A & A Alert - December 2012

The June 2012 edition of our A&A Alert addressed a FASB April 2012 proposal to modify the Business Combinations Topic of the Accounting Standards Codification to address post-acquisition date accounting for certain indemnification assets.

In October 2012, FASB issued ASU 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. 

ASU 2012-06 was issued without modification of the provisions contained in the April proposed ASU. In summary, the ASU requires post-acquisition date changes in the value of an indemnification asset to be accounted for on the same basis as the change in the underlying asset subject to the indemnification.

For a summary of this ASU, see the article titled FASB Exposure Draft Clarifies Indemnification Asset Accounting in our June 2012 A&A Alert which is available by clicking here.

ASU 2012-06 is effective for both public and nonpublic entities for years, and interim periods within those years, beginning on or after December 15, 2012, with early adoption permitted.

The full text of the ASU is available by clicking here.

Readers should not act upon information presented without individual professional consultation.

The American Institute of Certified Public Accountants (AICPA) has proposed a special purpose accounting framework for small and medium-sized private companies (referred to as SMEs) that do not require financial statements based on U.S. generally accepted accounting principles (GAAP).

The proposed financial reporting framework (FRF for SMEs) is less complicated than GAAP and is based on the perceived needs of the primary users of the financial statements of SMEs. The proposed FRF is principles based and comprises accounting principles for transactions and events most likely to be encountered by SMEs.

The term “special purpose framework” was introduced in Statement on Auditing Standards No. 122, Statements on Auditing Standards: Clarification and Recodification, and is commonly referred to as other comprehensive bases of accounting (OCBOA). However, when the clarity auditing standards become effective (audits of financial statements for periods ending on or after December 15, 2012) the term OCBOA will be replaced with the term “special purpose framework”.

The proposed framework is being developed by the AICPA Staff and the FRF-SME Task Force and will not be acted upon by any AICPA senior technical committee or the FASB. The decision to apply the FRF for SMEs would be made by an entity’s management based on the entity’s specific circumstances.

The exposure draft covers only broad recognition and measurement principles. Implementation guidance, in the form of application examples, illustrative financial statements, and disclosure checklists will be issued as a separate document accompanying the final FRF for SMEs.

Although no specific timetable is being proposed for updates or revisions, the AICPA Task Force expects to review the framework and propose changes no more frequently than every three or four years.

The recently established Private Company Council (PCC) will determine whether exceptions or modifications to existing GAAP are necessary to address the needs of users of private company financial statements. The AICPA notes that the goal of the PCC and the FASB is to streamline accounting and reporting for private companies within the context of GAAP, whereas the FRF for SMEs is not GAAP and is intended instead for private companies that do not require GAAP-based financial statements.

Some of the most significant recognition and measurement elements of the AICPA’s proposed FRF for SMEs that may differ from current GAAP are:

• The basic financial statements would include a balance sheet, income statement, statement of changes in equity, and a statement of cash flows. A statement of comprehensive income is not required.
• A choice could be made by a parent company either to consolidate its subsidiaries, or account for its subsidiaries under the equity method. In either case, all subsidiaries would have to be accounted for in the same way.
• Control of a subsidiary would be based entirely on ownership of more than 50%.
• In broad terms, lease accounting would be similar to current GAAP and the distinction between a capital lease and an operating lease would be retained. Such treatment differs from accounting for leases as proposed by the FASB.
• Generally, the conditions for recognizing revenue would be consistent with current GAAP and not according to the revenue recognition standard proposed by the FASB.
• A choice could be made to account for income taxes under either the “taxes payable” method or the “deferred” method.

The comment deadline for the FRF for SMEs is January 30, 2013.

The full text of the exposure draft is available by clicking here.

Readers should not act upon information presented without individual professional consultation.

The FASB has issued Accounting Standards Update (ASU) 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows.

The ASU clarifies the statement of cash flows presentation of cash received from the sale of donated financial assets and eliminates the diversity of presentation that currently occurs in practice. 

Under the ASU, not-for-profit organizations should classify cash receipts from the sale of financial assets, such as donated securities, consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of financial assets:

1. That upon receipt are directed for sale without any limitations imposed by the organization; and
2. Were converted nearly immediately into cash.

Accordingly, the cash receipts from the sale of those assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case those cash receipts would be classified as cash flows from financing activities.

Otherwise, receipts from the sale of financial assets should be classified as cash flows from investing activities by the not-for-profit organization.

The ASU is effective for fiscal years beginning after June 15, 2013, and should be applied prospectively. Additionally, retrospective application to all prior periods presented is permitted, as is early adoption.

For fiscal years beginning before October 22, 2012, early adoption is permitted only if the organization’s financial statements for those fiscal years and interim periods within those years have not been made available for issuance.

The full text of the ASU is available by clicking here.

Readers should not act upon information presented without individual professional consultation.

At its November 7, 2012 Board meeting, the Financial Accounting Standards Board (FASB) adopted a new financial reporting model for management’s assessment of going concern and related disclosures.

The Board has decided that at each reporting period, management would assess an entity’s potential inability to continue as a going concern and the need for related disclosures. In doing so, management would consider the likelihood of an entity’s potential inability to meet its obligations as they become due for a reasonable period of time. 

Management would start providing disclosures in its financial statements about an entity’s financial difficulties when existing events or conditions indicate it is near more likely than not that the entity may be unable to meet its obligations in the ordinary course of business, within a reasonable period of time from the balance sheet date.

In assessing the need for disclosures, the mitigating effect of management’s plans would be considered unless such plans involve actions that are outside the ordinary course of business.

Management would assert in the financial statements that there is substantial doubt about an entity’s ability to continue as a going concern when the likelihood of the entity’s inability to meet its obligations within a reasonable period of time reaches probable. In evaluating the need for this assertion, management would consider the effect of all management plans.

In performing the assessment, management would consider existing events or conditions that may result in an entity’s inability to meet its obligations within a reasonable period of time. A reasonable period of time would represent 12 months from the financial statement (period end) date.

In addition, the assessment would consider the effect of existing events or conditions that are probable of resulting in an entity’s inability to meet its obligations beyond the initial 12 months. A reasonable period of time would be limited to a practical amount of time in which the future impact of existing events or conditions can be identified, not to exceed a period of 24 months from the period end date.

The FASB expects to issue an exposure draft related to this matter in the first half of 2013.

Readers should not act upon information presented without individual professional consultation.

The FASB has issued ASU No. 2012-07, Entertainment - Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs.

The amendments in this ASU apply to all entities that perform impairment assessments of unamortized film costs in accordance with Topic 926.

This update eliminates the rebuttable presumption that the conditions leading to an underperforming film released after the balance sheet date, but before issuing the financial statements, existed at the balance sheet date. As a result, fair value measurements performed as of the balance sheet date will be based on market participant assumptions as of the measurement date.

The objective of this update is to align the guidance on fair value measurements in the impairment test of unamortized film costs with the guidance on fair value measurements in other instances within GAAP.

A company still will need to consider information that arises after the balance sheet date to determine whether that information would affect the company’s assumptions about market participant views as of the measurement date.

For public entities, the ASU is effective for fiscal periods beginning after December 15, 2012. For private entities, the ASU is effective for periods beginning after December 15, 2013. The ASU will be applied prospectively and early adoption is permitted.

The full text of the ASU is available by clicking here.

Readers should not act upon information presented without individual professional consultation.