The FASB continued to clear its current technical agenda by issuing four new Accounting Standards Updates (ASUs) over the past few weeks. With these issuances, another update is not expected until at least the 3rd quarter of 2017.
1)ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost.
In this update, the FASB provided definitive accounting guidance on the presentation of pension and post-retirement benefit costs in plan sponsor’s financial statements.
As background, such cost consists of multiple components, including service cost, the cost of the benefits which employees earn through their continued service as well as other costs, such an interest cost and amortization of certain gains and losses. There was disparity in practice among plan sponsors as to how they presented these costs in their financial statements. Some separated service cost from other costs in their presentations, as this represented an additional compensation expense, while others presented all such costs as a lump-sum in their financial statement presentation.
In this Update, the FASB is now requiring, for presentation purposes, that such costs be separated into service and other cost components. The service cost portion would be presented in the same financial statement line item as the related compensation expense for the employees to which this cost relates. Other benefit costs would be presented separately and not as a portion of income from operations.
Further, as certain of these costs are capitalized as either inventory or PP&E, only the component of such benefit costs related to service costs can be capitalized after the effective date of ASU No. 2017-07.
This Update will be effective for reporting years beginning after December 15, 2017 for public business entities and one year later for non-public business entities. Early adoption will be permitted for all entities as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.
The amendments for the presentation in the income statement of the service cost component and other components of net periodic pension cost and net periodic postretirement benefit cost will be applied retrospectively. The amendments for the capitalization in assets of the service cost component of net periodic pension cost and net periodic postretirement benefit cost will be applied prospectively.
Be sure to read the ASU in order to fully understand its requirements as well as see all the disclosure requirements and the practical expedient available for in adopting this new ASU.
2) ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.
In this Update, the FASB set the amortization period of bond premium for callable debt purchased at a premium to end at the date at which the security can first be called by its issuer.
If a debt security is purchased at a premium, its stated interest rate is higher than the current market rate of interest for similar securities. Accordingly, if the debt is callable, the issuer has an economic incentive to call the debt. However, purchasers of such debt were most likely amortizing the premium until the debt maturity date. As a result, at the date of call, the holder of the debt would be required to write off the unamortized premium, resulting in an income statement charge as well as poor matching of the interest income and related premium amortization.
Through this Update, by amortizing the premium through the first call date, such mismatch will be eliminated.
This Update will be effective for public business entities for fiscal years beginning on or after December 15, 2018 and one year later for non-public business entities. Early adoption is permitted and the Update will be applied on a modified retrospective basis, with any income statement impact recorded as a cumulative adjustment to retaining earnings as of the beginning of the year of adoption.
3) ASU No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting, the FASB addressed when an entity needs to apply the modification accounting guidance of Topic 718 to changes that the entity makes to its stock compensation plans and awards.
While this guidance was applicable since the original issuance of SFAS 123 ( R), it has taken on new significance as entities determine how to react to the changes in Topic 718 brought by ASU No. 2016-09. That Update, representing a simplification of the existing accounting guidance, provided options for entities for such items as estimating forfeitures and allowing for the sale of shares received under such awards to pay for the income tax consequences of exercising such awards. There was currently disparity in practice with regard to how entities determined when to apply modification accounting.
The Update established three criteria, each of which must be achieved, in order for an entity to not have to apply modification accounting to changes in plans and awards. These are:
- The changes must result in no change in the award fair value as measured immediately before and immediately after the amendment.
- The amendments cannot impact the vesting conditions of the award.
- The changes do not impact the classification of the award as either an equity or liability classified award.
If each of these conditions is not met, the entity must apply modification accounting treatment to its plan or award changes.
This Update is effective for all entities for annual and interim periods beginning after December 15, 2017 and is to be applied on a prospective basis. Early adoption is permitted for financial statements which have not yet been issued.
4) ASU No. 2017-10, Service Concession Arrangements (Topic 853), Determining the Customer of the Operation Services.
In this Update, the FASB, in a consensus of the Emerging Issues Task Force (EITF), provided guidance on determining the customer in a service concession arrangement. Such an arrangement is an agreement between a grantor and an operating entity whereby the operating entity will operate the grantor’s infrastructure, such as roads, airport, bridges and tunnels. This Update eliminates disparity in practice by providing guidance by determining that the grantor is the customer of the operations services in all cases for service concession arrangements within the scope of Topic 853.
For entities which have not yet adopted Topic 606, this Update is effective at the time of its adoption of Topic 606, using the same transition approach. For entities which have already adopted Topic 606, this Update is effective for fiscal years beginning after December 15, 2017 for public business entities and certain other entities and one year later for other entities.
Stay up-to-date on all Updates by registering for a 2017 Unlimited Course Package.
Rich Daisley is Senior Director, Accounting and Financial Reporting Content for Surgent CPE. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.