Significant Accounting & Reporting Updates

November 2016

FASB Issues Guidance on Eight Cash Flow Classification Issues
In August 2016, the FASB issued ASU 2016-15 to clarify whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions and (viii) receipts and payments with aspects of more than one class of cash flows. The new standard takes effect in 2018 for public companies. For all other entities, the amendments in this update are effective in 2019. If an entity elects early adoption, it must adopt all of the amendments in the same period.

FASB Issues ASU on Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model, and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. The update takes effect in 2020 for SEC filers and in 2021 for all other entities, including public business entities other than SEC filers. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years.

AICPA Requests Feedback on Revenue Recognition Implementation Issues
The AICPA’s Financial Reporting Executive Committee (FinREC) has issued several working drafts of accounting issues related to the implementation of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The working drafts aim to provide industry-specific considerations and illustrative examples in each implementation area for entities in various industries, including aerospace and defense. Once finalized, the AICPA plans to include them in a new revenue recognition guide currently in development.

Below is a recap of the issues identified to date by the Aerospace and Defense Revenue Recognition Task Force:

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SEC Requests Comments on Management, Certain Security Holders and Corporate Governance Disclosure Requirements
In August 2016, the SEC published a request for comment on the disclosure requirements of Subpart 400 of Regulation S-K, which relate to management, certain security holders and corporate governance matters. The request is part of the Disclosure Effectiveness Initiative, a broad-based staff review of the SEC’s disclosure rules designed to improve the disclosure regime for both companies and investors. The request follows the SEC’s proposal to eliminate redundant and outdated disclosure requirements in July 2016, the concept release on Regulation S-K, published in April 2016, and the request for comment on the effectiveness of certain financial disclosure requirements of Regulation S-X, published in September 2015. The request will also inform the Commission’s study on Regulation S-K, which is required by the Fixing America’s Surface Transportation (FAST) Act. The request for comment can be found on the SEC’s website. Comments should be provided within 60 days following publication of the request for comment in the Federal Register.

SEC Proposes to Eliminate Outdated and Redundant Disclosure Requirements
The SEC’s July 2016 proposed amendments to eliminate redundant and outdated disclosure requirements as part of its Disclosure Effectiveness Initiative. The proposal follows the SEC’s request for comment on the effectiveness of certain financial disclosure requirements of Regulation S-X, published in September 2015 and the concept release on Regulation S-K, published in April 2016. The amendments were also proposed in response to a FAST Act mandate, which requires the SEC to eliminate provisions of Regulation S-K that are duplicative, outdated or unnecessary disclosures for all filers.

The proposal acknowledges that certain disclosure requirements in Regulations S-K and S-X have become outdated, redundant, overlapping or superseded in light of developments in U.S. GAAP, IFRS, other SEC disclosure requirements and changes in the information environment. The changes are intended to simplify the overall compliance process, but not change the mix of information provided to investors. For example, some of these proposed changes include:
  • Eliminating the income tax rate reconciliation disclosure requirement in S-X 4-08(h)(2), as such disclosure is required by ASC 740-10-50-12.
  • Eliminating the requirement to provide a computation of earnings per share in S-K 601(b)(11), as such disclosure is required by ASC 260-10-50-1a.
  • Deleting S-K 101(b), which requires disclosure of segment financial information, restatement of prior periods when reportable segments change and discussion of segment performance that may not be indicative of current or future operations. Such disclosures are similar to those required by ASC 280 and S-K 303(b).
  • Deleting S-K 201(d), which requires disclosure of the securities authorized for issuance under equity compensation plans. Although U.S. GAAP requirements are not identical to those contained in S-K 201(d), they provide disclosures about the nature and terms of equity compensation arrangements, which result in reasonably similar disclosures.

Eliminating the requirement in S-K 503(d) and related forms to provide a ratio of earnings to fixed charges when an offering of debt securities is registered. The Commission believes this requirement is no longer relevant and useful.

The proposal also solicits comments on:
  • Certain disclosure requirements, which may overlap with U.S. GAAP, but provide incremental information. The SEC plans to use the feedback received on these areas to determine whether to retain, modify, eliminate or refer them to the FASB for potential incorporation into U.S. GAAP.
  • Where disclosures appear in an SEC filing. The proposal would result in the relocation of certain disclosures within a filing. The SEC is seeking feedback on how the relocations may affect the prominence or context of certain disclosures.

The proposal can be found on the SEC’s website. Comments should be provided within 60 days following publication of the release in the Federal Register.

SEC Proposes Amendments to Smaller Reporting Company Definition
In June 2016, the SEC proposed rules which would increase the financial thresholds in the smaller reporting company (SRC) definition. The proposal would expand the number of companies eligible for the scaled disclosures permitted by Regulation S-K and Regulation S-X. The financial thresholds in the definition of accelerated and large accelerated filer and their related filing requirements would remain unchanged.
Under the proposal, a company with less than $250 million of public float (or less than $100 million in annual revenues, if the company has no public float) would qualify as a SRC. The proposed financial threshold for re-entering SRC status is less than $200 million of public float (or less than $80 million in annual revenues, if the company has no public float).

The current definitions of accelerated and large accelerated filer contain a provision that excludes registrants that qualify as SRCs. The proposal would eliminate that provision, while maintaining the financial thresholds in the definitions of accelerated filer (i.e., $75 million of public float) and large accelerated filer (i.e., $700 million of public float). Therefore, companies with public floats of at least $75 million, but less than $250 million, that qualify as SRCs under the amended definition would still be subject to the accelerated filing requirements, including the accelerated timing of filing periodic reports and the requirement to provide the auditor’s attestation of management’s assessment of internal control over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. However, those companies would be allowed to take advantage of the scaled disclosure system available to SRCs.

Rule 3-05 of Regulation S-X requires financial statements of businesses acquired or to be acquired. Rule 3-05(b)(2)(iv) allows registrants to omit such financial statements for the earliest of three fiscal years required if the net revenues of the business to be acquired are less than $50 million. The Commission has not proposed to amend this threshold.

The proposal can be found on the SEC’s website. Comments should be provided within 60 days after the release is published in the Federal Register.


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