TOP ACCOUNTING
ISSUES FOR 2016
CPE COURSE
BONUS CPE COURSE!
Earn CPE Credit and stay on top of key Accounting issues.
Go to CCHGroup.com/PrintCPE
Top Accounting Issues
FOR 2016 ⏐ CPE COURSE
CCH Editorial Staff Publication
Contributors
Contributing Editors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steven C. Fustolo, CPA;
James F. Green, CPA
Technical Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sharon R. Brooks, CPA;
Colleen Neuharth McClain, CPA
Production Coordinator . . . . . . . . . . . . . . Mariela de la Torre; Jennifer Schencker;
Kavitha Madhesswaran; Prabhu Meenakshi
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lynn J. Brown
This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional
service. If legal advice or other expert assistance is required, the services of a
competent professional person should be sought.
© 2015 CCH Incorporated. All Rights Reserved.
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Chicago, IL 60646-6085
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CCHGroup.com
No claim is made to original government works; however, within this Product or
Publication, the following are subject to CCH Incorporated’s copyright: (1) the
gathering, compilation, and arrangement of such government materials; (2) the
magnetic translation and digital conversion of data, if applicable; (3) the historical,
statutory and other notes and references; and (4) the commentary and other
materials.
Printed in the United States of America
iii
Introduction
CCH’s Top Accounting Issues for 2016 CPE Course helps CPAs stay abreast of the most
significant new accounting standards and important projects. It does so by identifying the
events of the past year that have developed into hot issues and reviewing the opportunities
and pitfalls presented by these changes. The topics reviewed in this course were selected
because of their impact on financial reporting and because of the role they play in understanding the accounting landscape in the year ahead.
Module 1 of this course reviews ongoing issues.
Chapter 1 discusses the current developments in the establishment of a set of GAAP
rules for private, nonpublic companies.
Chapter 2 reviews ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
issued May 2014. It covers the scope of the ASU, its rules, disclosures required by the ASU,
and other issues.
Chapter 3 addresses authoritative guidance on accounting for the impairment of goodwill and other indefinite-lived intangible assets and illustrates the basic application of that
guidance.
Module 2 of this course reviews financial statement reporting.
Chapter 4 discusses ASU 2014-15, Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern and the interrelation of the new GAAP rules in the ASU with the auditing standards
found in AU-C 570.
Chapter 5 discusses ASU 2014-08, Presentation of Financial Statements (Topic 205) and
Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. It also provides an overview of the GAAP rules
that existed prior to the implementation of ASU 2014-08.
Chapter 6 discusses ASU 2015-01, Income Statement—Extraordinary and Unusual Items
(Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items, issued in January 2015.
Chapter 7 discusses ASU 2014-10, Development Stage Entities (Topic 915): Elimination
of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest
Entities Guidance in Topic 810, Consolidation, issued in June 2014.
Module 3 of this course reviews other current developments.
Chapter 8 examines new FASB proposed statements concerning financial performance
reporting and fair value accounting. It also reviews significant GAAP changes on the horizon.
Chapter 9 reviews the rules, transition date, and details of ASU 2014-17, Business
Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues
Task Force).
Finally, Chapter 10 reviews the application of ASU 2014-18, Business Combinations
(Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, discusses
the transition requirements, and provides examples.
Study Questions. Throughout the course you will find Study Questions to help you test
your knowledge, and comments that are vital to understanding a particular strategy or idea.
Answers to the Study Questions with feedback on both correct and incorrect responses are
provided in a special section beginning at ¶ 10,100.
iv
Index. To assist you in your later reference and research, a detailed topical index has been
included for this course.
Quizzer. This course is divided into three Modules. Take your time and review all course
Modules. When you feel confident that you thoroughly understand the material, turn to the
CPE Quizzer. Complete one, or all, Module Quizzers for continuing professional education
credit.
Go to CCHGroup.com/PrintCPE to complete your Quizzer online. The CCH Testing
Center website lets you complete your CPE Quizzers online for immediate results and no
Express Grading Fee. Your Training History provides convenient storage for your CPE
course Certificates. Further information is provided in the CPE Quizzer instructions at
¶ 10,200.
September 2015
CCH’S PLEDGE TO QUALITY
Thank you for choosing this CCH Continuing Education product. We will continue to
produce high quality products that challenge your intellect and give you the best option for
your Continuing Education requirements. Should you have a concern about this or any other
CCH CPE product, please call our Customer Service Department at 1-800-248-3248.
COURSE OBJECTIVES
This course provides an overview of important accounting developments. At the completion
of this course, the reader will be able to:
• Indicate the reasons why a set of GAAP rules for private, non-public companies was
needed
• Discuss the AICPA’s FRF for SMEs
• Describe the new ASUs for non-public companies that have been released by the
Private Company Council
• Identify some of the steps required to comply with the new revenue standard
• Recognize the approaches that may be used to recognize revenue under the revenue
standard
• Recall how certain costs are accounted for under the revenue standard
• Describe how an entity identifies goodwill, other intangible assets, and their useful
lives
• Explain how an entity tests goodwill for impairment
• Describe how an entity tests other indefinite-lived intangible assets for impairment
• Discuss presentation and disclosure of impairment losses and related matters
• Identify the period of time for which the going concern assessment must be made
under ASU 2014-15
• Explain the measurement threshold that is used for management’s assessment of
going concern under ASU 2014-15
• Recognize some of the criteria that must be met for a disposal to qualify as discontinued operations under ASU 2014-08
• Identify how discontinued operations should be presented on the income statement
and balance sheet under the ASU 2014-08 rules
v
• Recognize the transaction types that have been eliminated from extraordinary items
• Recognize the current GAAP for reporting on development stage entities
• Identify changes made to the development stage entity rules by ASU 2014-10
• Identify key proposed changes under the Financial Performance Reporting Project
• Discuss the changes that will be made under the proposed Financial Instruments—
Overall standard
• Explain the changes that will be made as a result of the Financial Instruments—Credit
Losses exposure draft
• Recognize the types of entities for which pushdown accounting is and is not available
• Recognize some of the types of entities that are permitted to elect the accounting
alternative for identifiable intangible assets under ASU 2014-18
• Identify how to apply the accounting alternative for goodwill amortization when electing the accounting alternative for identifiable intangibles in ASU 2014-18
One complimentary copy of this course is provided with certain copies of CCH publications. Additional copies of this course may be downloaded from CCHGroup.com/
PrintCPE or ordered by calling 1-800-248-3248 (ask for product 10024493-0003).
vii
Contents
MODULE 1: ONGOING ISSUES
1 Big GAAP-Little GAAP
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior Attempts at Little GAAP . . . . . . . . . . . . . . . . . . . . . .
FASB and AICPA Simultaneously Jump on the Little-GAAP
Bandwagon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FASB’s PCC Comes to Life . . . . . . . . . . . . . . . . . . . . . . .
AICPA’s FRF for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . .
The Multiple Framework Options for Non-Public Entities . . .
PCC Issues Private Company Decision-Making Framework
2 Recognizing Revenue from Contracts with Customers
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . .
Impact of Implementing the Revenue Recognition Standard .
3 Impairment of Goodwill and Indefinite-Lived Intangible Assets
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualitative Assessments . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite-Lived Intangible Assets Other Than Goodwill . . . .
MODULE 2: FINANCIAL STATEMENT REPORTING
4 Going Concern Disclosures
Welcome . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . .
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¶ 101
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¶ 105
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¶ 106
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¶ 110
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¶ 201
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¶ 213
¶ 214
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¶ 301
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¶ 305
¶ 306
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¶ 401
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viii
Rules for Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Evaluating Conditions and Events that may Raise
Substantial Doubt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration of Management’s Plans when Substantial Doubt is
Raised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
Going Concern GAAP Versus Auditing Standards . . . . . . . . . . . .
Impact of Going Concern Report Modifications on Company
Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 Discontinued Operations
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of Previous GAAP for Discontinued Operations . . . . . .
Games are Played in Classification Shifting . . . . . . . . . . . . . . . .
ASU 2014-08, Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting
Discontinued Operations and Disclosures of Disposals of
Components of an Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Key Provisions of ASU 2014-08 Versus Previous
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
6 Extraordinary Items
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of Existing GAAP for Extraordinary Items . . . . . . . . . .
Games Played in Classification Shifting . . . . . . . . . . . . . . . . . . .
FASB Gradually Attacks Extraordinary Items . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
7 Development Stage Entities Reporting
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
¶ 406
¶ 407
¶ 408
¶ 409
¶ 410
¶ 411
¶ 412
¶ 413
¶ 501
¶ 502
¶ 503
¶ 504
¶ 505
¶ 506
¶ 507
¶ 508
¶ 509
¶ 510
¶ 511
¶ 601
¶ 602
¶ 603
¶ 604
¶ 605
¶ 606
¶ 607
¶ 608
¶ 701
¶ 702
¶ 703
¶ 704
¶ 705
¶ 706
¶ 707
ix
MODULE 3: OTHER CURRENT DEVELOPMENTS
8 The Move to Fair Value Accounting and Other Reporting Developments
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant GAAP Changes in 2015 and Beyond . . . . . . . . . . . . .
FASB Starts Up Financial Performance Reporting Project . . . . . .
The Continued Move to Fair Value Accounting . . . . . . . . . . . . . .
9 Business Combinations: Pushdown Accounting
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition and Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
Example — Application of Pushdown Accounting . . . . . . . . . . . .
Reasons for Using Pushdown Accounting . . . . . . . . . . . . . . . . .
10 Business Combinations: Accounting for Identifiable Intangible Assets
Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Example — Application of ASU 2014-18 . . . . . . . . . . . . . . . . . .
Answers to Study Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 1—Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 1—Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 1—Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 2—Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 2—Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 2—Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 2—Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 3—Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 3—Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 3—Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CPE Quizzer Instructions . . . . . . . . . . . . . .
CPE Quizzer Questions: Module 1
CPE Quizzer Questions: Module 2
CPE Quizzer Questions: Module 3
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¶ 801
¶ 802
¶ 803
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¶ 805
¶ 901
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¶ 905
¶ 906
¶ 907
¶ 908
¶ 909
¶ 1001
¶ 1002
¶ 1003
¶ 1004
¶ 1005
¶ 1006
¶ 1007
¶ 1008
¶ 1009
¶ 10,100
¶ 10,101
¶ 10,102
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¶ 10,106
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¶ 10,110
Page
193
¶ 10,200
¶ 10,301
¶ 10,302
¶ 10,303
x
Answer Sheets . . . .
Module 1
Module 2
Module 3
Evaluation Form . .
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.
.
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¶ 10,400
¶ 10,401
¶ 10,402
¶ 10,403
¶ 10,500
1
MODULE 1: ONGOING ISSUES—CHAPTER
1: Big GAAP-Little GAAP
¶ 101 WELCOME
This chapter discusses the current developments in the establishment of a set of GAAP
rules for private, nonpublic companies.
¶ 102 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Indicate the reasons why a set of GAAP rules for private, non-public companies
was needed
• Discuss the AICPA’s FRF for SMEs
• Describe the new ASUs for non-public companies that have been released by
the Private Company Council
¶ 103 INTRODUCTION
In 2015, there is finally progress toward creating a little GAAP alternative for non-public
(private) companies. After all, it has only taken more than 40 years to get to the point
where practitioners and their clients are fed up with the extensive growth of GAAP,
much of which is useless to the users of non-public company financial statements. (For
purposes of this chapter, the author uses the terms “non-public and “private
interchangeably.)
¶ 104 BACKGROUND
For years there was discussion about establishing two sets of GAAP rules; one for
private companies, and the other for SEC companies. Yet, each time the discussion fell
into oblivion with no real support from the AICPA and FASB.
The Big-GAAP, Little-GAAP issue has been around since 1974. There is a long
history of various attempts to develop two sets of rules for GAAP, one for private
companies, and the other for public companies. For purposes of this discussion, the
term “Big-GAAP refers to GAAP for public companies, while “Little GAAP refers to a
modified and simplified version of GAAP applicable to private companies.
The Big GAAP-Little GAAP movement received new impetus over the past few
years due to several reasons:
• In the past decade, the FASB has issued several extremely controversial FASB
statements and interpretations that are costly and difficult for non-public entities
to implement, and not meaningful to the third-party users they serve.
• The Sarbanes-Oxley Act of 2002 mandated that the FASB’s funding come
primarily from SEC registrants, thereby suggesting that the FASB’s focus has
been and will continue to be on issues important to public entities.
• The FASB and International Accounting Standards Board (IASB) in Europe
continue to work on an international standards convergence project that may
ultimately result in one set of international GAAP standards. Changes will be
required to existing U.S. GAAP standards and many of those changes will not be
important to non-public entities.
¶ 104
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
• Presently, accountants from smaller CPA firms and from non-public companies
are not serving as FASB staff or board members, which results in no small
business representation or perspective within the FASB.
• On the auditing side, the role of the Auditing Standards Board (ASB) has
diminished to issuing auditing standards for non-public entities only. The Public
Company Accounting Oversight Board (PCAOB) is now the standard-setter for
SEC auditors. Thus, the AICPA’s ASB and the AICPA, in general, have closer
focus on the needs of non-public company audits.
