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Accounting & Disclosure

FASB Takes Aim at Liabilities, Equity Differences

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October 03, 2017

Accounting board looks to set clearer, less complicated guidance for new initiatives.

Accounting-MoneyThe Financial Accounting Standards Board (FASB) is in the final stages of a round of major projects that require corporate finance departments to make significant changes. At the same time the standard setter recently decided to embark on a new round of projects.

One of the bigger initiatives, which will have an impact on corporate treasury and on which FASB voted September 20 to add to its docket, is “distinguishing liabilities from equity.” This project will focus on indexation and settlement, convertible debt, disclosures, and earnings per share, with the aims of improving understandability and reducing complexity.

Before the vote, in a webinar that examined recent accounting developments, Deloitte Partner Bob Uhl noted that distinguishing liability from equity was the most popular project among financial statement preparers and users, whose input FASB sought in a recent consultation.

“Everyone agrees this area is extremely complicated, ranking up there with rocket scientist and brain surgeons, but some believe the best way forward is a comprehensive overhaul of the guidance, while others believe a more targeted approach is the way to go,” Mr. Uhl said.

FASB appears to have chosen the more targeted approach. Interestingly, the webinar’s more than 8700 participants resolutely voted for “reporting performance and cash flows” as their favored project for FASB to pursue; it garnered 33.9% of their vote, while only 15.4% voted for distinguishing liabilities and equity, which also fell behind the potential projects of “intangible assets” and “none of the above.”

FASB did add “disaggregation of performance reporting” to its list of upcoming projects while also deciding to continue its research on potential targeted improvements to the statement of cash flows. The board decided to remove a holistic project on intangibles from its research agenda and to maintain a part of developing qualitative disclosures about intangibles as part of its overall disclosures framework.

Mr. Uhl noted that most companies working with digital currencies account for them as intangible assets, while those trading the currencies often account for them as inventory, but neither of those measurement methods are satisfying.

“We’re hearing a lot more about how to account for digital currencies such as bitcoin,” Mr. Uhl said, noting that accounting standards setters may want to address the issue soon. “They’re clearly an asset but not cash, and they’re not a financial asset because they don’t contain contractual rights. So how do you account for them?”

Among the other projects the FASB added to its agenda was “segment reporting,” or the reporting of the operating segments of a company, which will aim to improve segment aggregation criteria and the disclosure requirements. It also decided to continue its research into potential targeted improvements to the statement of cash flows.

The bulk of Deloitte’s webinar was devoted detailing FASB’s projects that are ending. Key among those is the amendment to ASC 815, covering derivatives and hedging. It becomes effective for public companies in 2019, although companies interested in taking advantage of the several ways in which it facilitates obtaining and retaining hedge accounting, can adopt it—with a bit of work—for the 2017 calendar year. The amendment also reduces complexity and the costs to apply it, while also making the bookkeeping easier. FASB’s approach sought to improve existing hedge accounting, while the International Accounting Standards Board more fundamentally revamped its hedge accounting rules, which go into effect next year.

FASB’s new standard for leasing becomes effective for public companies in 2019, and its standard for credit losses becomes effective for public companies in 2020.

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