A & A Alert - March 2013

In order to add clarity and eliminate diversity in practice, the Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.

The ASU is intended to reduce unintended costs while providing users with the information necessary to understand the extent to which certain financial instruments are offset pursuant to master netting arrangements. 

ASU 2013-01 clarifies that ordinary trade receivables and payables are not in the scope of ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with specific criteria contained in the FASB Accounting Standards Codification.

An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date of ASU 2013-01 is the same as the effective date for ASU 2011-11.

The full text of ASU 2013-01 is available by clicking here.

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

The FASB recently issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.

This ASU applies to all public and nonpublic entities that report items of other comprehensive income except for Not-For-Profit entities that report under Subtopic 958-205, Not-For-Profit Entities – Presentation of Financial Statements.

The amendments in this ASU were made to improve the reporting of items reclassified out of accumulated other comprehensive income by requiring an entity to report the effect of those reclassifications on line items of net income only if the amounts are required to be reclassified in their entirety to net income under U.S. generally accepted accounting principles (GAAP). This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.

In cases where amounts of accumulated other comprehensive income are not required to be reclassified in their entirety to net income in the same reporting period, the ASU requires cross-referencing to required GAAP disclosures to provide readers with additional information about the reclassifications.

For example, amounts reclassified out of accumulated other comprehensive income to a balance sheet account instead of to income or expense in the same reporting period would be cross-referenced to other required disclosures to provide additional detail about the reclassifications.

Whereas information about significant reclassifications is currently presented in different places in financial statements and related footnote disclosures, the amendments in this ASU are intended to improve reporting of such reclassifications by requiring that information about significant reclassifications out of accumulated other comprehensive income be presented in one place in the financial statements, either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. 

The amendments in this ASU are effective for nonpublic entities for reporting periods beginning after December 15, 2013. They are effective for reporting periods beginning after December 15, 2012 for public entities.

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

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

The Accounting and Review Services Committee (ARSC) has voted to withdraw the exposure draft of the proposed Statement on Standards for Accounting and Review Services (SSARSs) Association With Unaudited Financial Statements; Compilation of Financial Statements; and Compilation of Financial Statements—Special Considerations.

The decision to withdraw the exposure draft was in response to comment letters that were received.

The compilation proposal would have revised the applicability of the compilation standards but would have retained the compilation service as an attest service. The association proposal addressed the accountant’s responsibilities when a member is associated with financial statements that have not been compiled, reviewed, or audited.

The ARSC noted that certain comments suggested that the compilation service be positioned as a nonattest service consistent with the positioning of preparation of financial statements. A second concern was confusion between the proposed standards and the views of many respondents that they needed to be combined and simplified.

The withdrawal of the exposure draft related to compilations does not affect the exposure draft of the proposed SSARSs Review of Financial Statements and Review of Financial Statements—Special Considerations, which is outstanding with comments due April 26, 2013.

The complete exposure draft related to review services is available by clicking here.

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

In February 2013, the FASB issued ASU 2013-03, Financial Instruments: Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities.

This ASU clarifies when it is appropriate for nonpublic entities to disclose the level within the fair value hierarchy for certain assets and liabilities in the statement of financial position.

As noted in the ASU, it is not a requirement for nonpublic entities to disclose the level of the fair value hierarchy within which the fair value measurements are categorized (Level 1, 2, or 3) for items within the statement of financial position that are not measured at fair value but for which fair value is disclosed. Disclosure of the fair value hierarchy information is only required for items reported within the statement of financial position that are measured at fair value and disclosed as such.

The amendments are effective upon issuance.

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

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

The FASB has published an exposure draft titled Transfers and Servicing (Topic 860) - Effective Control for Transfers with Forward Purchase Agreements to Repurchase Assets and Accounting for Repurchase Financings.

The proposals in the exposure draft would modify the financial reporting of transactions such as repurchase agreements and securities lending transactions, which involve a transfer of a financial asset and a contemporaneous agreement that both entitles and obligates the transferor to repurchase or redeem the transferred asset. 

Under current financial reporting rules, if specific criteria are satisfied, agreements that both entitle and obligate a transferor to repurchase or redeem transferred financial assets result in the transferor’s maintaining effective control over transferred financial assets and, thus, are not to be accounted for as a sale under the derecognition framework in Topic 860.

The FASB conducts ongoing monitoring of capital markets in order to identify financial reporting developments that might need to be addressed through the FASB’s standards-setting process. As part of this monitoring process, the FASB identified various practice issues related to the effective control guidance as described above.

The proposals in the exposure draft are intended to address these practices issues. The significant requirements included in the exposure draft include the following:

• The exposure draft would require that a transfer of an existing financial asset with an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred asset from the transferee with all of the following characteristics be considered to maintain the transferor’s effective control over the transferred financial asset and, therefore, accounted for as a secured borrowing transaction:
  
  
  • The financial asset to be repurchased at settlement of the agreement is identical to or substantially the same as the financial asset transferred at inception or, when settlement of the forward agreement to repurchase or redeem the transferred assets is at the maturity of the transferred assets, the agreement is settled through an exchange of cash (or a net amount of cash).
     
  • The repurchase price is fixed or readily determinable.
     
  • The agreement to repurchase the transferred financial asset is entered into contemporaneously with, or in contemplation of, the initial transfer.

If the agreement fails any of the criteria listed above, it would not maintain the transferor’s effective control over the transferred financial asset and the transferor would be required to assess the transfer under the remaining derecognition conditions in paragraph 860-10-40-5 to determine whether it should be accounted for as a secured borrowing or sale and a forward repurchase agreement.

• The exposure draft also would clarify the characteristics of financial assets that may be considered “substantially the same.” The characteristics that must be satisfied to consider financial assets to be substantially the same should result in identifying those transactions in which the transferor is economically in the equivalent position with the return of a substantially-the-same asset compared with the return of the identical asset.
   
• The exposure draft would eliminate the requirement to determine whether repurchase agreements entered into as part of a repurchase financing should be accounted for separately or linked with the initial transfer for accounting purposes. Instead, a transferor would account for the initial transfer separately from the related repurchase financing that requires the financial asset to be transferred back to the initial transferor with an agreement that both entitles and obligates the initial transferee to repurchase or redeem the transferred financial asset.
   
• The exposure draft would require two new disclosures for certain transfers of financial assets with agreements that both entitle and obligate a transferor to repurchase the transferred financial asset from the transferee.
  
  
  • For those agreements accounted for as secured borrowings, the proposed amendments would require the transferor to disclose the gross amount of the total borrowing disaggregated on the basis of the class of financial asset pledged as collateral.
     
  • For those agreements that result in derecognition of the transferred financial assets only because the assets to be repurchased are not considered to be substantially the same as the initially transferred assets, the proposed amendments would require a transferor to disclose the carrying amount of assets derecognized during the reporting period. To the extent that amount has changed significantly since the previous balance sheet date, the transferor also would disclose the reason(s) for the change.

Comments in response to this exposure draft are due March 29, 2013. The exposure draft did not identify an effective date for the revised guidance. However, the exposure draft did indicate that, for transfers with forward repurchase agreements that settle at the maturity of the transferred financial asset and repurchase financings that involve such agreements, an entity would apply the proposed amendments by means of a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is effective.

For all other transactions, the entity would apply the proposed amendments prospectively to transactions entered into or modified after the effective date.

The full text of the proposed ASU can be found by clicking here.

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