The Financial Accounting Standards Board is planning to propose two new projects as part of its initiative to simplify accounting standards, along with two new projects for FASB’s Emerging Issues Task Force.
The first simplification project relates to the equity method. According to FASB officials who spoke on condition of anonymity, when investing in an entity, an organization is currently required to account for the purchase basis difference the same way it would account for it in an acquisition. Thus, it has to determine the fair value of the underlying asset, and account for it going forward. Generally that is an off-book issue because the equity method is a one-line item on the balance sheet.
The board is proposing that an organization would not have to account for it that way. If it invests in an entity, it could just record the one-line item. For example, if it invested $100, it could simply record the $100 and be finished in terms of that particular step. It would not have to allocate the $100 to a basis difference in fair value.
A related issue with the equity method is when an organization has an investment that becomes eligible for the equity method. In the past the organization would have to go back for however long it owned that investment and treat it as if it were under the equity method even though it hadn’t been in the past. FASB is now proposing to remove that requirement.
The other simplification proposal relates to the measurement adjustment for business combinations. When accounting for a business combination in an acquisition, there might be certain amounts or values that haven’t been determined yet. An organization is currently required to record the provisional amounts and disclose them in the financial statements if it is still waiting for information to finalize those numbers. When it receives that information, it needs to retrospectively account for it and treat it as if it happened as of the acquisition date, and adjust its previously issued financials. The proposal would remove that requirement. An organization would be allowed to do those revisions within a one-year measurement period. Under the proposed guidance, the organization would be able to account for the revisions when it has the final numbers.
FASB also decided to put two issues on the agenda of the Emerging Issues Task Force. One relates to the effect of derivative contract novations on existing hedge accounting relationships. The basic question is whether a change in the counterparty to a derivative instrument would cause an existing hedge accounting relationship under the accounting standards update for derivatives and hedging, Topic 815, to be re-designated. or terminated. There are some diverse views and practices around whether a change in the counterparty through a derivative novation would cause a re-designation. FASB viewed this as a pervasive issue and decided to hand it over to the EITF.
The other item that the EITF will be examining relates to put options, call options and debt instruments. Preparers typically need to go through an analysis to determine whether or not they should bifurcate puts and calls. As part of that assessment, they have to determine whether or not the options are clearly and closely related to the debt instrument. FASB had previously asked a similar question when the accounting rules for derivatives were issued under Financial Accounting Standard 133. FASB issued guidance that clarified the issue to some degree, but has found there remains some diversity in practice so it is revisiting the issue to see whether the existing guidance answers the question or whether there should be another step in the analysis.
The next decision-making meeting of the EITF will be in June, and that will be the first time those two issues will be discussed. However, it is unclear whether the EITF will make a decision on the two projects or will ask the staff to go back and do more work on them.
As for the two accounting simplification projects, FASB anticipates issuing a proposal on them late in the second quarter of this year.