The Financial Accounting Standards Board (FASB) is wrapping up some major projects. It released additional updates to revenue recognition and the long-awaited changes to financial instruments: credit losses in the second quarter of 2016. It also released exposure drafts on smaller scale projects. Activity with this Board is expected to continue, with eight exposure drafts and three final standards scheduled for the third quarter.

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Principal versus agent considerations, finalized in the
first quarter, clarifies the unit of accounting when an
entity determines whether it acts as a principal or an
agent in a transaction.
Performance obligations and licenses, finalized
in April 2016, addresses materiality, shipping and
handling and identifying performance obligations,
and method of recognition, royalties and identifying
performance obligations when accounting for
licensing of intellectual property.
The narrow scope improvements and practical
expedients, finalized in May 2016, addressed
collectability, sales tax and noncash consideration
and provided additional transition guidance.
Additionally, the FASB rescinded previous SEC staff
guidance with the passage of ASU 2016-11. The
accounting standards update clarified that when an
entity adopts Topic 606, the prior guidance issued by
the SEC staff ceases to apply for freight services in
process, accounting for shipping and handling fees
and costs, accounting for consideration given by a
vendor to a customer, and gas-balancing arrangement
using the entitlements method.
The FASB also issued a proposal to make technical
corrections to Topic 606 that will clarify wording within
the standard, including clarifying when disclosure of
additional information on variable consideration will
be required.
The Financial Accounting Standards Board (FASB)
is wrapping up some major projects. It released
additional updates to revenue recognition and the
long-awaited changes to financial instruments: credit
losses in the second quarter of 2016. It also released
exposure drafts on smaller scale projects. Activity
with this Board is expected to continue, with eight
exposure drafts and three final standards scheduled
for the third quarter.
Major Projects
Revenue Recognition
Effective Date: Calendar Year 2018, including interim
reporting periods during 2018, for public business
entities and certain not-for-profit entities, Calendar
Year 2019 year end reporting and calendar year 2020
interim reporting for all other entities.
Keeping on top of the revenue recognition standard has
been somewhat complicated because of the number of
post-issuance updates. Since releasing the standard,
the FASB has finalized four accounting standards
updates designed to streamline implementation.
July 2016
Lay of the Accounting Landscape: Q2 2016

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Wrap up activity comes just in time. March 31, 2017 is
the first interim reporting date that Topic 606 can be
applied to a calendar-year entity early adopting the
standard.
Credit Loss
Effective Date: Calendar Year 2020 for public
companies (including interim periods); Calendar Year
2021 for all other entities
In the second quarter, the FASB passed changes
to accounting for credit losses. The update modifies
accounting from an incurred loss model to a current
expected credit loss (CECL) model. It affects financial
assets measured at amortized cost, including trade
receivables, loans, held-to-maturity-debt securities,
loan commitments, financial guarantees, net
investments in leases and reinsurance.
Entities currently recognize losses in assets measured
at amortized cost when it is probable that the losses
have occurred. Under the expected loss model, entities
will account for losses using the current estimate of
all expected credit losses. Estimating expected credit
losses draws from historical information, current
information, forecasts and estimates of prepayments.
The estimation process eliminates the probable
threshold used in current U.S. generally accepted
accounting principles (GAAP), which shareholders
told the FASB proves problematic because it prolongs
the recognition of expected losses in some cases.
For available-for-sale debt securities, measurement
of the expected credit loss is similar to the existing
impairment model, but it eliminates the concept of
other-than-temporary impairment, prohibits expected
losses from exceeding the fair value of the debt
security, requires expected losses to be recognized
as an allowance and permits the allowance to be
reversed into current earnings.
The guidance includes purchases of credit-impaired
financial assets. Any assets purchased with “more
than insignificant” credit deterioration will also follow
the new credit loss model, with some modifications.
For more information, please see Recognition of
Credit Losses Updated.
Exposure Drafts
Statement of Cash Flows: Restricted Cash
The FASB Emerging Issues Task Force (EITF)
separated restricted cash accounting from a larger
project on restricted cash flows due to delays in being
able to reach a consensus. In the recently released
exposure draft, the FASB proposes requiring the
inclusion of restricted cash in the beginning and
ending balance of cash on the cash flow statement.
It also recommends disclosing the location of the
restricted cash in the balance sheet.
For more information, please see Second Quarter
Developments from the Emerging Issues Task Force.
Goodwill Impairment
The FASB tackled goodwill impairment in the second
quarter of 2016 as well. Its exposure draft recommends
removing Step 2 of the goodwill impairment test.
Current GAAP requires entities to use a three-step
process to determine goodwill impairment:
• Step 0- Optional qualitative test to determine
whether goodwill is more likely than not impaired
• Step 1- Taken when Step 0 is not performed or it
is likely goodwill is impaired, and
• Step 2- A hypothetical purchase price allocation
to determine the implied fair value of the goodwill.

