Third Quarter in Review — 2017

Summary: On July 13, 2017, the FASB issued ASU 2017-11,3 which makes limited changes to the Board’s guidance on classifying certain financial instruments as either liabilities or equity. The ASU’s objective is to improve (1) the accounting for instruments with “down-round” provisions and (2) the readability of the guidance in ASC 4804 on distinguishing liabilities from equity by replacing the indefinite deferral of certain pending content with scope exceptions.

The ASU amends ASC 815 to exclude consideration of a down-round feature in the evaluation of whether an instrument is indexed to an entity’s own stock under ASC 815-40-15-7C. That is, a down-round provision would not preclude an entity from concluding that an instrument or feature that includes a down-round feature is indexed to the entity’s own stock. This guidance applies to both freestanding financial instruments and embedded conversion options (e.g., in convertible instruments with beneficial conversion features or cash conversion features). In addition, the ASU amends the guidance on the recognition and measurement of freestanding equity-classified instruments (e.g., warrants) by adding requirements to ASC 260 for entities that disclose earnings per share (EPS).

Next Steps: For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. For all other entities, the ASU is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual reporting periods beginning after December 15, 2020. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance.

Other Resources: Deloitte’s July 21, 2017, Heads Up. Also see the press release on the FASB’s Web site.

Summary: On August 28, 2017, the FASB issued ASU 2017-12,5 which amends the hedge accounting recognition and presentation requirements in ASC 815. The Board’s objectives in issuing the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. Changes made by the ASU include the following:

• Elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges.
• Recognition and presentation of changes in the fair value of the hedging instrument.
• Recognition and presentation of components excluded from an entity’s hedge effectiveness assessment.
• Addition of the ability to exclude cross-currency basis spreads for currency swaps from an entity’s hedge effectiveness assessment.
• Addition of the ability to elect to perform subsequent effectiveness assessments qualitatively.
• Elimination of the benchmark interest rate concept for variable-rate instruments in cash flow hedges. An entity can now designate the contractually specified interest rate as the hedged risk.
• Addition of the Securities Industry and Financial Markets Association Municipal Swap Rate as a benchmark interest rate.
• Addition of the ability to designate a “fallback” long-haul method for the shortcut method.
• Addition of the ability to apply the shortcut method to partial-term fair value hedges of interest rate risk.
• Enhancement of the ability to use the critical-terms-match method for cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date.
• Addition of new disclosure requirements and amendments to existing ones.

Next Steps: For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein; however, early adoption by all entities is permitted upon its issuance.

Other Resources: Deloitte’s August 30, 2017, Heads Up. Also see the press release, FASB in Focus, and cost-benefit analysis on the FASB’s Web site.

Summary: On September 20, 2017, the FASB issued a proposed ASU6 that would amend the consolidation guidance currently in ASC 810 by (1) creating separate subtopics for variable interest entities (VIEs) and voting interest entities, which would both be included in a new topic (ASC 812); (2) moving the guidance applied by not-for-profit entities in the consolidation of entities controlled by contract to ASC 958; (3) superseding the guidance related to research and development arrangements in ASC 810-30; and (4) clarifying certain guidance.

Next Steps: Comments on the proposed ASU are due by December 4, 2017.

Summary: On August 3, 2017, the FASB issued a proposed ASU7 that would enhance the framework under which an entity assesses whether to account for a transaction as a contribution or exchange. Although the proposal would primarily affect not-for-profit entities, which may earn significant revenue from contributions, it would apply to all entities, including public business entities, that make or receive contributions of cash or other assets. FASB Chairman Russ Golden pointed out that the proposal is being released in response to concerns from stakeholders that “there is difficulty and diversity in practice among not-for-profits with characterizing grants as exchanges or contributions, and in distinguishing between conditional and unconditional contributions.”

Next Steps: Comments on the proposed ASU are due by November 1, 2017.