In the past few years, there was sharp criticism pointed toward the FASB in its issuance
of several extremely controversial statements that were difficult to implement for
smaller, closely held companies including:
• Consolidation of Variable Interest Entities (ASC 810) (formerly FIN
46R): Requires entities (large and small) to consolidate their operating entities
with their off-balance-sheet real estate leasing entities if certain conditions are
met
• Accounting for Uncertainty in Income Tax (An Interpretation of FAS 109)
(ASC 740): Clarifies the accounting for uncertainty in tax positions related to
income taxes recognized in an entity’s financial statements
In addition, layers of mindless disclosures have been added to GAAP over the past
decade, many of which are targeted at larger publicly held entities. Yet, the FASB has
not exempted non-public entities from the application of those disclosures. In general,
there have been few instances in which the FASB has issued standards that exempt
private companies. A few of those instances include:
• ASC 260 (formerly FAS 128, Earnings Per Share)
• ASC 280 (formerly FAS 131, Disclosures about Segments of an Enterprise and
Related Information)
• ASC 825 (formerly FAS 107, Disclosure About Fair Value of Financial
Instruments)
In fact, the extent to which the FASB has carved out GAAP exclusions for private
companies has previously been limited to delaying the effective date of a new standard
and, in very limited cases, exempting private companies from one or two disclosures.
Otherwise, private companies have had to adopt the same standards that public companies do. Consequently, accountants and their clients have defaulted to using several
techniques to avoid the burdensome task of having to comply with recently issued
difficult and irrelevant accounting standards, including:
• Using OCBOA (income tax basis financial statements)
• Including a GAAP exception in the accountant’s/auditor’s report
• Ignoring the new GAAP standards by arguing their effect is not material
However, some third parties have not been receptive to using OCBOA financial statements, and issuing a GAAP exception could be a red flag. Simply ignoring the new
GAAP standards has its obvious problems.
¶ 105 PRIOR ATTEMPTS AT LITTLE GAAP
Over the past 40 years, there have been 12 studies and reports on some version of BigGAAP, Little-GAAP conducted by committees on behalf of the FASB and AICPA. No
viable action was taken on any of the study’s recommendations.
In October 2004, an AICPA Task Force issued a report entitled, 2004 Private
Company Financial Reporting Study. That report was followed by a May 2005 AICPA
¶ 105
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MODULE 1 - CHAPTER 1 - Big GAAP-Little GAAP
Council passage of a resolution endorsing an effort to explore potential changes to
GAAP for private companies. Findings from the 2004 report concluded that GAAP for
private companies should be developed based on concepts and accounting that are
appropriate for the distinctly different needs of constituents of financial reporting.
Nothing happened.
In June 2006, the FASB and AICPA issued a joint proposal entitled, Enhancing the
Financial Accounting and Reporting Standard-Setting Process for Private Companies. The
Proposal had, as its primary basis, a mechanism by which the FASB can be more
reflective of the needs of non-public entities during FASB’s deliberation process.
Ultimately, the proposal resulted in the creation of a Private Company Financial
Reporting Committee (PCFRC) to provide recommendations that would help the FASB
determine whether there should be differences in prospective and existing accounting
standards for private companies.
Then there was the Blue Ribbon Panel. In December 2009, a group of organizations
led by the AICPA, the Financial Accounting Foundation (FAF) (the parent organization
of the FASB), and other organizations established a Blue Ribbon Panel to address
accounting standards of private companies. The Panel was comprised of 18 members,
all senior leaders including lenders, investors, owners, accountants, and auditors. The
Panel also invited regulators and other stakeholders to participate (but not vote) in the
discussions of the Panel.
The Panel issued a report in January 2011 to the FAF. That report made drastic
recommendations as to how to resolve the accounting standards challenges for private
companies.
Unlike previous panels and committees, the Panel recommended that in the near
term, a little-GAAP system should:
• Retain existing GAAP with carve-out exceptions and modifications for private
companies that better respond to the needs of the private company sector rather
than move toward a separate, self-contained GAAP for private companies or a
wholesale reorganization of GAAP.
• Create a new separate private company standards board (consisting of five to
seven members) to help ensure that appropriate and sufficient exceptions and
modifications are made for private companies, for both new and existing
standards.
• Empower the new board to approve all GAAP exceptions and modifications for
private companies with the power to override the FASB.
¶ 106 FASB AND AICPA SIMULTANEOUSLY JUMP ON
THE LITTLE-GAAP BANDWAGON
On May 23, 2012, a rather profound series of events happened. After more than 40 years
of the profession seeking a little-GAAP alternative, both the FASB and AICPA simultaneously announced their own independent proposals for a little-GAAP alternative for
non-public companies as follows:
• The FASB’s new PCC was created to issue GAAP exceptions and modifications
for private companies.
• The AICPA created its new Financial Reporting Framework for Small and
Medium Sized Entities (FRF for SMEs).
¶ 106
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FASB’s Private Company Council (PCC)
More specifically, on May 23, 2012, the FASB’s FAF Board of Trustees announced that
it was establishing a new body to improve the process of setting accounting standards
for private companies, referred to as the Private Company Council (PCC). According to
the FAF, the PCC has the following principal responsibilities:
• Based on criteria mutually developed and agreed to with the FASB, the PCC
determines whether exceptions or modifications to existing non-governmental
U.S. GAAP are necessary to address the needs of users of private company
financial statements.
• The PCC identifies, deliberates, and votes on any proposed changes, which are
then subject to endorsement by the FASB and submitted for public comment
before being incorporated into GAAP.
• The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the
FASB’s technical agenda.
Key elements of the PCC responsibilities and operating procedures include:
• Agenda Setting: The PCC and the FASB will mutually agree on criteria for
determining whether and when exceptions or modifications to GAAP are warranted for private companies. Using the criteria, the PCC will determine which
elements of existing GAAP to consider for possible exceptions or modifications
by a vote of two-thirds of all sitting members, in consultation with the FASB and
with input from stakeholders.
FASB Endorsement Process: If endorsed by a simple majority of FASB members, the
proposed exceptions or modifications to GAAP will be exposed for public comment. At
the conclusion of the comment process, the PCC will redeliberate the proposed
exceptions or modifications and forward them to the FASB, which will make a final
decision on endorsement (not ratification), generally within 60 days.
• Membership and Terms: The PCC consists of nine to 12 members, including a
Chair, all of whom are selected and appointed by the FAF Board of Trustees:
- The PCC Chair will not be a FASB member.
- Membership of the PCC will include a variety of users, preparers, and practitioners with substantial experience working with private companies. Members
will be appointed for a three-year term and may be reappointed for an additional
term of two years. Membership tenure may be staggered to establish an orderly
rotation.
- The PCC Chair and members will serve without remuneration but will be
reimbursed for expenses.
FASB Liaison and Staff Support: A FASB member will be assigned as a liaison to the
PCC. FASB technical and administrative staff will be assigned to support and work
closely with the PCC. Dedicated full-time employees will be supplemented with FASB
staff with specific expertise, depending on the issues under consideration.
Meetings: During its first three years of operation, the PCC will hold at least five
meetings each year, with additional meetings if determined necessary by the PCC
Chair. All FASB members will be expected to attend and participate in deliberative
meetings of the PCC, but closed educational and administrative meetings may be held
with or without the FASB.
Oversight: The FAF Board of Trustees will create a special-purpose committee of
Trustees, the Private Company Review Committee (Review Committee), which will
¶ 106
MODULE 1 - CHAPTER 1 - Big GAAP-Little GAAP
5
have primary oversight responsibilities for the PCC. The Review Committee will hold
both the PCC and the FASB accountable for achieving the objective of ensuring
adequate consideration of private-company issues in the standard-setting process.
FAF Trustees’ Three-Year Assessment: The PCC will provide quarterly written
reports to the FAF Board of Trustees. The FAF Trustees will conduct an overall
assessment of the PCC following its first three years of operation to determine whether
its mission is being met and whether further changes to the standard-setting process for
private companies are warranted.
STUDY QUESTIONS
1. Why did the Big GAAP-Little GAAP movement receive new impetus over the past
few years?
a. Many changes that will be required by the single set of international GAAP
standards will be important to non-public entities.
b. Recent controversial FASB statements and interpretations are costly and difficult for non-public entities to implement.
c. The Sarbanes-Oxley Act mandates that the FASB’s funding come from nonpublic entities.
d. There is no large business representation or perspective on the FASB.
2. Which of the following is one of the controversial statements that are difficult to
implement for smaller, closely held companies?
a. Accounting for Uncertainty in Income Tax
b. Disclosure about Fair Value of Financial Instruments
c. Earnings per Share
d. Segment Reporting
¶ 107 FASB’S PCC COMES TO LIFE
In 2012, the FAF nominated 10 individuals to the new PCC board. On December 6,
2012, the PCC held its first meeting during which time the FASB staff presented to the
PCC several key issues that concern constituents of private companies. They are:
• Consolidation of Variable Interest Entities (ASC 810) (formerly FIN
46(R) and FAS167): which involves the consolidation of variable interest
entities (VIEs), with particular concern for the consolidation of a related party
real estate lessor into the financial statements of the operating company lessee
• Accounting for “plain vanilla interest rate swaps, which are used to convert
variable interest rates on loans to fixed interest rates, and vice versa, as
referenced in ASC 815, Derivatives and Hedging (formerly FAS 133)
• Accounting for Uncertain Tax Positions (ASC 740, Income Taxes) (formerly FIN 48): which requires measurement, disclosure, and reporting of
uncertain tax positions
• Recognizing and measuring various intangible assets (other than goodwill)
acquired in business combinations, including providing Level 3 fair value measurements and disclosures associated with them, as referenced in ASC 805,
Business Combinations, and ASC 350, Intangibles—Goodwill and Other (formerly
FAS 141(R) and FAS 142, respectively).
¶ 107
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
On February 12, 2013, the PCC held its second meeting, at which time the FASB staff
presented four issue papers on the above noted topics. At that meeting, the PCC
directed the FASB staff to prepare research papers on two additional topics: stock-based
compensation and development stage enterprises. The PCC also provided input on
current FASB projects, including revenue recognition, going concern, and the Emerging Issues Task Force project on pushdown of new basis accounting.
¶ 108 AICPA’S FRF FOR SMEs
As a counter-punch to the FASB taking control over the non-public company issue
through the newly established PCC, the AICPA took its own action to deal with the
needs of non-public companies.
On May 23, 2012, the AICPA announced that it was developing a financial reporting
framework for private small-and medium-sized entities (FRF for SMEs) that do not need
U.S. GAAP financial statements. According to the AICPA, the AICPA’s FRF for SMEs
framework is less complicated and a less costly alternative system of accounting to U.S.
GAAP for private companies that do not need U.S. GAAP financial statements. The
framework was officially released in June 2013.
A critical distinction is necessary – FRF for SMEs is not generally an accepted
accounting principle. It is neither “small GAAP nor GAAP light nor GAAP without
some of the detailed rules.
This new framework is not GAAP.
In one sentence, FRF for SMEs is one more in a collection of Other Comprehensive
Basis of Accounting (OCBOA) frameworks that might be an acceptable alternative to
GAAP for some companies in some circumstances. Just as modified cash basis or tax
basis might be appropriate for some entities, FRF for SMEs might be an appropriate
alternative for others.
The FRF for SMEs was drafted and published by the American Institute of
Certified Public Accountants (AICPA) with assistance from a task force appointed for
the project.
FRF for SMEs are a self-contained body of knowledge describing one approach on
how financial statements can be prepared to communicate financial position and results
of operations of an organization (i.e. what constitutes a financial reporting framework).
In printed format the text of the framework is 172 pages long with a 16 page
glossary. It is designed to be an alternative for businesses in the small and medium size
range. Many of these organizations (mostly owner-managed) do not have a requirement
from a lender to prepare financial statements in accordance with GAAP. Often times
these owner-managers need to relay financial information to a lender with whom they
already have frequent communication. In such circumstances, financial reports prepared on a modified cash basis or income tax basis may be sufficient for management/
owners and for lenders. Now there is another option – FRF for SMEs.
This new framework relies primarily on historical cost for measurement of transactions, except for available-for-sale securities. It includes a variety of options, giving
management flexibility in preparing financial statements while still maintaining a relatively consistent and standard structure.
Use of the FRF for SMEs framework is completely optional since the AICPA has no
authority to require an entity to use it. Since it is optional, there is no effective date. It
may be used at any point after it was officially released (June 2013).
The framework is intended to be simpler than GAAP. One implication of that idea
is the framework will not need to be updated to deal with cutting-edge or highly
¶ 108
MODULE 1 - CHAPTER 1 - Big GAAP-Little GAAP
7
sophisticated developments in the business world. That means it will not require
significant ongoing revisions/updates as is the case with GAAP.
The announced goal is for the AICPA staff and the task force to monitor implementation of the framework and then propose modifications if necessary. After that initial
round of modifications, the goal is to amend the framework every three or four years.
The overall goal is for the framework to be a very stable financial reporting
platform.
¶ 109 THE MULTIPLE FRAMEWORK OPTIONS FOR
NON-PUBLIC ENTITIES
With the advent of the FASB’s PCC and the AICPA’s FRF for SMEs, U.S. non-public
companies will ultimately have many special-purpose frameworks from which to choose.
Consider the list of reporting alternatives for U.S. non-public entities:
Types of Frameworks Available (or Pending) For U.S. Non-Public Entities
Framework
Comments
U.S. GAAP
U.S. GAAP with GAAP exceptions
•
•
•
Income-tax-basis financial statements
•
FASB’s Private Company Council Framework
•
•
AICPA’s Financial Reporting Framework for
Small- to Medium-Sized Entities (FRF for SMEs)
IASB’s IFRS for SMEs
•
•
•
•
•
•
In effect but getting more complex
Generally accepted by all third parties
Can be used but practitioner is limited as to the
extent to which GAAP exceptions can be used
Popular special-purpose framework effective
for profitable, non-public businesses
Many third parties accept its use.
