What You Need to Know about the Upcoming FASB Standards

March 12, 2020 | Article

By Kristin Cornell

What is the Financial Accounting Standards Board (FASB) up to this year? To help your business stay in the know, here is more about standards likely to be issued this year. Your business may be permitted or even required to immediately adopt these standards, so thinking about these standards now can help you as you plan for the year ahead.

Are you in compliance with new effective dates?

Investments in Equity Securities
When: The final standard is expected in the first quarter of 2020.

What: The accounting for investments in equity securities depends on the extent of the investor’s holdings. If the investor owns less than a majority interest but can exert significant influence over the investee, the equity method should be used. Under Accounting Standards Update (ASU) 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities at lower levels of ownership, equity securities are accounted for at fair value, with an alternative measurement approach permitted in certain circumstances when fair value is not readily determinable.

This standard will address questions that have arisen regarding the interaction between the equity method and the fair value/alternative measurement method for equity securities in two fact patterns:

  • Applying the alternative measurement approach for equity securities when there is a change to or from the equity method. A company using the alternative measurement model to consider whether the price paid or received in the transaction should result in an adjustment to the carrying value of the equity securities through income immediately before (or after) the company begins (or discontinues) the equity method.

  • Accounting for forward contracts and options to purchase equity securities if they are not derivatives and if the equity securities resulting from their settlement or exercise will be accounted for under the equity method. A company should account for these forward contracts and purchase call options as equity securities. The company need not consider whether the equity method will be used to account for the equity securities obtained by the settlement or exercise of the contract.

Debt vs. Equity
When: The final standard is on fast track and is expected in 2020.

What: This proposal would simplify the existing accounting for convertible instruments and contracts in a company’s own equity by essentially ignoring many of the instruments’ features.

  • Issues and proposed changes include: Convertible Instruments – Five different models currently exist to determine how to account for the proceeds received from issuing a convertible instrument. The FASB is proposing to simplify the current rules by eliminating three of the models. By adopting a one-size-fits-all approach for most convertible instruments, many would be simply accounted for as a single unit (debt or preferred stock).
  • Contracts in a Company’s Own Equity – Contracts are currently accounted for as assets or liabilities, rather than equity based on a complex analysis that considers, among other things, potential contract settlement adjustments that are tied to contingent events. Under the new model, companies would not be required to consider certain contract provisions, such as contingent events, when determining whether to classify the contract as equity.

  • Earnings Per Share (EPS) – Proposed guidance would account for many convertible instruments as a single unit; consequently, EPS guidance would be amended to require companies to use the if-converted method for all convertible instruments when computing diluted EPS.

Hedge Accounting
A new standard was issued in 2017 targeted to improve hedge accounting. The FASB is working on two projects related to questions that arose from the targeted improvement. The proposed changes would clarify existing guidance to reduce inconsistent application. The first project resulted in an exposure draft for which the comment period ended January 20, 2020. The second project is expected to result in an exposure draft shortly.

Other Accounting Standards Items to Consider
The FASB is also working on number of projects that have a high potential to be finalized during 2020. These include:

  • Debt – Balance Sheet Classification
  • Income Taxes – Disclosure
  • Nonprofit Entities – Contributed Nonfinancial Assets In-Kind Gifts
  • Revenue Recognition – Licenses of Intellectual Property
  • Modifications of Freestanding Warrants Classified as Equity

It’s important to keep on top of these accounting standards as they could have an impact on your organization. Knowing what’s coming will help you plan for compliance.

We’re continuing to keep an eye on how these standards will impact you.

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