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The exposure draft would instead require entities to
calculate goodwill by examining the amount by which
the carrying amount of the reporting unit exceeds
its fair value based on the same measurements as
performed in Step 1 of the existing model. Goodwill
would continue to be tested for impairment on an at
least annual basis.
For more information, please see Proposal to Simplify
Goodwill Impairment.
Consolidation: Indirect Interests
The FASB issued an update to the consolidation
guidance for variable interest entities (VIE) and voting
interest entities in 2015. Guidance takes effect for
the calendar year end 2016, including interim periods
therein, for public business entities, and calendar year
end 2017 for all entities. When entities were looking
to adopt the guidance, questions arose about the
treatment of indirect interest. The originally issued
guidance called for interests held in a VIE by entities
under common control with the single decision maker
of a VIE to be treated as direct interests of the decision
maker. This treatment appeared to be inconsistent
with other changes to the related party rules for
determining a primary beneficiary. As a result, the
Board has issued a proposal to clarify that a decision
maker of a VIE should only include a proportionate
share of interests in the VIE held by related parties,
including those under common control, when
evaluating whether the decision maker is the primary
beneficiary of the VIE.
Comments on the exposure draft are due July 25,
2016.
Other Income: Gains and Losses from the
Derecognition of Nonfinancial Assets
In an exposure draft that represents the second phase
of the FASB’s multi-phased effort to re-evaluate the
definition of a business, the Board considered what
nonfinancial assets are, and how gains and losses
should be recognized when a controlling financial
interest is lost in nonfinancial assets. Under existing
accounting guidance, an entity that deconsolidates a
business or a subsidiary that is not a business due to
a sale, or for other reasons, recognizes a full gain or
loss. The gain or loss also includes the gain or loss
on any partial interest (e.g. equity method interest)
retained. However, if the partial sale is of a business
or subsidiary that is considered in-substance real
estate, or the partial sale is of another asset or asset
group that is not a business or subsidiary, an entity is
precluded from recognizing a full gain.
The proposed update would align the treatment of
these two scenarios by creating a new defined term
“insubstance nonfinancial asset”, eliminating the
concept of insubstance real estate, and requiring that
a full gain or loss based on fair value be recognized for
the loss of a controlling financial interest in nonfinancial
assets and insubstance nonfinancial assets.
The standard would impact partial sales where
an interest is retained, such as an equity method
investment, or a cost method investment. In addition,
it would affect accounting for the formation of a joint
venture. The Board continues to deliberate Phase 1
of its efforts to clarify the definition of a business and
plans a third phase to discuss other differences in the
acquisition and derecognition of assets that could be
removed from U.S. GAAP.
Comments on the exposure draft are due August 5,
2016.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
Stay Up-to-Date on Changes That Affect You
We will continue to keep you abreast of the
accounting developments that could have an impact
on your operations. For a full recap of the second
quarter’s changes, please see our webinar. If you
have specific comments, questions or concerns on
the issues presented here, please share them with
Mark Winiarski of the MHM Professional Standards
Group. Mark can be reached at mwiniarski@cbiz.com
or 816.945.5614.