Goal is to create exceptions and exclusions to
existing GAAP for non-public entities.
Authoritative and endorsed by the FASB
Simpler version of U.S. GAAP
Non-authoritative
Concerns about whether third parties will
accept its use
Can be used by U.S. non-public entities
U.S. accountants and third-party users are not
familiar with its application.
¶ 110 PCC ISSUES PRIVATE COMPANY DECISIONMAKING FRAMEWORK
In December 2013, the Private Company Council issued a final guide (framework)
entitled, Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.
In January 2014, the FASB endorsed and passed two new statements at the request
of the PCC.
In March 2014, the FASB endorsed a third statement, ASU 2014-07, to provide
relief to private companies with respect to the consolidation of variable interest entity
rules.
In December 2014, the PCC passed its fourth statement, ASU 2014-18, Business
Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business
Combination, to allow private companies the option not to allocate a portion of the
acquisition cost in a business combination to certain intangible assets other than
goodwill.
¶ 110
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
These four statements, issued in the form of Accounting standards Updates
(ASUs), provide exemptions and simpler GAAP application for non-public companies as
identified in the following table:
Description of new ASU for Non-public Entities
What the New ASU Does
ASU 2014-02, Intangibles—Goodwill and Other
(Topic 350): Accounting for Goodwill
(Issued January 2014)
Allows a non-public entity to amortize goodwill on
a straight-line basis over 10 years or less if another
shorter life is more appropriate.
Goodwill should be tested for impairment when a
triggering event occurs that indicates that the fair
value of the entity may be below the carrying
amount. The automatic annual goodwill
impairment test is eliminated if a non-public entity
elects to amortize goodwill under this ASU.
ASU 2014-03, Accounting for Certain ReceiveAllows a non-public entity to use a simplified
Variable, Pay-Fixed Interest Rate Swaps—Simplified hedge accounting approach to account for swaps
Hedge Accounting Approach (Issued January 2014) that are entered into for the purpose of
economically converting a variable-rate borrowing
into a fixed-rate borrowing.
Under this approach, the income statement charge
for interest expense is similar to the amount that
would result if the entity had directly entered into
a fixed-rate borrowing instead of a variable-rate
borrowing and a receive-variable, pay-fixed
interest swap.
ASU 2014-07, Consolidation (Topic 810): Applying Allows a non-public company lessee to elect an
Variable Interest Entities Guidance to Common
accounting alternative not to consolidate a variable
Control Leasing Arrangements (Issued March
interest entity (VIE) if certain criteria are met.
2014)
ASU 2014-18, Business Combinations (Topic 805): Allows a non-public company to elect an
Accounting for Identifiable Intangible Assets in a
accounting alternative not to allocate a portion of
Business Combination (Issued December 2014)
the acquisition cost of a business combination to
certain intangible assets other than goodwill.
As of April 2015, the PCC has one project on its agenda, which is Definition of a Public
Business Entity (phase 2).
NOTE: The PCC is off to a good start by issuing four statements in its first
year. If the PCC continues with its initial pace, private companies should see a
rapid expansion in the number of GAAP exemptions and modification available to
private companies.
STUDY QUESTION
3. Which of the following is true of the AICPA’s FRF for SMEs?
a. Fair value is used instead of historical cost.
b. The effective date was June 30, 2013.
c. The goal is to amend the framework annually.
d. It is not GAAP.
¶ 110
9
MODULE 1: ONGOING ISSUES—CHAPTER
2: Recognizing Revenue from Contracts with
Customers
¶ 201 WELCOME
This chapter reviews ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
issued May 2014. It covers the scope of the ASU, its rules, disclosures required by the
ASU, and other issues.
¶ 202 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Identify some of the steps required to comply with the new revenue standard
• Recognize the approaches that may be used to recognize revenue under the
revenue standard
• Recall how certain costs are accounted for under the revenue standard
¶ 203 INTRODUCTION
The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to
develop a common revenue standard for U.S. GAAP and IFRS that would:
• Remove inconsistencies and weaknesses in revenue requirements
• Provide a more robust framework for addressing revenue issues
• Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
• Provide more useful information to users of financial statements through improved disclosure requirements
• Simplify the preparation of financial statements by reducing the number of
requirements to which an entity must refer.
¶ 204 BACKGROUND
Revenue recognition has been an important topic and a primary concern in recent cases
of fraud and accounting violations noted by the SEC. Traditional accounting rules for
recognizing revenue have become outdated as more complex revenue transactions have
become the norm.
Based on several reliable accounts, revenue recognition issues account for approximately 50 percent of all financial statement frauds. Some of the more important revenue
violations involve:
• Recognition of revenue made prematurely such as:
- “Channel stuffing (shipping inventory in excess of orders, or giving customers
incentives to purchase more goods than they need in exchange for future
discounts or other benefits)
- Reporting revenue after goods are ordered, but before they are shipped
- Reporting revenue when significant services have not been performed
¶ 204
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
•
•
•
•
•
- Improper use of the percentage-of-completion method
- Improper year-end cutoff procedures
Recognition of revenue that has not been earned including recognizing revenue
on bill and hold transactions, consignment sales, sales subject to contingencies,
and those with the right to return goods, sales coupled with purchase discounts
or credits, and other side agreements.
Reporting sales to fictitious or nonexistent customers
Sales to related parties in excess of market value
Recognizing transactions at fair value that relate to exchanges of similar assets
Reporting peripheral or incidental transactions, such as nonrecurring gains
In addition to traditional revenue manipulation strategies, there are numerous methods
that a company can use to recognize revenue, subject to certain limitations, including:
• Traditional sales method
• Percentage-of-completion method
• Completed contract method
• Installment sales method
Thus, it is clear that there are simply too many variations in both methods and
applications related to such a key financial statement item such as revenue.
For close to a decade, revenue recognition has been at the top of the list of the
Financial Accounting Standards Board’s (FASB’s) top issues based on the annual
survey of the Financial Accounting Standards Advisory Council (FASAC). Revenue is
usually the largest single item in the financial statements. According to the FASB,
studies confirm that revenue is the single largest category of financial statement
restatements. As a result, issues related to revenue recognition are important to tackle.
There is no general standard for revenue recognition although there are more than
200 separate pieces of authoritative literature scattered throughout U.S. Generally
Accepted Accounting Principles (GAAP). The result is that there is a gap between broad
conceptual guidance in the FASB concept statements, and the more detailed guidance.
Most of the detailed authority offers industry-specific guidance, rather than a broaderbased guidance. Further, authority is scattered among previously issued Accounting
Principles Board (APB) Opinions, FASB Statements, Accounting Institute of Certified
Public Accountants (AICPA) Auditing and Accounting Guides, AICPA Statements of
Position (SOP), FASB Interpretations and Emerging Issues Task Force (EITF) Issues,
SEC Staff Accounting Bulletins (SABs), and other pronouncements.
Previously, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. SAB No. 101 concludes that revenue should not be
recognized until it is realized.
Realization occurs when four criteria have been met:
• Persuasive evidence of an arrangement exists.
• Delivery has occurred.
• The seller’s price to the buyer is fixed and determinable.
• Collectability is reasonably assured.
The four criteria mirror the criteria for revenue recognition of software revenue noted in
ASC 985, Software Revenue Recognition (formerly SOP 97-2).
The FASB Emerging Issues Task Force (EITF) has also issued guidance on revenue
recognition, particularly guidance related to e-commerce and revenue arrangements
¶ 204
MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
11
with multiple deliverables. However, because there is no general standard for revenue
recognition, the EITF has been in a position to interpret, rather than establish, overall
GAAP for revenue.
There have been revenue recognition issues with international standards, as well. To
date, international standards have offered limited guidance on revenue-related issues,
particularly related to the accounting for multiple-element arrangements.
Why Create the Revenue Project?
The FASB cites several reasons for its revenue project including:
• Much of the existing U.S. GAAP for revenue was developed before the Conceptual Framework.
• U.S. GAAP contains no comprehensive standard for revenue recognition that is
generally applicable.
• U.S. GAAP for revenue recognition consists of more than 200 pronouncements
by various standard-setting bodies that is hard to retrieve and sometimes
inconsistent.
• Despite the large number of revenue recognition pronouncements, there is little
guidance for service activities, which is the fastest growing part of the U. S.
economy.
• Revenue recognition is a primary source of restatements due to applicable
errors and fraud, which undermine investor confidence in financial reporting.
• Users face noncomparability among entities and industries, with little information to assist in identifying and adjusting for the differences.
• Accounting policy disclosures are too general to be informative.
• Revenue data are highly aggregated, and users say they would like more detail
about specific revenue-generating activities.
In June 2010, the FASB and the International Accounting Standards Board (IASB)
issued an exposure draft entitled Revenue Recognition (Topic 605): Revenue from
Contracts with Customers. The two Boards received nearly 1,000 comment letters on the
exposure draft leading to the two Boards deciding to reissue the exposure draft to
reflect public comments. In January 2012, the FASB and IASB issued a new exposure
draft entitled, Revenue Recognition (Topic 605): Revenue from Contracts with Customers
(including proposed amendments to the FASB Accounting Standards Codification®). In
May 2014, the FASB and IASB issued ASU 2014-09, Revenue From Contracts With
Customers. The ASU creates a single, principles-based revenue recognition standard for
International Financial Reporting Standards (IFRSs) and U.S. GAAP that applies across
various industries and capital markets.
The ASU:
• Creates a new ASC 606, Revenue from Contracts with Customers, and the IASB is
issuing IFRS 15, Revenue from Contracts with Customers.
• Supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance.
• Supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts.
• Amends the existing requirements for the recognition of a gain or loss on the
transfer of nonfinancial assets that are not in a contract with a customer (e.g.,
assets within the scope of ASC 360, Property, Plant, and Equipment, and intangible assets within the scope of ASC 350, Intangibles—Goodwill and Other)
¶ 204
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
ASU 2014-09 makes the following changes to existing GAAP for revenue recognition:
• Removes inconsistencies in existing requirements
• Creates a new criterion for revenue recognition which is based on a transfer of
control
• Requires that contracts be identified and segmented into performance
obligations
• Requires a determination of transaction price, taking into account certain factors
such as credit risk and time value, among other factors
• Makes changes to how contract costs are accounted for, including requiring
certain contract costs to be capitalized as assets
• Provides a new presentation of revenue-related accounts in the statement of
financial position
• Requires expanded disclosures
Who is Most Affected?
The ASU affects any entity that either enters into contracts with customers to transfer
goods or services, or enters into contracts for the transfer of nonfinancial assets, unless
those contracts are within the scope of other standards (e.g., insurance contracts or
lease contracts). Certain types of contracts within the software, telecom, and real estate
industries will be most affected by the new standard.
¶ 205 SCOPE
An entity shall apply the guidance in ASU 2014-09 to all contracts with customers, except
the following, which are exempt from the application of ASU 2014-09:
• Lease contracts within the scope of ASC 840, Leases
• Insurance contracts within the scope of ASC 944, Financial Services—Insurance
• Financial instruments and other contractual rights or obligations within the
scope of the following ASC Topics:
- ASC 310, Receivables
- ASC 320, Investments—Debt and Equity Securities
- ASC 323, Investments—Equity Method and Joint Ventures
- ASC 325, Investments—Other
- ASC 405, Liabilities
- ASC 470, Debt
- ASC 815, Derivatives and Hedging
- ASC 825, Financial Instruments
- ASC 860, Transfers and Servicing
• Guarantees (other than product or service warranties) within the scope of ASC
460, Guarantees.
• Nonmonetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers
EXAMPLE: The ASU does not apply to a contract between two oil companies
that agree to an exchange of oil to fulfill demand from their customers in different
specified locations on a timely basis. ASC 845, Nonmonetary Transactions, may
apply to nonmonetary exchanges that are not within the scope of this ASU.
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¶ 206 DEFINITIONS
Contract: An agreement between two or more parties that creates enforceable rights
and obligations
Contract Asset: An entity’s right to consideration in exchange for goods or
services that the entity has transferred to a customer when that right is conditioned on
something other than the passage of time (e.g., the entity’s future performance)
Contract Liability: An entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or the amount is due) from
the customer
Customer: A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for consideration
Not-for-Profit Entity: An entity that possesses the following characteristics, in
varying degrees, that distinguish it from a business entity:
• Contributions of significant amounts of resources from resource providers who
do not expect commensurate or proportionate pecuniary return
• Operating purposes other than to provide goods or services at a profit
• Absence of ownership interests like those of business entities
Performance Obligation: A promise in a contract with a customer to transfer to the
customer either:
• A good or service (or a bundle of goods or services) that is distinct
• A series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer
Probable: The future event or events are likely to occur
Public Business Entity: A public business entity is a business entity meeting any
one of the criteria below. (Neither a not-for-profit entity nor an employee benefit plan is
a business entity.):
• It is required by the U.S. Securities and Exchange Commission (SEC) to file or
furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial
statements or financial information are required to be or are included in a filing).
• It is required by the Securities Exchange Act of 1934 (the Act), as amended, or
rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
• It is required to file or furnish financial statements with a foreign or domestic
regulatory agency in preparation for the sale of, or, for purposes of issuing
securities that are not subject to contractual restrictions on transfer.
• It has issued, or is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market.
• It has one or more securities that are not subject to contractual restrictions on
transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP
financial statements (including footnotes) and make them publicly available on a
periodic basis (e.g., interim or annual periods). An entity must meet both of
these conditions to satisfy this criterion.
