My first post about the FASB GAAP Simplification Initiative was in April 2015, and I have posted since then about specific GAAP changes under this umbrella that seemed to bestow the most widespread consequences for companies in Silicon Valley. Now seems like a good time to look back over the past year and a half for other GAAP simplification subjects you might not know about, but are not exactly esoteric topics.
Issued in July 2015, ASU 2015-11 now requires companies (with certain exceptions) to measure inventory at “the lower of cost and net realizable value”. Previously GAAP required this measure to be “the lower of cost or market”, with “market” in this context meaning potentially one of three different concepts: replacement cost, net realizable value (NRV), or NRV less a “normal” profit margin. The way this works is that the measure used to value inventory, if not cost, is replacement cost, as long as that measure is not above NRV or below NRV less a normal profit margin. This last sentence illustrates the difficulty in explaining the former rules, much less applying them! Privately-held companies must adopt these new rules for years beginning after December 15, 2016, or years ended December 31, 2017 for calendar-year companies. As with most new accounting standards, these provisions can be adopted early.
Debt Issuance Costs
“Debt issuance costs” are those third-party costs that would not have been incurred but for securing debt financing, with examples being loan fees paid to banks or legal fees. Until this new guidance is implemented, typically companies recorded these debt issuance costs as assets and then amortized that asset over the term of the debt. ASU 2015-22, issued in April 2015, changed the balance sheet presentation to require these issuance costs to be netted against the related debt. What happens if the debt agreement is in place but no borrowing are outstanding (as commonly might be the case with a line-of-credit)? Debt issuance costs are presented as an asset, as under previous guidance. In fact, the SEC Staff has gone so far as to say they will not object to presenting debt issuance costs incurred in securing a line-of-credit as an asset, regardless of whether a balance is outstanding under the line.
Privately-held companies must adopt these new rules for years beginning after December 15, 2015, or years ended December 31, 2016 for calendar-year companies, and these provisions can be adopted early.
Accounting for Measurement Period Adjustments
If “business combinations” (acquisitions of a business) are not in your recent past or planned for your future, you are now permitted to skip to the end of this post. For companies where this is not the case, you should know about ASU 2015-16, issued in September 2015. In the common situation where accounting measurements required for recording business combinations are incomplete at a reporting date, the acquirer recorded estimated amounts and then recorded changes in those amounts determined in the “measurement period” (up to one-year after the acquisition) by restating prior period financial statements. Under the new guidance, the impact of changes in measurement is recorded in the reporting period when the changes are determined. In other words, the cumulative impact of the measurement changes is recorded through the income statement, and presented in the specific financial statement lines affected. This new guidance is effective for measurement period adjustments of privately-held companies that occur after annual periods beginning after December 15, 2016, or years ended December 31, 2017 for calendar year companies, and these provisions can also be adopted early.
Earlier GAAP Simplification Posts
To view previous posts on other Simplification topics:
- CPAs Talk Tech Biz
- FASB Simplifying GAAP…oh, really?? (April 15, 2015)
- Deferred Taxes Just Got Simpler (December 4, 2015)
- Cloud Computing Accounting “Simplification” – Hurt More Than Help? (February 10. 2016)
- Stock-Based Compensation Accounting – Simplified (Believe it or not!) (April 27, 2016)