Other Resources: For more information, see the press release and FASB in Focus on the FASB’s Web site.

Summary: On September 14, 2017, the IASB issued a proposal8 that would amend IAS 19 and IAS 810 to clarify the definition of “material.” The definition would be aligned with forthcoming revisions to the IASB’s conceptual framework as well as with its new practice statement11 on materiality judgments, which was released concurrently with the proposal.

In addition, on September 12, 2017, the IASB issued a proposal12 that would amend the definitions of the terms “accounting policies” and “accounting estimates” in IAS 8. The proposal is being issued in response to concerns that there is diversity in how entities determine whether a change in how they apply a standard is a change in an accounting policy or a change in estimate.

Next Steps: Comments on both proposals are due by January 15, 2018.

Other Resources: Deloitte’s September 14, 2017, IFRS in Focus newsletters on the amendments to the definitions of materiality and accounting policies and accounting estimates and on the new practice statement on materiality judgments. Also see the September 12 and September 14 press releases on the IASB’s Web site.

Summary: On August 18, 2017, the SEC issued Staff Accounting Bulletin (SAB) 116 as well as two interpretive releases to update its interpretive guidance on revenue recognition and bring it into conformity with the FASB’s new revenue standard (ASC 606).

SAB 116 modifies SAB Topics 8, 11.A, and 13 as follows:

• SAB Topic 8, which is specific to retail companies, and SAB Topic 13, which provides the SEC staff’s views regarding general revenue recognition guidance as codified in ASC 605, will no longer be applicable upon a registrant’s adoption of ASC 606.
• SAB Topic 11.A is amended to clarify that “revenues from operating-differential subsidies presented under a revenue caption should be presented separately from revenue from contracts with customers accounted for under [ASC] 606.”

The interpretive releases are as follows:

• Commission Guidance Regarding Revenue Recognition for Bill-and-Hold Arrangements — Indicates that upon adopting ASC 606, “registrants should no longer rely on the guidance in Securities Exchange Act Release No. 23507 and Accounting and Auditing Enforcement Release No. 108, In the Matter of Stewart Parness, which set forth the criteria to be met in order to recognize revenue when delivery has not occurred.”
• Updates to Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement Into the Pediatric Vaccine Stockpile or the Strategic National Stockpile — States that upon adopting ASC 606, manufacturers should recognize revenue for vaccines that are placed into the “Vaccines for Children Program” and the “Strategic National Stockpile” because control of the enumerated vaccines will have been transferred to the customer when the vaccines are placed into the federal government stockpile program.

Other Resources: Deloitte’s August 22, 2017, journal entry. Also see the press release on the SEC’s Web site.

Summary: At the July 20, 2017, EITF meeting, the SEC staff provided significant relief to registrants that are required to include financial statements or financial information of other reporting entities in their SEC filings. Specifically, the SEC staff announced that it would not object to elections by certain PBEs to use the non-PBE effective dates for the sole purpose of adopting the FASB’s new standards on revenue (ASC 606) and leases (ASC 842).

The staff announcement makes clear that the ability to use non-PBE effective dates for adopting the new revenue and leases standards is limited to the subset of PBEs “that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filings with the SEC.”

Other Resources: Deloitte’s July 20, 2017, Heads Up.

Summary: In August 2017, the CAQ released highlights of the May 16, 2017, joint meeting between the SEC staff and the CAQ’s International Practice Task Force (IPTF). Topics discussed at the meeting included:

• Monitoring inflation in certain countries.
• Fixing America’s Surface Transportation (FAST) Act amendments to the Jumpstart Our Business Startups (JOBS) Act and IFRS reporting.
• The XBRL IFRS taxonomy.
• Non-GAAP financial measures under IFRSs.
• SEC staff matters.

Next Steps: The next meeting between the IPTF and SEC staff is scheduled for November 21, 2017.