Revenue: Inflows or other enhancements of assets of an entity or settlements of its
liabilities (or a combination of both) from delivering or producing goods, rendering
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services, or other activities that constitute the entity’s ongoing major or central
operations.
Standalone Selling Price: The price at which an entity would sell a promised
good or service separately to a customer
Transaction Price: The amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties
¶ 207 CORE PRINCIPLE
The core principle of ASU 2014-09 is:
An entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services.
An entity recognizes revenue in accordance with the core principle by applying the
following five steps:
• Step 1: Identify the contract(s) with a customer.
• Step 2: Identify the performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the performance obligations in the
contract.
• Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.
STUDY QUESTIONS
1. What reason does the FASB cite for the revenue project?
a. Accounting policy disclosures are too general.
b. There is too much guidance for service activities making it confusing.
c. U.S. GAAP contains a comprehensive standard for revenue recognition that is
generally applicable.
d. U.S. GAAP for revenue recognition consists of only 15 pronouncements by
various standard-setting bodies.
2. Company X has obtained a price at which X would sell a promised good separately to
a customer. That price is referred to as the _____________.
a. Transaction price
b. Standalone price
c. Selling price
d. Performance obligation
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¶ 208 FIVE STEPS
Step 1: Identify the Contract(s) With a Customer
A contract is an agreement between two or more parties that creates enforceable rights
and obligations. An entity should apply the requirements to each contract that meets
the following criteria:
• There is approval and commitment of the parties.
• There is identification of the rights of the parties.
• There is identification of the payment terms.
• The contract has commercial substance.
• It is probable that the entity will collect the consideration to which it will be
entitled in exchange for the goods or services that will be transferred to the
customer.
In some cases, an entity should combine contracts and account for them as one
contract. In addition, the ASU has guidance on the accounting for contract modifications. An entity shall combine two or more contracts entered into at or near the same
time with the same customer (or related parties of the customer) and account for the
contracts as a single contract if one or more of the following criteria are met:
• The contracts are negotiated as a package with a single commercial objective.
• The amount of consideration to be paid in one contract depends on the price or
performance of the other contract.
• The goods or services promised in the contracts (or some goods or services
promised in each of the contracts) are a single performance obligation.
Step 2: Identify the Performance Obligations in the Contract
A performance obligation is a promise in a contract with a customer to transfer a good or
service to the customer. If an entity promises in a contract to transfer more than one
good or service to the customer, the entity should account for each promised good or
service as a performance obligation only if it is distinct, or there is a series of distinct goods
or services that are substantially the same and have the same pattern of transfer.
NOTE: A series of distinct goods or services has the same pattern of transfer to
the customer if both of the following criteria are met:
• Each distinct good or service in the series that the entity promises to
transfer to the customer would meet the criteria to be a performance
obligation satisfied over time.
• The same method would be used to measure the entity’s progress toward
complete satisfaction of the performance obligation to transfer each distinct
good or service in the series to the customer.
A good or service is distinct if both of the following criteria are met:
• Capable of being distinct: The customer can benefit from the good or service
either on its own or together with other resources that are readily available to
the customer.
• Distinct within the context of the contract: The promise to transfer the good
or service is separately identifiable from other promises in the contract.
NOTE: A customer can benefit from a good or service if the good or service
could be used, consumed, sold for an amount that is greater than scrap value, or
otherwise held in a way that generates economic benefits.
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A good or service that is not distinct should be combined with other promised goods or
services until the entity identifies a bundle of goods or services that is distinct.
Performance obligations identified in a contract may include promises that are
implied by an entity’s customary business practices, published policies, or specific
statements if, at the time of entering into the contract, those promises create a valid
expectation of the customer that the entity will transfer a good or service to the
customer. Performance obligations do not include activities that an entity must undertake to fulfill a contract unless those activities transfer a good or service to a customer.
EXAMPLE: A services provider may need to perform various administrative
tasks to set up a contract. The performance of those tasks does not transfer a
service to the customer as the tasks are performed. Therefore, those setup
activities are not a performance obligation.
Depending on the contract, promised goods or services may include, but are not limited
to, the following:
• Sale of goods produced by an entity (e.g., inventory of a manufacturer)
• Resale of goods purchased by an entity (e.g., merchandise of a retailer)
• Resale of rights to goods or services purchased by an entity (e.g., a ticket resold
by an entity acting as a principal)
• Performing a contractually agreed-upon task (or tasks) for a customer
• Providing a service of standing ready to provide goods or services (e.g., unspecified updates to software that are provided on a when-and-if-available basis) or of
making goods or services available for a customer to use and when the customer decides
• Providing a service of arranging for another party to transfer goods or services
to a customer (e.g., acting as an agent of another party)
• Granting rights to goods or services to be provided in the future that a customer
can resell or provide to its customer (e.g., an entity selling a product to a retailer
promises to transfer an additional good or service to an individual who
purchases the product from the retailer)
• Constructing, manufacturing, or developing an asset on behalf of a customer
• Granting licenses
• Granting options to purchase additional goods or services (when those options
provide a customer with a material right).
Example: Determining whether goods or services are distinct (from Example 11
of ASU 2014-09, as modified by the Author)
An entity, a software developer, enters into a contract with a customer to (1) transfer a
software license, (2) perform an installation service, and (3) provide unspecified
software updates and technical support (online and telephone) for a two-year period.
The entity sells the license, installation service, and technical support separately.
The installation service includes changing the Web screen for each type of user
(e.g., marketing, inventory management, and information technology). The installation
service is routinely performed by other entities and does not significantly modify the
software. The entity assesses the goods and services promised to the customer to
determine which goods and services are distinct.
The entity observes that the software is delivered before the other goods and
services and remains functional without the updates and the technical support. The
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MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
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entity concludes that the customer can benefit from each of the goods and services
either on their own or together with the other goods and services that are readily
available.
The entity also determines that the promise to transfer each good and service to
the customer is separately identifiable from each of the other promises. In particular:
• The entity observes that the installation service does not significantly modify or
customize the software itself.
• The software and the installation service are separate outputs promised by the
entity instead of inputs used to produce a combined output.
Conclusion: On the basis of this assessment, the entity identifies four performance
obligations in the contract for the following goods or services:
• The software license
• An installation service
• Software updates
• Technical support
The reason is because each good or service is distinct in that each satisfies two criteria:
• Capable of being distinct: The customer can benefit from each good and
service either on its own or together with other resources that are readily
available to the customer.
• Distinct within the context of the contract: The promise to transfer each
good and service is separately identifiable from other promises in the contract.
Step 3: Determine the Transaction Price
The transaction price is the amount of consideration (e.g., payment) to which an entity
expects to be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.
To determine the transaction price, an entity should consider the effects of:
• Variable consideration: If the amount of consideration in a contract is variable,
an entity should determine the amount to include in the transaction price by
estimating either the expected value (i.e., probability-weighted amount) or the
most likely amount, depending on which method the entity expects to better
predict the amount of consideration to which the entity will be entitled.
• Constraining estimates of variable consideration: An entity should include
in the transaction price some or all of an estimate of variable consideration only
to the extent it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the
variable consideration is subsequently resolved.
• The existence of a significant financing component: An entity should adjust
the promised amount of consideration for the effects of the time value of money
if the timing of the payments agreed upon by the parties to the contract (either
explicitly or implicitly) provides the customer or the entity with a significant
benefit of financing for the transfer of goods or services to the customer. In
assessing whether a financing component exists and is significant to a contract,
an entity should consider various factors. (As a practical expedient, an entity
need not assess whether a contract has a significant financing component if the
entity expects at contract inception that the period between payment by the
customer and the transfer of the promised goods or services to the customer
will be one year or less.)
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• Noncash consideration: If a customer promises consideration in a form other
than cash, an entity should measure the noncash consideration (or promise of
noncash consideration) at fair value. If an entity cannot reasonably estimate the
fair value of the noncash consideration, it should measure the consideration
indirectly by reference to the standalone selling price of the goods or services
promised in exchange for the consideration. If the noncash consideration is
variable, an entity should consider the guidance on constraining estimates of
variable consideration.
An entity does not consider the effects of customer credit risk (i.e., collectability) when
determining the transaction price.
Variable Consideration
If the promised amount of consideration in a contract is variable (because of discounts,
rebates, refunds, credits, incentives, performance bonuses, penalties, contingencies,
price concessions, or other similar items), an entity should be required to estimate the
total amount to which the entity will be entitled in exchange for transferring the
promised goods or services to a customer. The entity must update the estimated
transaction price at each reporting date to reflect the circumstances present at the
reporting date and the changes in circumstances during the reporting period.
To estimate the transaction price, an entity should use either of the following two
methods, depending on which method the entity expects to better predict the amount of
consideration to which it will be entitled:
• The expected value: The expected value is the sum of probability-weighted
amounts in a range of possible consideration amounts. An expected value may
be an appropriate estimate of the transaction price if an entity has a large
number of contracts with similar characteristics.
• The most likely amount: This amount is the single most likely amount in a
range of possible consideration amounts (i.e., the single most likely outcome of
the contract). The most likely amount may be an appropriate estimate of the
transaction price if the contract has only two possible outcomes (e.g., an entity
either achieves a performance bonus or does not).
NOTE: When estimating the transaction price, an entity would apply one
method consistently throughout the contract.
Consideration Payable to the Customer
If an entity pays, or expects to pay, consideration to a customer (or to other parties that
purchase the entity’s goods or services from the customer) in the form of cash or items
(e.g., credit, a coupon, or a voucher) that the customer can apply against amounts owed
to the entity (or to other parties that purchase the entity’s goods or services from the
customer), the entity should account for the payment (or expectation of payment) as a
reduction of the transaction price or as a payment for a distinct good or service (or both).
If the consideration payable to a customer is a variable amount and accounted for as a
reduction in the transaction price, an entity should consider the guidance on constraining estimates of variable consideration.
Step 4: Allocate the Transaction Price to the Performance
Obligations in the Contract
For a contract that has more than one performance obligation, an entity should allocate
the transaction price to each performance obligation in an amount that depicts the
amount of consideration to which the entity expects to be entitled in exchange for
satisfying each performance obligation. To allocate an appropriate amount of considera-
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MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
19
tion to each performance obligation, an entity must determine the standalone selling
price at contract inception of the distinct goods or services underlying each performance obligation and typically allocate the transaction price on a relative standalone
selling price basis.
The standalone selling price is the price at which an entity would sell a promised
good or service separately to a customer. The best evidence of a standalone selling
price is the observable price of a good or service when the entity sells that good or
service separately in similar circumstances and to similar customers. A contractually
stated price or a list price for a good or service may be (but shall not be presumed to
be) the standalone selling price of that good or service.
If a standalone selling price is not observable, an entity must estimate it, and can do
so using any of the following suitable methods, among others:
• Adjusted market assessment approach: An entity could evaluate the market
in which it sells goods or services and estimate the price that a customer in that
market would be willing to pay for those goods or services.
• Expected cost plus a margin approach: An entity could forecast its expected
costs of satisfying a performance obligation and then add an appropriate margin
for that good or service.
• Residual approach: An entity may estimate the standalone selling price by
reference to the total transaction price less the sum of the observable standalone
selling prices of other goods or services promised in the contract. An entity may
use a residual approach to estimate the standalone selling price of a good or
service only if one of the following criteria is met:
- The entity sells the same good or service to different customers (at or near the
same time) for a broad range of amounts (i.e., the selling price is highly variable
because a representative standalone selling price is not discernible from past
transactions or other observable evidence).
- The entity has not yet established a price for that good or service, and the good
or service has not previously been sold on a standalone basis (i.e., the selling
price is uncertain).
An entity should allocate to the performance obligations in the contract any subsequent
changes in the transaction price on the same basis as at contract inception. Amounts
allocated to a satisfied performance obligation should be recognized as revenue, or as a
reduction of revenue, in the period in which the transaction price changes.
Example: Allocation methodology [from Example 33 of ASU
2014-09, as modified by the Author]
An entity enters into a contract with a customer to sell Products A, B, and C in exchange
for $100,000. The entity will satisfy the performance obligations for each of the products
at different points in time. The entity regularly sells Product A separately, and, therefore
the standalone selling price is directly observable. The standalone selling prices of
Products B and C are not directly observable.
Conclusion: If a contract that has more than one performance obligation, an entity
should allocate the transaction price to each performance obligation based standalone
prices. The best evidence of standalone price is the observable price of a good or
service. When an observable price is not available, the entity should estimate it using
certain suitable methods. Examples of suitable methods include:
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• Adjusted market assessment approach
• Expected cost plus a margin approach
• Residual approach: (subject to certain limitations)
In this example, the entity has an observable price for Product A, but not for Products B
and C, for which the entity should estimate them.
Following is an analysis of the standalone prices obtained for the three products
and the allocation of the $100,000 revenue.
Standalone
Price
(given)
%
A
$50
33%
$33,000
B
C
25
75
17%
50%
17,000
50,000
$150
100%
$100,000
Product
Allocation of
Revenue
Method to Determine
Standalone Price
Directly observable
Adjusted market assessment
approach
Expected cost plus a margin approach
Once the $100,000 of revenue is allocated to each performance obligation, that revenue
is recognized as each performance obligation is satisfied per Step 5.
Step 5: Recognize Revenue When (or As) the Entity Satisfies a
Performance Obligation
An entity should recognize revenue when (or as) it satisfies a performance obligation by
transferring a promised good or service to a customer. A good or service is transferred
when (or as) the customer obtains control of that good or service. The customer satisfies
a performance obligation (customer obtains control) under one of two scenarios: (1)
over time, or (2) at a point in time. For each performance obligation, an entity should
first determine whether the entity satisfies the performance obligation over time by
transferring control of a good or service over time. If an entity does not satisfy a
performance obligation over time, the performance obligation is satisfied at a point in
time.
