While ASC 606/IFRS 15 are set to change the way accounting and finance professionals do business, there are many more standards on the horizon that will continue to impact the finance community.
While we have discussed the revenue recognition standard in a series of blogs, a whitepaper, and a video to be released soon, we would like to share with you a few of the many FASB and IASB accounting standards updates (proposed and published) that may change the way you do business.
FASB Topic 842: Lease Accounting Rules
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (Topic 842). Topic 842 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”
The key principle of Topic 842 is that lessees should recognize the asset and liability that arises from a lease. The asset that is recognized is termed a right-of-use (ROU) asset, and the corresponding liability represents the future lease payments.
Our parent company, Wipfli, broke down the new standard in depth in the following article: Understanding the New Lease Guidance.
FASB Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2016-01 impacts all entities holding financial assets or owing financial liabilities and was designed to make targeted improvements to GAAP. The amendments in this ASU enhance and improve financial reporting disclosures for certain topics and simplify other areas of GAAP.
This ASU is effective for all public business entities for fiscal years beginning after December 15, 2017 (calendar year 2018) and for all other entities for fiscal years beginning after December 15, 2018 (calendar year 2019).
FASB Topic 326: Measurement of Credit Losses on Financial Instruments
ASU 2016-13, Published in June 2016, pertains to the Measurement of Credit Losses on Financial Instruments. This ASU is applicable to all entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Therefore, this standard will have far-reaching effects.
Not only will it affect the banking and financial industry, but also virtually all operating entities with trade receivables and notes receivable, two of the more common financial instruments.
FASB Topic 958: Presentation of Financial Statements for Not-for-Profit Entities
Mid-August saw the release of ASU 2016-14, the first in the FASB’s efforts to improve the financial statements of not-for-profit entities (NFP). This ASU applies to NFPs, which include nongovernmental entities such as foundations, colleges, health care providers, religious organizations, and others.
For more on this new not-for-profit financial statement standard, see the article, Simplifying and Improving Not-for-Profit Financial Statements.
FASB Topic 230: Restricted Cash
The most recent ASU, issued in November 2016, seeks to reduce diverse practices in the classification and presentation of changes in restricted cash transactions on the statement of cash flows. The amendments in this ASU apply to all entities that have restricted cash or cash equivalents and are required to present a statement of cash flows.
Some examples of restricted cash and cash equivalents include funds received with a donor-imposed restriction that limits use of that cash to long-term purposes and funds required to be set aside by contractual arrangement, such as a reserve for payment for certain insurance claims or for escrow accounts for financing arrangements.
Past ASUs Taking Place Shortly
Wipfli highlighted additional ASUs with rapidly approaching effective dates in their article, GAAP in Review.
- (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement: The amendments in this update provide guidance to customers about cloud computing arrangements and the related fees paid. Cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. For entities other than public business entities, the update is effective for fiscal years beginning after December 15, 2015 (calendar year 2016)
- (Topic 330) – Simplifying the Measurement of Inventory: This update simplifies the requirement of recording inventory at the lower of cost or market. Currently, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendment establishes the valuation of inventory at the lower of cost and net realizable value. For entities other than public business entities, the update is effective for fiscal years beginning after December 15, 2016 (calendar year 2017).
Learn More: ASC 606/IFRS 15 Resources
With just under a year before ASC 606, Revenue from Contracts with Customers taking place for public entities, time is running out. We’ve compiled this list of resources to help you understand what this change means, and how you can prepare your organization for one of the biggest changes in GAAP in decades.
- Beyond Accounting: 5 Departments Affected by ASC 606/IFRS 15
- ASC 606/IFRS 15 Update: SEC Chief Wants Progress Reports
- ASC 606/IFRS 15: The Definitive Guide to New Revenue Recognition Rules
- Top Takeaways from ASC 606/IFRS 15 #IntacctChat
- Are You Ready for ASC 606 and IFRS 15?
- Got Contracts? How to Prepare for Revenue Recognition Standards
Get in contact with Brittenford to learn more about our services and the first to market solution for handling contracts under ASC 606/IFRS 15.