Summary: On September 21, 2017, the SEC issued interpretive guidance on pay ratio disclosure. The interpretive guidance is designed to “assist companies in their efforts to comply with the pay ratio disclosure requirement mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” In addition, the SEC staff has issued guidance on the pay ratio rule that includes “hypothetical examples of use of sampling and other reasonable methodologies.”

Next Steps: The interpretive guidance will become effective on the date of its publication in the Federal Register.

Other Resources: For more information, see the press release on the SEC’s Web site.

Summary: The SEC is evaluating the impact of Hurricane Irma and Hurricane Harvey on investors and capital markets. Specifically, the SEC will consider granting “relief from filing deadlines and other regulatory requirements for those affected by the storms.”

Other Resources: For more information, see the press release on the SEC’s Web site and Deloitte’s September 20, 2017, Financial Reporting Alert.

Summary: The SEC’s Division of Corporation Finance has published an update to its Financial Reporting Manual that contains revisions made as of August 25, 2017. The update includes:

• A new section that “[d]escribes communications with CF-OCA and provides contact information.”
• Revisions to Section 2065 and the index to “clarify that questions about applying the guidance on abbreviated financial statements to a predecessor entity should be directed to CF-OCA.”
• Revisions to paragraphs 10220.1 and 10220.5 to “clarify the guidance on the omission of financial information from draft and filed registration statements.” The updatesin paragraph 10220.1 omit previous guidance, refer users via hyperlink to the newly issued Question 101.4 of the Securities Act compliance and disclosure interpretations (C&DIs), and note that Question 101.5 of the C&DIs addresses similar matters for non-emerging growth company (EGC) issuers. The updates in paragraph 10220.5(c) delete previous guidance and refer users via hyperlink to Question 2 of the FAST Act C&DIs.

Other Resources: For more information, see the Financial Reporting Manual page on the SEC’s Web site.

Summary: On September 14 and September 20, 2017, the staff in the SEC’s Division of Corporation Finance released updates to its C&DIs related to Securities Act rules. The C&DIs issued on September 14, 2017, discuss the following:

• Whether financial statements in the post-qualification amendment to a Form 1-A must be current at the time it is qualified (Question 182.21).
• When an issuer whose “qualified Form 1-A did not contain financial statements for the last full fiscal year preceding the fiscal year of effectiveness of the Form 8-A [is] required to file an annual report on Form 10-K for the preceding fiscal year” (Question 182.22).
• When an issuer whose “qualified Form 1-A did not contain financial statements for one or more quarterly periods that followed the most recent annual or semiannual period for which financial statements were included in the Form 1-A and that were completed prior to effectiveness of the Form 8-A [is] required to file quarterly reports for these quarterly periods” (Question 182.23).

Summary: On August 17, 2017, the SEC updated its June 29, 2017, announcement that it is extending to all companies benefits that are similar to those it has extended to EGCs regarding the confidential review process for draft registration statements under the JOBS Act. The updates are intended to clarify the factors a company considers in determining whether it is eligible to use the expanded nonpublic review process.

The announcement notes that the nonpublic review process is “available for Securities Act registration statements prior to the issuer’s initial public offering date and for Securities Act registration statements within one year of the initial public offering. In identifying the initial public offering date, we will refer to Section 101(c) of the JOBS Act. The nonpublic review process is available for the initial registration of a class of securities under Exchange Act Section 12(b) on Form 10, 20-F or 40-F.”

In addition, the SEC’s Division of Corporation Finance has published two new C&DIs related to Securities Act forms. The new C&DIs (Question 101.04 and Question 101.05) clarify when an EGC and a non-EGC, respectively, may omit from its draft registration statement interim and annual financial information that it reasonably believes will not need to be presented separately at the time it files its registration statement publicly. Question 101.04 was added to reflect the updates the SEC made to Question 1 of its FAST Act C&DIs.

Other Resources: Deloitte’s July 11, 2017, Heads Up.