An entity transfers control of a good or service over time and, therefore, satisfies a
performance obligation and recognizes revenue over time if one of the following criteria
is met:
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• The customer simultaneously receives and consumes the benefits provided by
the entity’s performance as the entity performs.
• The entity’s performance creates or enhances an asset (e.g., work in process)
that the customer controls as the asset is created or enhanced.
• The entity’s performance does not create an asset with an alternative use to the
entity, and the entity has an enforceable right to payment for performance
completed to date.
Entity’s Performance Does Not Create an Asset with an Alternative Use
In assessing whether an asset has an alternative use to an entity, an entity should
consider the effects of contractual restrictions and practical limitations on the entity’s
ability to readily direct that asset for another use, such as selling it to a different
customer. The possibility of the contract with the customer being terminated is not a
relevant consideration in assessing whether the entity would be able to readily direct the
asset for another use.
A contractual restriction on an entity’s ability to direct an asset for another use
must be substantive for the asset not to have an alternative use to the entity. A
contractual restriction is substantive if a customer could enforce its rights to the
promised asset if the entity sought to direct the asset for another use. In contrast, a
contractual restriction is not substantive if, for example, an asset is largely interchangeable with other assets that the entity could transfer to another customer without
breaching the contract and without incurring significant costs that otherwise would not
have been incurred in relation to that contract.
A practical limitation on an entity’s ability to direct an asset for another use exists if
an entity would incur significant economic losses to direct the asset for another use. A
significant economic loss could arise because the entity either would incur significant
costs to rework the asset or would only be able to sell the asset at a significant loss. For
example, an entity may be practically limited from redirecting assets that either have
design specifications that are unique to a customer or are located in remote areas.
Entity has an Enforceable Right to Payment for Performance Completed to Date
For an entity to have an enforceable right to payment, the entity must be entitled to an
amount that at least compensates the entity for performance completed to date if the
contract is terminated by the customer or another party for reasons other than the
entity’s failure to perform as promised. The fact that an entity can retain nonrefundable
deposits as its sole remedy against a defaulting customer does not mean the entity has
an enforceable right if those deposits are less than the amount that compensates the
entity for performance completed to date.
If a performance obligation is not satisfied over time, an entity satisfies the
performance obligation at a point in time (when a customer obtains control). To
determine the point in time at which a customer obtains control of a promised asset and
an entity satisfies a performance obligation, the entity should consider indicators of the
transfer of control, which include, but are not limited to, the following:
• The entity has a present right to payment for the asset.
• The customer has legal title to the asset.
• The entity has transferred physical possession of the asset.
• The customer has the significant risks and rewards of ownership of the asset.
• The customer has accepted the asset.
Measuring Revenue Over Time
An entity shall recognize revenue for a performance obligation satisfied over time only if
the entity can reasonably measure its progress toward complete satisfaction of the
performance obligation.
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NOTE: An entity would not be able to reasonably measure its progress toward
complete satisfaction of a performance obligation if it lacks reliable information that
would be required to apply an appropriate method of measuring progress.
In some circumstances (e.g., in the early stages of a contract), an entity may not be able
to reasonably measure the outcome of a performance obligation, but the entity expects
to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognize revenue only to the extent of the costs incurred until
such time that it can reasonably measure the outcome of the performance obligation.
Methods that can be used to measure an entity’s progress toward complete satisfaction
of a performance obligation satisfied over time include the following:
• Output methods: An entity recognizes revenue based on direct measurements
of the value to the customer of the goods or services transferred to date relative
to the remaining goods or services promised under the contract, and include:
- Surveys of performance completed to date
- Appraisals of results achieved
- Milestones reached, time elapsed
- Units produced or units delivered
• Input methods: An entity recognizes revenue on the basis of the entity’s efforts
or inputs to the satisfaction of a performance obligation, including:
- Costs incurred
- Resources consumed
- Labor hours expended
- Costs incurred (similar to percentage-of-completion method)
- Time elapsed
- Machine hours used relative to the total expected inputs to the satisfaction of
that performance obligation.
NOTE: If the entity’s efforts or inputs are expended evenly throughout the
performance period, it may be appropriate for the entity to recognize revenue on a
straight-line basis.
A shortcoming of input methods is that there may not be a direct relationship between
an entity’s inputs and the transfer of control of goods or services to a customer.
Therefore, an entity should exclude from an input method the effects of any inputs that
do not depict the entity’s performance in transferring control of goods or services to the
customer. For instance, when using a cost-based input method, an adjustment to the
measure of progress may be required in the following circumstances:
• When a cost incurred does not contribute to an entity’s progress in satisfying
the performance obligation
• When a cost incurred is not proportionate to the entity’s progress in satisfying
the performance obligation.
Example: Customer simultaneously receives and consumes the benefits [from
Example 13 of ASU 2013-09]
An entity enters into a contract to provide monthly payroll processing services to a
customer for one year. The promised payroll processing services are accounted for as a
single performance obligation.
Conclusion: The entity recognizes revenue over time by measuring its progress toward
complete satisfaction of that performance obligation. The basic rule is that an entity
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23
transfers control of a good or service over time and, therefore, satisfies a performance
obligation and recognizes revenue over time if one of the following criteria is met:
• The customer simultaneously receives and consumes the benefits provided by
the entity’s performance as the entity performs.
• The entity’s performance creates or enhances an asset (e.g., work in process)
that the customer controls as the asset is created or enhanced.
• The entity’s performance does not create an asset with an alternative use to the
entity, and the entity has an enforceable right to payment for performance
completed to date.
In this example, the entity satisfies the performance obligation over time because the
customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed.
The fact that another entity would not need to re-perform payroll processing services for
the service that the entity has provided to date also demonstrates that the customer
simultaneously receives and consumes the benefits of the entity’s performance as the
entity performs.
Example: Enforceable right to payment for performance completed to date (from
Example 16 of the ASU, as modified by the Author)
An entity enters into a contract with a customer to build an item of equipment. The
customer does not receive any benefit from the equipment until it is completed.
The payment schedule in the contract specifies that the customer must make an
advance payment at contract inception of 10 percent of the contract price, regular
payments throughout the construction period (amounting to 50 percent of the contract
price), and a final payment of 40 percent of the contract price after construction is
completed and the equipment has passed the prescribed performance tests. The
payments are nonrefundable unless the entity fails to perform as promised. If the
customer terminates the contract, the entity is entitled only to retain any progress
payments received from the customer. The entity has no further rights to compensation
from the customer. (KEY POINT)
At contract inception, the entity assesses whether its performance obligation to
build the equipment is a performance obligation satisfied over time. As part of that
assessment, the entity considers whether it has an enforceable right to payment for
performance completed to date, and if the customer were to terminate the contract for
reasons other than the entity’s failure to perform as promised. Even though the
payments made by the customer are nonrefundable, the cumulative amount of those
payments is not expected, at all times throughout the contract, to at least correspond to
the amount that would be necessary to compensate the entity for performance completed to date. Consequently, the entity does not have a right to payment for performance completed to date.
Conclusion: To review, an entity may recognize revenue over time if one of the
following criteria is met:
• The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.
• The entity’s performance creates or enhances an asset (e.g., work in process)
that the customer controls as the asset is created or enhanced.
• The entity’s performance does not create an asset with an alternative use to the
entity, and the entity has an enforceable right to payment for performance completed to date. The enforceable right to payment requires that the entity must be
entitled to an amount that at least compensates the entity for performance
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completed to date if the contract is terminated by the customer or another party
for reasons other than the entity’s failure to perform as promised.
In this example, the entity does not satisfy the first item above in that the customer does
not receive or consume the benefits of the equipment until it is completed. There is also
no evidence that the entity’s performance creates any asset such as work in progress
that the customer controls. In fact, the customer does not receive control over the asset
until it is completed. Thus, the question is whether the last item is satisfied. It requires
that two elements be satisfied:
• First, the equipment cannot have an alternative use to the entity, which is does
not because it is custom made.
• Second, the entity has to have an enforceable right to payment. The ASU
requires that the right be payment for an amount that at least compensates the
entity for performance completed to date. In this example, the deposits are
nonrefundable but are not at amounts that at least compensate the entity for
performance completed to date.
Thus, because the entity does not have a right to payment for performance completed to
date, the entity’s performance obligation is not satisfied over time. Because the entity
does not meet the criteria to recognize revenue over time, the entity must account for
the construction of the equipment as a performance obligation satisfied at a point in
time, when control transfers (at the end of the contract).
Examples: Assessing whether a performance obligation is satisfied at a point in
time or over time [from Example 17 of ASU 2014-09]
SCENARIO A: Entity Does Not Have an Enforceable Right to Payment for Performance
Completed to Date
An entity is developing a multi-unit residential complex. A customer enters into a
binding sales contract with the entity for a specified unit that is under construction.
Each unit has a similar floor plan and is of a similar size, but other attributes of the units
are different (e.g., the location of the unit within the complex).
The customer pays a deposit upon entering into the contract, and the deposit is
refundable only if the entity fails to complete construction of the unit in accordance with
the contract. The remainder of the contract price is payable on completion of the
contract when the customer obtains physical possession of the unit. If the customer
defaults on the contract before completion of the unit, the entity only has the right to
retain the deposit.
At contract inception, the entity determines whether its promise to construct and
transfer the unit to the customer is a performance obligation satisfied over time. The
entity determines that it does not have an enforceable right to payment for performance
completed to date because until construction of the unit is complete, the entity only has a
right to the deposit paid by the customer.
Conclusion: The entity should account for the sale of the unit as a performance
obligation at a point in time. Here are the three criteria:
• Does the customer simultaneously receive and consume the benefits provided
by the entity’s performance as the entity performs?
Response: No. The customer does not receive any benefits until the unit is
completed.
• Does the entity’s performance create or enhance an asset (e.g., work in process)
that the customer controls as the asset is created or enhanced?
Response: No. The customer has no control until the unit is completed.
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• Does the entity’s performance not create an asset with an alternative use to the
entity, and does the entity have an enforceable right to payment for performance
completed to date?
Response: First, although the entity has the right to retain deposits upon
customer default, it does not have the right to recover additional amounts for
work completed to date. Thus, the entity does not have an “enforceable right to
payment for performance completed to date. Given the fact that the enforceable
right is not satisfied, it is not important to assess whether the entity creates an
asset with an alternative use.
The entity fails to satisfy any one of the three criteria necessary to record revenue over
time. Thus, the performance obligation is satisfied and revenue recognized at a point in
time, which is likely when the asset is delivered to the customer at the end of
production.
SCENARIO B: Entity Has an Enforceable Right to Payment for Performance Completed to
Date
An entity is developing a multi-unit residential complex. A customer enters into a
binding sales contract with the entity for a specified unit that is under construction.
Each unit has a similar floor plan and is of a similar size, but other attributes of the units
are different (e.g., the location of the unit within the complex).
The customer pays a nonrefundable deposit upon entering into the contract and
will make progress payments during construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit to another
customer. In addition, the customer does not have the right to terminate the contract
unless the entity fails to perform as promised. If the customer defaults on its obligations
by failing to make the promised progress payments as and when they are due, the entity
would have a right to all of the consideration promised in the contract if it completes the
construction of the unit. At contract inception, the entity tests to determine whether its
promise to construct and transfer the unit to the customer is a performance obligation
satisfied over time.
Conclusion: The entity should account for the sale of the unit as a performance
obligation over time. Here is the analysis:
• Does the customer simultaneously receive and consume the benefits provided
by the entity’s performance as the entity performs?
Response: No. The customer does not receive any benefits until the unit is
completed.
• Does the entity’s performance create or enhance an asset (e.g., work in process)
that the customer controls as the asset is created or enhanced?
Response: No. The customer has no control until the unit is completed.
• Does the entity’s performance not create an asset with an alternative use to the
entity, and does the entity have an enforceable right to payment for performance
completed to date?
Response: Yes. This condition is satisfied.
First, the entity determines that the asset (unit) created by the entity’s performance
does not have an alternative use to the entity because the contract precludes the entity
from transferring the specified unit to another customer. Second, if the customer were
to default on its obligations, the entity would have an enforceable right to all of the
consideration promised under the contract if it continues to perform as promised.
Consequently, the entity’s performance does not create an asset with an alternative use
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to the entity, and the entity has an enforceable right to payment for performance
completed to date. The entity has a performance obligation that it satisfies over time.
Example: Revenue over time [from Example 18 of ASU 2014-09]
An entity, an owner and manager of health clubs, enters into a contract with a customer
for one year of access to any of its health clubs. The customer has unlimited use of the
health clubs and promises to pay $100 per month.
The entity determines that its promise to the customer is to provide a service of making
the health clubs available for the customer to use as and when the customer wishes.
This is because the extent to which the customer uses the health clubs does not affect
the amount of the remaining goods and services to which the customer is entitled. The
entity concludes that the customer simultaneously receives and consumes the benefits
of the entity’s performance as it performs by making the health clubs available.
Conclusion: Because the customer simultaneously receives and consumes the benefits
of the entity’s performance, the revenue can be recognized over time. The entity also
determines that the customer benefits from the entity’s service of making the health
clubs available evenly throughout the year (i.e., the customer benefits from having the
health clubs available, regardless of whether the customer uses it or not). Consequently, the entity concludes that the best measure of progress toward complete
satisfaction of the performance obligation over time is a time-based measure, and it
recognizes revenue on a straight-line basis throughout the year at $100 per month.
