-as-a-service be accounted for prospectively (no adjustment to revenue recognized under previous contract terms). Members also recommended that companies disclose more information about revenues recognized at a point in time versus revenues recognized over time. Some members also recommended enhanced disclosure pertaining to remaining performance obligations.
- Disclosure Framework—Interim Reporting: IAC members discussed the events that should trigger the disclosure of more detailed information in an interim period. Members generally agreed that enhanced interim disclosure should be completed for any event that significantly affects revenues, expenses, or cash flows. Members further discussed other specific information that would be useful for interim periods. Members also generally agreed that there are some quarterly disclosures that could be provided on an annual basis instead, but some cautioned against removing those interim disclosure requirements because of the diverse nature of companies that provide them.
- Reference Rate Reform: IAC members discussed the adequacy of disclosures provided by companies that will be affected by the reference rate transition. Members explained that companies are providing limited disclosure on their exposures to benchmark interest rates being phased out. Members ideally would like companies to provide more detailed disclosures about their exposures to specific reference rates for both assets and liabilities as well as the reference rates to which those assets and liabilities will transition. Additionally, members requested more information about hedging relationships that may be discontinued in anticipation of the reference rate transition.
- Financial Performance Reporting–Disaggregation: IAC members discussed the internal view approach to disaggregating certain expense items on the income statement. Members expressed mixed views on the approach. Members generally agreed that, in principle, more detailed expense information would be useful for trend analysis. Additionally, members discussed how some of this information is currently provided in the Management’s Discussion and Analysis (MD&A) section of the financial report. Despite the information already provided in MD&A, some members explained that having the absolute expense amounts on the income statement or in the footnotes would be useful. Other members expressed concern that the internal view approach to disaggregation could reduce comparability across companies and could be misleading over time. Members also discussed the project’s interaction with the Segments Reporting project.