June 26, 2019 — FASB Discusses Reference Rate Reform, Distinguishing Liabilities From Equity, and the Conceptual Framework
Deloitte Accounting Journal
June 26, 2019
FASB Discusses Reference Rate Reform, Distinguishing Liabilities From Equity, and the Conceptual Framework
At its June 19, 2019, meeting, the FASB discussed the following projects:
Reference rate reform.
Distinguishing liabilities from equity.
Summaries of the Board’s deliberations are provided below.
Reference Rate Reform: Facilitation of the Effects of the Interbank Offered Rate Transition on Financial Reporting
The FASB clarified the scope of its project on reference rate reform, which was added to the FASB’s agenda to address the anticipated transition from use of the London Interbank Offered Rate (LIBOR) to other interbank offered rates in many jurisdictions; however, as noted below, the scope of the project is not limited to LIBOR transition. Specifically, the FASB reached tentative decisions about the following:
The scope of the project and the nature and extent of recognition and measurement relief that will be provided.
The manner in which relief will be applied.
As indicated in the summary of tentative Board decisions, the FASB decided on the following principles for the scope criteria:
“Contracts that reference the [LIBOR] or an interest rate that has been discontinued or is anticipated to be discontinued would qualify for the relief guidance.”
“Critical term changes [made to contracts] that are either essential to or related to the replacement of an interest rate would qualify for the relief guidance. The Board also decided to provide examples of eligible and ineligible changes.”
The FASB tentatively decided that entities would be able to obtain relief in the following areas of accounting:
Assessments of whether a debt or loan modification should be treated as a modification, extinguishment, or troubled debt restructuring.
Lease modification accounting requirements.
Embedded derivative reassessments.
The Board also tentatively decided to establish a principle that “would allow such modifications to be considered a continuation of the contract for the purposes of the relevant [ASC topic].”
Option to Apply Relief
The Board tentatively decided to permit an entity to “determine whether it wants to apply the relief on a Codification Topic-by-Topic basis.” For example, an entity would be able to elect to apply the relief for debt modifications, but not for lease modifications.
Distinguishing Liabilities From Equity: Simplifications to Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
The FASB decided to issue a proposed ASU that would modify ASC 260-10,1 ASC 470-20, and ASC 815-40 to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. Some of the modifications were discussed previously at the Board’s February 13, 2019, meeting.2 The Board decided that the proposed ASU would have a 75-day comment period.
The Board discussed topics related to the elements and measurement aspects of the conceptual framework. In its elements discussion, the Board continued to address the definition of an asset and, as noted in the meeting summary, tentatively decided that:
“The identifiable and separability notions should be included in the explanatory paragraphs of the asset definition to help assess whether an intangible item meets the definition of an asset.”
“The term control should not be included in the definition of an asset.”
In its measurement discussion, although it did not make any decisions, the Board “discussed an approach for developing a proposed measurement chapter of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting.”
For further information on the topics discussed, see the meeting handout.