STUDY QUESTIONS
3. Which of the following is not one of the four elements used to determine the
transaction price in the revenue project?
a. Variable consideration
b. Time value of money
c. Consideration in the form of cash or a cash equivalent
d. Consideration payable to the customer
4. Company F cannot obtain a standalone selling price for its performance obligations.
F is looking for suitable alternative methods. Which of the following is not identified by
ASU 2014-09 as a suitable method to use?
a. Adjusted market assessment approach
b. Expected cost plus a margin
c. Residual approach
d. Historical cost
5. Company M is recognizing revenue at a point in time under the revenue standard. M
wants to determine when it obtains control of the asset and satisfies its performance
obligation. Which of the following is a factor that would indicate that there has been a
transfer of control to M?
a. M has no legal title to the asset.
b. M has accepted the asset.
c. M has no real significant risks and rewards of ownership of the asset.
d. M has not yet picked up the asset and obtained possession of the asset.
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¶ 209 OTHER ISSUES
Sale with a Right of Return
In some contracts, an entity transfers control of a product to a customer and also grants
the customer the right to return the product for various reasons (such as dissatisfaction
with the product) and receives any combination of the following:
• A full or partial refund of any consideration paid
• A credit that can be applied against amounts owed, or that will be owed, to the
entity
• Another product in exchange
The statement provides the following rules to account for the right to return a product.
To account for the transfer of products with a right of return (and for some services
that are provided subject to a refund), an entity should recognize all of the following:
• Revenue for the transferred products in the amount of consideration to which
the entity is reasonably assured to be entitled (considering the products expected
to be returned)
• A refund liability (portion not reasonably assured)
• An asset (and corresponding adjustment to cost of sales) for its right to recover
products from customers on settling the refund liability
An entity’s promise to stand ready to accept a returned product during the return period
would not be accounted for as a separate performance obligation in addition to the
obligation to provide a refund.
NOTE: The cumulative amount of revenue the entity recognizes to date shall
not exceed the amount to which the entity is reasonably assured to be entitled.
For any amounts to which an entity is not reasonably assured to be entitled, the entity
should not recognize revenue when it transfers products to customers, but should
recognize any consideration received as a refund liability.
Subsequently, the entity should update its assessment of amounts to which the
entity is reasonably assured to be entitled in exchange for the transferred products and
should recognize corresponding adjustments to the amount of revenue recognized. An
entity should update the measurement of the refund liability at the end of each
reporting period for changes in expectations about the amount of refunds. An entity
should recognize corresponding adjustments as revenue (or reductions of revenue).
An entity should recognize an asset (and corresponding adjustment to cost of
sales) for its right to recover products from customers on settling the refund liability.
The asset should initially be measured by reference to the former carrying amount of
the inventory less any expected costs to recover those products. Subsequently, an entity
should update the measurement of the asset to correspond with changes in the
measurement of the refund liability.
Example: Right of Return (from ASU 2014-09, as modified by the
Author)
An entity sells 100 products for $100 each. The cost of each product is $60. The entity’s
customary business practice is to allow a customer to return any unused product within
30 days and receive a full refund.
The entity estimates that three products will be returned. The entity’s experience is
predictive of the amount of consideration to which the entity will be entitled. The entity
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estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Conclusion: Upon transfer of control of the products, the entity should not recognize
revenue for the three products that it expects to be returned. Consequently, the entity
should recognize:
Total sales
Estimated returns
Sales not expected to be returned
100 units x $100 =
3 units x $100 =
$10,000
(300)
97 units x $100 =
$9,700
Entry at date of transfer of control:
Accounts receivable
Revenue
Refund liability
Cost of sales (97 x $60)
Recovery asset (3 x $60)
Inventory (100 x $60)
10,000
9,700
300
5,820
180
6,000
Principal Versus Agent Considerations
When another party is involved in providing goods or services to a customer, the entity
should determine whether the nature of its promise is a performance obligation to
provide the specified goods or services itself (i.e., the entity is a principal) or to arrange
for the other party to provide those goods or services (i.e., the entity is an agent).
A principal: An entity is a principal if the entity controls a promised good or service
before the entity transfers the good or service to a customer. An entity is not necessarily
acting as a principal if the entity obtains legal title of a product only momentarily before
legal title is transferred to a customer.
An entity that is a principal in a contract may satisfy a performance obligation by
itself or it may engage another party (e.g., a subcontractor) to satisfy some or all of a
performance obligation on its behalf. When an entity that is a principal satisfies a
performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services
transferred.
An Agent: An entity is an agent if the entity’s performance obligation is to arrange for
the provision of goods or services by another party. When an entity that is an agent
satisfies a performance obligation, the entity recognizes revenue in the amount of any
fee or commission to which it expects to be entitled in exchange for arranging for the
other party to provide its goods or services.
NOTE: An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in
exchange for the goods or services to be provided by that party.
Indicators that an entity is an agent (and therefore does not control the good or service
before it is provided to a customer) include the following:
• Another party is primarily responsible for fulfilling the contract.
• The entity does not have inventory risk before or after the goods have been
ordered by a customer, during shipping, or on return.
• The entity does not have discretion in establishing prices for the other party’s
goods or services and, therefore, the benefit that the entity can receive from
those goods or services is limited.
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MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
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• The entity’s consideration is in the form of a commission.
• The entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services.
If another entity assumes the entity’s performance obligations and contractual rights in
the contract so that the entity is no longer obliged to satisfy the performance obligation
to transfer the promised good or service to the customer (i.e., the entity is no longer
acting as the principal), the entity should not recognize revenue for that performance
obligation. Instead, the entity should evaluate whether to recognize revenue for satisfying a performance obligation to obtain a contract for the other party (i.e., whether the
entity is acting as an agent).
Example: Arranging for the provision of goods or services (entity is an agent)
[from Example 45 of ASU 2014-09, as modified by the Author]
An entity operates a Web site that enables customers to purchase goods from a range of
suppliers who deliver the goods directly to the customers. When a good is purchased
via the Web site, the entity is entitled to a commission that is equal to 10 percent of the
sales price.
The entity’s Web site facilitates payment between the supplier and the customer at
prices that are set by the supplier. The entity requires payment from customers before
orders are processed, and all orders are nonrefundable.
The entity has no further obligations to the customer after arranging for the
products to be provided to the customer.
Conclusion: To determine whether the entity’s performance obligation is to provide
the specified goods itself (i.e., the entity is a principal) or to arrange for the supplier to
provide those goods (i.e., the entity is an agent), the entity considers the nature of its
promise. Specifically, the entity observes that
The supplier of the goods delivers its goods directly to the customer and, thus, the
entity does not obtain control of the goods before the entity transfers the good or
service to a customer. Instead, the entity’s promise is to arrange for the supplier to
provide those goods to the customer. In reaching that conclusion, the entity considers
the following indicators:
• The supplier is primarily responsible for fulfilling the contract; that is, by shipping
the goods to the customer.
• The entity does not take inventory risk at any time during the transaction because
the goods are shipped directly by the supplier to the customer.
• The entity does not have discretion in establishing prices for the supplier’s goods
and, therefore, the benefit the entity can receive from those goods is limited.
• The entity’s consideration is in the form of a commission (10 percent of the sales
price).
• The entity has no credit risk because payments from customers are made in
advance.
Consequently, the entity concludes that it is an agent and its performance obligation is
to arrange for the provision of goods by the supplier. When the entity satisfies its
promise to arrange for the goods to be provided by the supplier to the customer (which,
in this example, is when goods are purchased by the customer), the entity recognizes
revenue in the net amount of the $10,000 commission to which it is entitled.
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Example: Promise to provide goods or services (Entity Is a Principal) [from
Example 46 of ASU 2014-09]
An entity enters into a contract with a customer for equipment with unique specifications. The entity and the customer develop the specifications for the equipment, which
the entity communicates to a supplier that the entity contracts with to manufacture the
equipment. The entity also arranges to have the supplier deliver the equipment directly
to the customer. Upon delivery of the equipment to the customer, the terms of the
contract require the entity to pay the supplier the price agreed to by the entity and the
supplier for manufacturing the equipment.
The entity and the customer negotiate the selling price, and the entity invoices the
customer for the agreed-upon price with 30-day payment terms. The entity’s profit is
based on the difference between the sales price negotiated with the customer and the
price charged by the supplier.
The contract between the entity and the customer requires the customer to seek
remedies for defects in the equipment from the supplier under the supplier’s warranty.
However, the entity is responsible for any corrections to the equipment required
resulting from errors in specifications.
Conclusion: To determine whether the entity’s performance obligation is to provide
the specified goods or services itself (i.e., the entity is a principal) or to arrange for
another party to provide those goods or services (i.e., the entity is an agent), the entity
considers the nature of its promise. The entity has promised to provide the customer
with specialized equipment; however, the entity has subcontracted the manufacturing of
the equipment to the supplier. In determining whether the entity obtains control of the
equipment before control transfers to the customer and whether the entity is a principal,
the entity considers the following indicators:
• The entity is primarily responsible for fulfilling the contract. Although the entity
subcontracted the manufacturing, the entity is ultimately responsible for ensuring that the equipment meets the specifications for which the customer has
contracted.
• The entity has inventory risk because of its responsibility for corrections to the
equipment resulting from errors in specifications, even though the supplier has
inventory risk during production and before shipment.
• The entity has discretion in establishing the selling price with the customer, and
the profit earned by the entity is an amount that is equal to the difference
between the selling price negotiated with the customer and the amount to be
paid to the supplier.
• The entity’s consideration is not in the form of a commission.
• The entity has credit risk for the amount receivable from the customer in
exchange for the equipment.
The entity concludes that its promise is to provide the equipment to the customer.
On the basis of the indicators, the entity concludes that it controls the equipment
before it is transferred to the customer. Thus, the entity is a principal in the transaction
and recognizes revenue in the gross amount of consideration to which it is entitled from
the customer in exchange for the equipment.
¶ 210 COSTS
Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a
contract with a customer that it would not have incurred if the contract had not been
obtained, such as sales commission.
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An entity shall recognize as an asset the incremental costs of obtaining a contract
with a customer if the entity expects to recover those costs. An entity may recognize the
incremental costs of obtaining a contract as an expense when incurred if the amortization
period of the asset that the entity otherwise would have recognized is one year or less.
Costs to obtain a contract that would have been incurred regardless of whether the
contract was obtained shall be recognized as an expense when incurred, unless those
costs are explicitly chargeable to the customer regardless of whether the contract is
obtained.
EXAMPLE: Legal costs incurred to review a transaction and create and
submit a proposal for a contract, would be incurred regardless of whether the deal
is ultimately completed and the contract executed. Such costs are expensed.
Costs to Fulfill a Contract
An entity shall recognize an asset from the costs incurred to fulfill a contract only if
those costs meet all of the following criteria:
• The costs relate directly to a contract or to an anticipated contract that the entity
can specifically identify (e.g., costs relating to services to be provided under
renewal of an existing contract or costs of designing an asset to be transferred
under a specific contract that has not yet been approved).
• The costs generate or enhance resources of the entity that will be used in
satisfying (or in continuing to satisfy) performance obligations in the future.
• The costs are expected to be recovered.
Costs that relate directly to a contract (or a specific anticipated contract) include any of
the following:
• Direct labor (e.g., salaries and wages of employees who provide the promised
services directly to the customer)
• Direct materials (e.g., supplies used in providing the promised services to a
customer)
• Allocations of costs that relate directly to the contract or to contract activities
(e.g., costs of contract management and supervision, insurance, and depreciation of tools and equipment used in fulfilling the contract)
• Costs that are explicitly chargeable to the customer under the contract
• Other costs that are incurred only because an entity entered into the contract
(e.g., payments to subcontractors).
OBSERVATION: The ASU provides an opportunity for abuse with respect to
the capitalization of costs to fulfill a contract. An entity is permitted to allocate costs
that relate directly to the contract such as costs of contract management and
supervision. Such an allocation appears arbitrary and might motivate companies to
overallocate certain overheads to costs to fulfill a contract in order to capitalize
those costs.
Other Costs
An entity shall recognize the following costs as expenses when incurred:
• General and administrative costs (unless those costs are explicitly chargeable to
the customer under the contract, and capitalized as costs to fulfill the contract)
• Costs of wasted materials, labor, or other resources to fulfill the contract that
were not reflected in the price of the contract
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• Costs that relate to satisfied performance obligations (or partially satisfied
performance obligations) in the contract (i.e., costs that relate to past
performance)
• Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations or to satisfied performance obligations (or partially
satisfied performance obligations).
Subsequent Measurement of Capitalized Costs
An asset recognized due to the capitalization of incremental costs of obtaining a
contract, or costs to fulfill a contract, shall be amortized on a systematic basis that is
consistent with the transfer to the customer of the goods or services to which the asset
relates. An entity shall update the amortization to reflect a significant change in the
entity’s expected timing of transfer to the customer of the goods or services to which
the asset relates. Such a change shall be accounted for as a change in accounting
estimate in accordance with ASC Subtopic 250-10, Accounting Changes and Error
Corrections, on accounting changes and error corrections.
An entity shall recognize an impairment loss in its income statement to the extent
that the carrying amount of an asset capitalized exceeds the remaining amount of
consideration that the entity expects to receive in exchange for the goods or services to
which the asset relates, less the costs that relate directly to providing those goods or
services and that have not been recognized as expenses.
NOTE: An entity shall not recognize a reversal of an impairment loss previously recognized.
