By Michael Cohn | AccountingToday.com | June 10, 2020
The Financial Accounting Standards Board approved Wednesday a pair of new accounting standards for convertible instruments and nonprofit gifts-in-kind, while also voting to defer the effective date of its long-duration insurance standard because of the COVID-19 pandemic, during the final meeting in FASB chairman Russell Golden’s term.
The new standards wrap up some of the important work that Golden has been trying to complete before the end of his second term running FASB, showing the standard-setting board hasn’t been slowing down in the midst of the pandemic.
Like other recent meetings, this one was held virtually so the members and staff won’t need to risk possible exposure to the novel coronavirus. FASB has been delaying the effective dates of a number of important standards in recent months to give companies and their accountants more time to adjust to them, especially with the pandemic having such a serious impact on their companies and firms where they work.
The convertible instruments standard aims to improve the financial reporting associated with the accounting for such instruments and contracts in an entity’s own equity. The other new standard would improve how not-for-profits present and disclose their contributed nonfinancial assets, otherwise known as gifts-in-kind.
The insurance standard whose effective date is being postponed covers long-term contracts for policies such as life insurance, disability income, long-term care, as well as annuities.
Under the upcoming accounting standards update for convertible instruments that was approved at the meeting, the accounting for convertible instruments would be simplified by removing major separation models required under current U.S. GAAP. Thus, more convertible instruments would be reported as a single liability or equity without requiring separate accounting for embedded conversion features. Some of the settlement conditions that are now required for equity contracts to qualify for the derivative scope exception would be removed. That means more equity contracts would qualify for FASB’s scope exception. The upcoming standards update that FASB will be issuing will also simplify the diluted earnings-per-share calculation in some areas.
Last July, in an exposure draft, FASB originally proposed to simplify the accounting for equity contracts by decreasing the form-over-substance-based accounting conclusions that are driven by remote contingent events when assessing the derivatives scope exception. However, based on mixed feedback from its constituents during the public comment period, FASB decided to eliminate those proposed changes from the upcoming standards update. FASB still plans to explore further improvements on this aspect of the guidance in a future phase 2 of the project.
“The upcoming ASU will address areas of liabilities and equity guidance that stakeholders identified as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” said FASB chairman Golden (pictured) in a statement. “We expect it to result in improved comparability of information for financial statement users and reduced cost and complexity for preparers and auditors.”
The upcoming standards update will take effect for public business entities that meet the definition of an SEC filer, excluding entities that are eligible to be considered smaller reporting companies as defined by the SEC, for fiscal years starting after Dec. 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will take effect for fiscal years starting after Dec. 15, 2023, including interim periods within those fiscal years. FASB will allow early adoption of the standard. It plans to issue the upcoming standards in the third quarter of the year.
Nonprofit gifts in kind standard
The upcoming standard on gifts in kind will require a nonprofit to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets.
It also will require a not-for-profit to disclose:
1. The amount of contributed nonfinancial assets received, disaggregated by category, that depicts the type of contributed nonfinancial assets; and
2. For each category of contributed nonfinancial assets received (as identified above):
a. Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were or are intended to be used.
b. The nonprofit’s policy (if any) about monetizing as opposed to using the contributed nonfinancial assets.
c. A description of any donor restrictions associated with the contributed nonfinancial assets.
d. A description of the valuation techniques and inputs used to arrive at a fair value measure in accordance with FASB’s fair value measurement standard, at initial recognition.
e. The principal market (or most advantageous market) used to arrive at a fair value measure if it’s a market in which the nonprofit recipient is prohibited by donor restrictions from selling or using the contributed nonfinancial assets.
The upcoming standards update will take effect for annual reporting periods starting after June 15, 2021, and is expected to be issued in the third quarter.
FASB has also asked its staff to find out whether more educational efforts are needed for valuing contributed nonfinancial assets and to keep tabs on how the new standard is improving transparency by providing better information to users.
Insurance standards delay
FASB also voted Wednesday to issue a proposed standards update that would grant insurance companies that issue long-duration contracts, such as life insurance and annuities, an extra year to implement Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
FASB has been delaying the effective dates of a number of its standards in response to the coronavirus pandemic this year (see story). Like the leasing, revenue recognition and credit loss standards, the insurance contracts standard was originally part of a major convergence project with the International Accounting Standards Board. The final standards have been rolling out over time, often with stark differences emerging between the two boards. Eventually, FASB and the IASB decided to go separate ways on the insurance standards project. Constituents will get 45 days to review and provide comments on the proposed standards update, which FASB plans to release in the weeks ahead.
Final meeting
Golden ended the meeting, his last after serving two terms as chairman since July 2013 and as a board member since 2010, by acknowledging the colleagues and stakeholders who have supported FASB’s work while he was there.
“Before my seven-year term as FASB chairman comes to a close on June 30, I want to offer my heartfelt thanks to all members of the FASB and FASB staff I’ve worked with over the years,” he said. “These are all dedicated professionals who get up every day to support our mission to improve information for our capital markets. I also want to thank the international standard-setting community for working with the FASB to help improve accounting standards worldwide; the commissioners and staff of the U.S. Securities and Exchange Commission for their unwavering support of our mission; and U.S. stakeholders, whose willingness to share their views were critical to our ability to support more transparent capital markets with high-quality accounting standards. I encourage each and everyone one of you to continue that support when Rich Jones takes the reins on July 1, 2020.”