Example 1: Incremental costs of obtaining a contract
An entity, a provider of consulting services, wins a competitive bid to provide consulting
services to a new customer. The entity incurred the following costs to obtain the
contract:
External legal fees for due diligence
Travel costs to deliver proposal
Commissions to sales employees
$15,000
25,000
10,000
$50,000
The entity also pays discretionary annual bonuses to sales supervisors based on annual
sales targets, overall profitability of the entity, and individual performance evaluations.
Conclusion: The entity recognizes an asset for the $10,000 incremental costs of
obtaining the contract arising from the commissions to sales employees because the
entity expects to recover those costs through future fees for the consulting services.
Once capitalized, the $10,000 should be amortized in a systematic and rational manner
that is consistent with the way in which the underlying revenue is recognized.
The external legal fees ($15,000) and travel costs ($25,000) would have been
incurred regardless of whether the contract was obtained. The fact that they relate to
the transaction and original proposal and due diligence is not relevant because they
would have been incurred if the entity had not won the contract. Therefore, the external
legal fees and travel costs are recognized as expenses when incurred.
The entity does not recognize an asset for the bonuses paid to sales supervisors
because the bonuses are not incremental to obtaining a contract. The amounts are
discretionary and are based on other factors, including the profitability of the entity and
the individuals’ performance. The bonuses are not directly attributable to identifiable
contracts.
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Example 2: Costs that give rise to an asset
An entity enters into a service contract to manage a customer’s information technology
data center for five years. The contract is renewable for subsequent one-year periods
beyond the initial five-year period. The average customer term is seven years. The
entity pays an employee a $10,000 sales commission upon the customer signing the
contract.
Before providing the services, the entity designs and builds a technology platform
for the entity’s internal use that interfaces with the customer’s systems. That platform is
not transferred to the customer but will be used to deliver services to the customer. The
initial costs incurred to set up the technology platform, which will continue to be owned
by the entity, are as follows:
Design costs
Hardware
Software
Migration and testing of data center
$40,000
120,000
90,000
100,000
$350,000
In addition to the initial costs to set up the technology platform, the entity also assigns
two employees who are primarily responsible for providing the service to the customer.
Conclusion: The entity recognizes an asset for the $10,000 incremental costs of
obtaining the contract for the sales commission because the entity expects to recover
those costs through future fees for the services to be provided. The entity amortizes the
$10,000 asset over seven years because the asset relates to the services transferred to
the customer during the contract term of five years and the entity anticipates that the
contract will be renewed for two subsequent one-year periods.
The initial setup costs relate primarily to activities to fulfill the contract but do not
transfer goods or services to the customer. The entity accounts for the initial setup
costs as follows:
• Hardware costs: $120,000: Should be capitalized, depreciated, and accounted
for in accordance with ASC 360, Property, Plant, and Equipment.
• Software costs: $90,000: Should be accounted for in accordance with ASC
350-40 on internal-use software.
• Costs of the design, migration, and testing of the data center: Should be
assessed to determine whether they are costs to fulfill the contract to be
capitalized and amortized.
Those costs will be capitalized as an asset only if those costs meet all of the following
criteria:
• The costs relate directly to the contract or to an anticipated contract that the
entity can specifically identify.
• The costs generate or enhance resources of the entity that will be used in
satisfying (or in continuing to satisfy) performance obligations in the future.
• The costs are expected to be recovered.
Any resulting asset would be amortized on a systematic basis over the seven-year period
(i.e., the five-year contract term and two anticipated one-year renewal periods) that the
entity expects to provide services related to the data center.
Although the costs for these two employees are incurred as part of providing the
service to the customer, the entity concludes that the costs do not generate or enhance
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resources of the entity. Therefore, the costs do not meet the criteria and cannot be
recognized as an asset. In addition, the entity recognizes the payroll expense for these
two employees when incurred.
¶ 211 PRESENTATION
When either party to a contract has performed, an entity shall present the contract in
the statement of financial position as a contract asset or a contract liability, depending
on the relationship between the entity’s performance and the customer’s payment. An
entity shall present any unconditional rights to consideration separately as a receivable.
If a customer pays consideration, or an entity has a right to an amount of
consideration that is unconditional (i.e., a receivable), before the entity transfers a good
or service to the customer, the entity shall present the contract as a contract liability
when the payment is made or the payment is due (whichever is earlier). A contract
liability is an entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or an amount of consideration is due) from the
customer.
If an entity performs by transferring goods or services to a customer before the
customer pays consideration or before payment is due, the entity shall present the
contract as a contract asset, excluding any amounts presented as a receivable. A
contract asset is an entity’s right to consideration in exchange for goods or services that
the entity has transferred to a customer.
An entity shall assess a contract asset for impairment in accordance with ASC 310,
Receivables. An impairment of a contract asset shall be measured, presented, and
disclosed in accordance with ASC 310.
A receivable is an entity’s right to consideration that is unconditional. A right to
consideration is unconditional if only the passage of time is required before payment of
that consideration is due. For example, an entity would recognize a receivable if it has a
present right to payment even though that amount may be subject to refund in the
future. An entity shall account for a receivable in accordance with ASC 310. Upon initial
recognition of a receivable from a contract with a customer, any difference between the
measurement of the receivable in accordance with ASC 310 and the corresponding
amount of revenue recognized shall be presented as an expense (e.g., as an impairment
loss).
NOTE: This guidance uses the terms contract asset and contract liability but
does not prohibit an entity from using alternative descriptions in the statement of
financial position for those items. If an entity uses an alternative description for a
contract asset, the entity shall provide sufficient information for a user of the
financial statements to distinguish between receivables and contract assets.
¶ 212 DISCLOSURES
The objective of the disclosure requirements in ASU 2014-09 is for an entity to disclose
sufficient information to enable users of financial statements to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. To achieve that objective, an entity shall disclose qualitative and quantitative
information about all of the following:
• Its contracts with customers
• The significant judgments, and changes in the judgments, made in applying the
guidance in this ASU to those contracts
• Any assets recognized from the costs to obtain or fulfill a contract with a
customer
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An entity shall consider the level of detail necessary to satisfy the disclosure objective
and how much emphasis to place on each of the various requirements. An entity shall
aggregate or disaggregate disclosures so that useful information is not obscured by
either the inclusion of a large amount of insignificant detail or the aggregation of items
that have substantially different characteristics. Amounts disclosed are for each reporting period for which a statement of comprehensive income (statement of activities) is
presented and as of each reporting period for which a statement of financial position is
presented. An entity need not disclose information if it has provided the information.
Contracts with Customers
An entity shall disclose the following amounts for the reporting period unless those
amounts are presented separately in the statement of comprehensive income (statement of activities) in accordance with other ASC Topics:
• Revenue recognized from contracts with customers, which the entity shall
disclose separately from its other sources of revenue
• Any impairment losses recognized (in accordance with ASC 310, Receivables) on
any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from impairment losses from
other contracts.
Disaggregation of Revenue
An entity shall disaggregate revenue recognized from contracts with customers into
categories that depict how the nature, amount, timing, and uncertainty of revenue and
cash flows are affected by economic factors. The entity shall apply the guidance in
paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue. Examples of categories that might be appropriate include, but are not
limited to, all of the following:
• Type of good or service (e.g., major product lines)
• Geographical region (e.g., country or region)
• Market or type of customer (e.g., government and nongovernment customers)
• Type of contract (e.g., fixed-price and time-and-materials contracts)
• Contract duration (e.g., short-term and long-term contracts)
• Timing of transfer of goods or services (e.g., revenue from goods or services
transferred to customers at a point in time and revenue from goods or services
transferred over time)
• Sales channels (e.g., goods sold directly to consumers and goods sold through
intermediaries)
An entity shall disclose sufficient information to enable users of financial statements to
understand the relationship between the disclosure of disaggregated revenue and
revenue information that is disclosed for each reportable segment, if the entity applies
ASC 280, Segment Reporting.
A nonpublic entity may elect not to apply the quantitative disaggregation disclosures in this section. If it elects not to provide those disclosures, the entity shall
disclose, at a minimum, revenue disaggregated according to the timing of transfer of
goods or services (e.g., revenue from goods or services transferred to customers at a
point in time and revenue from goods or services transferred to customers over time)
and qualitative information about how economic factors (such as type of customer,
geographical location of customers, and type of contract) affect the nature, amount,
timing, and uncertainty of revenue and cash flows.
¶ 212
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Contract Balances
An entity shall disclose all of the following:
• The opening and closing balances of receivables, contract assets, and contract
liabilities from contracts with customers, if not otherwise separately presented
or disclosed
• Revenue recognized in the reporting period that was included in the contract
liability balance at the beginning of the period
• Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (e.g., changes in transaction
price)
An entity shall explain how the timing of satisfaction of its performance obligations
relates to the typical timing of payment and the effect that those factors have on the
contract asset and the contract liability balances. The explanation provided may use
qualitative information.
An entity shall provide an explanation of the significant changes in the contract
asset and the contract liability balances during the reporting period. The explanation
shall include qualitative and quantitative information. Examples of changes in the
entity’s balances of contract assets and contract liabilities include any of the following:
• Changes due to business combinations
• Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in
the measure of progress, a change in an estimate of the transaction price
(including any changes in the assessment of whether an estimate of variable
consideration is constrained), or a contract modification
• Impairment of a contract asset
• A change in the time frame for a right to consideration to become unconditional
(i.e., for a contract asset to be reclassified to a receivable)
• A change in the time frame for a performance obligation to be satisfied (i.e., for
the recognition of revenue arising from a contract liability)
A nonpublic entity may elect not to provide any or all of the disclosures this section
regarding contract balances. However, if an entity elects not to provide the disclosures
in this section, the entity shall provide the first disclosure described above, which
requires the disclosure of the opening and closing balances of receivables, contract
assets, and contract liabilities from contracts with customers, if not otherwise separately
presented or disclosed.
Performance Obligations
An entity shall disclose information about its performance obligations in contracts with
customers, including a description of all of the following:
• When the entity typically satisfies its performance obligations (e.g., upon shipment, upon delivery, as services are rendered, or upon completion of service)
including when performance obligations are satisfied in a bill-and-hold
arrangement
• The significant payment terms (e.g., when payment typically is due, whether the
contract has a significant financing component, whether the consideration
amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 606-10-32-11 through 32-13)
¶ 212
37
MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
• The nature of the goods or services that the entity has promised to transfer,
highlighting any performance obligations to arrange for another party to transfer goods or services (i.e., if the entity is acting as an agent)
• Obligations for returns, refunds, and other similar obligations
• Types of warranties and related obligations
Transaction Price Allocated to the Remaining Performance
Obligations
An entity shall disclose the following information about its remaining performance
obligations:
• The aggregate amount of the transaction price allocated to the performance
obligations that are unsatisfied (or partially unsatisfied) as of the end of the
reporting period (An entity shall explain qualitatively whether it is applying this
practical expedient.)
• An explanation of when the entity expects to recognize as revenue the aggregate
amount of the transaction price allocated to the performance obligations that are
unsatisfied (or partially unsatisfied) as of the end of the reporting period, which
the entity shall disclose in either of the following ways (An entity shall explain
whether any consideration from contracts with customers is not included in the
transaction price and, therefore, not included in this information):
- On a quantitative basis using the time bands that would be most appropriate for
the duration of the remaining performance obligations
- By using qualitative information
As a practical expedient, an entity need not disclose the information in the first bullet
above for a performance obligation if either of the following conditions is met:
• The performance obligation is part of a contract that has an original expected
duration of one year or less.
• The entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18.
NOTE: An estimate of the transaction price would not include any estimated
amounts of variable consideration that are constrained.
A nonpublic entity may elect not to provide any of these disclosures concerning its
remaining performance obligations.
Significant Judgments in the Application of the Guidance in this ASU
An entity shall disclose the judgments, and changes in the judgments, made in applying
the guidance in this Topic that significantly affect the determination of the amount and
timing of revenue from contracts with customers. In particular, an entity shall explain
the judgments, and changes in the judgments, used in determining both the timing of
satisfaction of performance obligations, and the transaction price and the amounts
allocated to performance obligations.
Determining the Timing of Satisfaction of Performance Obligations
For performance obligations that an entity satisfies over time, an entity shall disclose
both the methods used to recognize revenue (e.g., a description of the output methods
or input methods used and how those methods are applied) and an explanation of why
the methods used provide a faithful depiction of the transfer of goods or services
(optional for nonpublic companies).
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For performance obligations satisfied at a point in time, an entity shall disclose the
significant judgments made in evaluating when a customer obtains control of promised
goods or services (optional for nonpublic companies).
Determining the Transaction Price and the Amounts Allocated to
Performance Obligations
An entity shall disclose information about the methods, inputs, and assumptions used
for all of the following:
• Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time
value of money, and measuring noncash consideration (optional for nonpublic
companies)
• Assessing whether an estimate of variable consideration is constrained
• Allocating the transaction price, including estimating standalone selling prices of
promised goods or services and allocating discounts and variable consideration
to a specific part of the contract (if applicable) (optional for nonpublic
companies)
• Measuring obligations for returns, refunds, and other similar obligations (optional for nonpublic companies)
Other Disclosures
If an entity elects to use the practical expedient in either paragraph 606-10-32-18 (about
the existence of a significant financing component) or paragraph 340-40-25-4 (about the
incremental costs of obtaining a contract), the entity shall disclose that fact. This
disclosure is optional for nonpublic entities.
Example: Disaggregation of Revenue—Quantitative Disclosure
[from Example 41 of ASU 2-014-09]
An entity reports the following segments: consumer products, transportation, and
energy, in accordance with ASC 280, Segment Reporting. When the entity prepares its
investor presentations, it disaggregates revenue into primary geographical markets,
major product lines, and timing of revenue recognition (i.e., goods transferred at a point
in time or services transferred over time).
The entity determines that the categories used in the investor presentations can be
used to meet the objective of the disaggregation disclosure, which is to disaggregate
revenue from contracts with customers into categories that depict how the nature,
amount, timing, and uncertainty of revenue and cash flows are affected by economic
factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line, and timing of revenue recognition, including a
reconciliation of how the disaggregated revenue ties in with the consumer products,
transportation, and energy segments.
Segments
Primary Geographical Markets:
North America
Europe
Asia
¶ 212
Consumer
Products Transportation
Energy
Total
$990
300
700
$2,250
750
260
$5,250
1,000
0
$8,490
2,050
960
$1,990
$3,260
$6,250
$11,500
MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
39
Major Goods/Service Lines
Office supplies
Appliances
Clothing
Motorcycles
Automobiles
Solar panels
Power plant
$600
990
400
1,000
5,250
$600
990
400
500
2,760
1,000
5,250
500
2,760
$1,990
$3,260
$6,250
$11,500
$1,990
0
$3,260
0
$1,000
5,250
$6,250
5,250
$1,990
$3,260
$6,250
$11,500
Timing of Revenue Recognition:
Goods transferred at a point in time
Services transferred over time
¶ 213 TRANSITION AND EFFECTIVE DATE
The following are the transition and effective date requirements of ASU 2014-09, as
amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date.
a. A public business entity, a not-for-profit entity that has issued, or is a conduit
bond obligor for, securities that are traded, listed, or quoted on an exchange or
an over-the-counter market, and an employee benefit plan that files or furnishes
financial statements with or to the Securities and Exchange Commission: shall
apply the ASU for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
b. All other entities (nonpublic entities) shall apply the ASU for annual reporting
periods beginning after December 15, 2018, and interim reporting periods within
annual reporting periods beginning after December 15, 2019. All other entities
(nonpublic entities) may elect to apply the ASU earlier only as of:
1) An annual reporting period beginning after December 15, 2016, including
interim reporting periods within that reporting period (public entity effective date)
2) An annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one
year after the annual reporting period in which the entity first applies the
guidance in ASU 2014-09
c. For the purposes of the transition guidance in (d) through (i):
1) The date of initial application is the start of the reporting period in which
an entity first applies the pending content that links to this paragraph
2) A completed contract is a contract for which the entity has transferred all
of the goods or services identified in accordance with revenue guidance
that is in effect before the date of initial application.
¶ 213
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
d. An entity shall apply the pending content that links to this paragraph using one
of the following two methods:
1) Retrospectively to each prior reporting period presented in accordance
with the guidance on accounting changes in ASC 250, Accounting Changes
and Error Corrections, Subtopics 10-45-5 through 45-10
2) Retrospectively with the cumulative effect of initially applying the ASU
recognized at the date of initial application in accordance with (h) through
(i)
e. If an entity elects to apply the ASU retrospectively in accordance with (d)(1),
the entity shall provide the disclosures required in ASC 250-10-50-1 through
50-3 in the period of adoption.
f. An entity may use one or more of the following practical expedients when
applying the ASU retrospectively in accordance with (d)(1):
1) For completed contracts, an entity need not restate contracts that begin
and end within the same annual reporting period.
2) For completed contracts that have variable consideration, an entity may
use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative reporting periods.
3) For all reporting periods presented before the date of initial application, an
entity need not disclose the amount of the transaction price allocated to the
remaining performance obligations and an explanation of when the entity
expects to recognize that amount as revenue.
g. For any of the practical expedients in (f) that an entity uses, the entity shall
apply that expedient consistently to all contracts within all reporting periods
presented. In addition, the entity shall disclose all of the following information:
1) The expedients that have been used
2) To the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients
h. If an entity elects to apply the ASU retrospectively in accordance with (d)(2),
the entity shall recognize the cumulative effect of initially applying the ASU as
an adjustment to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) of the
annual reporting period that includes the date of initial application. Under this
transition method, an entity shall apply this guidance retrospectively only to
contracts that are not completed contracts at the date of initial application (for
example, January 1, 2018, for an entity with a December 31 year-end).
i. For reporting periods that include the date of initial application, an entity shall
provide both of the following additional disclosures if the ASU is applied
retrospectively in accordance with (d)(2):
1) The amount by which each financial statement line item is affected in the
current reporting period by the application of the ASU as compared with
the guidance that was in effect before the change
2) An explanation of the reasons for significant changes identified in (i)(1)
¶ 213
MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
41
¶ 214 IMPACT OF IMPLEMENTING THE REVENUE
RECOGNITION STANDARD
General Effects
The FASB suggests that for some contracts (e.g., many retail transactions), the guidance will have little, if any, effect on current practice. However, the guidance differs
from current practice in the following ways:
• Recognition of revenue only from the transfer of goods or services: Contracts for the development of an asset (e.g., construction, manufacturing, and
customized software) would result in continuous revenue recognition only if the
customer controls the asset as it is developed.
• Identification of separate performance obligations: An entity will be required to divide each contract into separate performance obligations for goods
or services that are distinct. As a result of those requirements, an entity might
separate a contract into units of accounting that differ from those identified in
current practice.
• Licensing and rights to use: An entity will be required to evaluate whether a
license to use the entity’s intellectual property (for less than the property’s
economic life) is granted on an exclusive or nonexclusive basis. If a license is
granted on an exclusive basis, an entity will be required to recognize revenue
over the term of the license. That pattern of revenue recognition might differ
from current practice.
• Use of estimates: In determining the transaction price (e.g., estimating variable consideration) and allocating the transaction price on the basis of standalone
selling prices, an entity will be required to use estimates more extensively than
in applying existing standards.
• Accounting for costs: The guidance specifies which contract costs an entity
will recognize as expenses when incurred and which costs would be capitalized
because they give rise to an asset. Applying that cost guidance might change
how an entity would account for some costs, such as commissions.
• Disclosure: The guidance specifies disclosures to help users of financial statements understand the amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. An entity will be required to
disclose more information about its contracts with customers than is currently
required, including more disaggregated information about recognized revenue
and more information about its performance obligations remaining at the end of
the reporting period.
Concern by the Construction Industry
One industry that will be significantly impacted by the revenue changes is the construction industry. Of particular concern is that the new standard eliminates the use of the
percentage-of-completion method and replaces it with the possible use of a similar
version based on costs, depending on the terms and conditions of the underlying
construction contract. Consider the following details.
A company will recognize revenue either at a point of time or over a period of time
depending on whether certain factors are met. In order to record revenue over time
(similar to the percentage-of-completion method), a company must decide whether it
satisfies the performance obligation (construction of the building) over time by transferring control of the promised good or service over time. If control is transferred over
time, revenue is recognized over time, which is similar to the percentage-of-completion
¶ 214
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
method. In recognizing revenue over time, the standard allows a company to apply a
method that measures progress toward complete satisfaction of the construction project, such as:
• Using input methods: which recognize revenue on the basis of the entity’s
efforts or inputs to the satisfaction of the construction project, such as labor
hours expended, costs incurred, time lapsed, or machine hours used, relative to
the total expected inputs to the satisfaction of that performance obligation.
• Using output methods: which recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to
date (e.g., surveys of performance completed to date, appraisals of results
achieved, milestones reached, or units produced) and can be the most faithful
depiction of the entity’s performance.
Using input methods, such as percentage of costs incurred, will be similar to use of the
percentage-of-completion method under existing GAAP. If the company cannot demonstrate that it transfers control over time, it defaults to recording revenue at a point of
time, which is typically the end of the contract, similar to the completed contract
method.
STUDY QUESTIONS
6. Company X sells a product and is trying to determine whether to record the
transaction gross, as a principal, or net, as an agent. Which of the following criteria
determines that X is a principal?
a. X does not obtain legal title to the goods.
b. X controls promised goods or services.
c. X obtains a commission on the transaction.
d. X does not set the price of the goods.
7. Company Q has incurred certain costs to fulfill a contract. Q wants to record the
costs as an asset and needs to know the criteria for doing so. Which of following is one
of the criteria that must be satisfied in order for Q to capitalize the costs as an asset?
a. The costs do not enhance resources of Company Q.
b. The costs may not be recoverable.
c. The costs must provide no future value to Q.
d. The costs must relate directly to a contract.
8. Company P is identifying types of costs that are directly related to a contract it has.
Which of the following costs is a cost directly related to a contract?
a. Indirect labor
b. Indirect materials
c. General overhead
d. Specific salaries of employees working on the contract
¶ 214
MODULE 1 - CHAPTER 2 - Recognizing Revenue Contracts with Customers
43
9. Company L is trying to determine what the impact of implementing the revenue
standard will have on its company. L has several performance obligations in one
contract. L also has a construction contract. In making that assessment, which of the
following is a possible effect?
a. L will most likely have fewer disclosures.
b. L will not have to deal with any estimates.
c. L will have to divide each contract into separate performance obligations.
d. L’s construction contracts will be recognized on a completed contract basis.
¶ 214
45
MODULE 1: ONGOING ISSUES—CHAPTER
3: Impairment of Goodwill and IndefiniteLived Intangible Assets
¶ 301 WELCOME
This chapter addresses authoritative guidance on accounting for the impairment of
goodwill and other indefinite-lived intangible assets and illustrates the basic application
of that guidance.
¶ 302 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Distinguish intangible assets (including goodwill) from other assets
• Describe how an entity identifies goodwill, other intangible assets, and their
useful lives
• Cite qualitative factors that an entity may assess annually (or in the interim) to
identify impairment of goodwill or other indefinite-lived intangible assets
• Explain how an entity tests goodwill for impairment
• Describe how an entity tests other indefinite-lived intangible assets for
impairment
• Discuss presentation and disclosure of impairment losses and related matters
¶ 303 BACKGROUND
In this section of the chapter, you will learn:
• How to distinguish intangible assets (including goodwill) from other assets, and
• Where to find GAAP on goodwill and indefinite-lived intangible assets.
Distinguishing Between Assets
This chapter addresses how an entity accounts for impairment of goodwill and other
indefinite-lived intangible assets. Intangible assets (such as goodwill) are only one of
various types of an entity’s assets that could become impaired (Exhibit 1).
EXHIBIT 1: Types of Assets
I. Financial
II. Nonfinancial
A. Tangible
B. Intangible
1. Goodwill
2. Other than goodwill
a. Indefinite useful life (indefinite-lived)
b. Finite useful life (finite-lived)
An intangible asset is an asset, other than a financial asset, that lacks physical
substance (ASC Master Glossary, “Intangible Assets; ASC 350-20-20).
¶ 303
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Goodwill is an intangible asset that arises from a business combination (or an
acquisition by a not-for-profit entity) (ASC Master Glossary, “Goodwill; ASC 350-20-20).
The useful life of an intangible asset period over which an asset is expected to
contribute directly or indirectly to future cash flows and may be finite or indefinite.
(ASC Master Glossary, “Useful Life; ASC 350-30-20) Goodwill and other indefinite-lived
intangible assets are the focus of this chapter.
OBSERVATION: GAAP—and this chapter—typically uses the term intangible asset to refer to any intangible asset other than goodwill (ASC Master Glossary,
“Intangible Assets; ASC 350-10-20).
Finding Related GAAP
Authoritative GAAP on impairment of goodwill and other indefinite-lived intangible
assets is set out in the following subtopics of ASC 350, Intangibles—Goodwill and Other:
• Goodwill (ASC 350-20), and
• General Intangibles Other Than Goodwill (ASC 350-30).
The accounting for goodwill and indefinite-lived intangible assets may also be affected
by the guidance on other long-lived assets.
For example, tangible assets include property, plant, and equipment (including real
estate). The guidance on accounting for property, plant, and equipment is set out in
ASC 360, Property, Plant, and Equipment, and includes accounting for the impairment
and disposal of long-lived assets.
Some assets are evaluated collectively under ASC 360 as part of asset groups or
disposal groups. (ASC 360-10-20; ASC Master Glossary, “Asset Group; ASC Master
Glossary “Disposal Group). These groups may include long-lived intangible assets
(including goodwill). This interaction is discussed later in this chapter.
OBSERVATION: This chapter reflects authoritative generally accepted accounting principles (GAAP) in the United States as set out in the Financial
Accounting Standards Board (FASB) Accounting Standards Codification® (ASC)
through the issuance of:
• FASB Accounting Standards Update (ASU) No. 2015-10, Technical Corrections and Improvements, which was issued June 12, 2015; and,
• FASB Editorial and Maintenance Update 2015-10 (released June 16, 2015).
An entity does not have to apply authoritative GAAP to an immaterial item
(ASC 105-10-05-6).
The subsequent accounting for intangible assets is summarized in Exhibit 2.
EXHIBIT 2: Subsequent Accounting for Intangible Assets
Intangible
Asset
Useful Life
Goodwill
-
Goodwill
(private
company
shortcut)
10 years (or
possibly less
than 10 years)
¶ 303
Amortize?
No, do not amortize unless electing the
private company shortcut
(ASC 350-20-35-1; ASC 350-20-35-63)
Test for Impairment?
Yes, amortize over useful life
(ASC 350-20-35-63)
Yes, as facts warrant
(ASC 350-20-35-66)
Yes, at least annually
(ASC 350-20-35-28)
47
MODULE 1 - CHAPTER 3 - Impairment of Goodwill
Other than
goodwill
Indefinite
No, do not amortize
(ASC 350-30-35-1)
Finite
Yes, amortize over useful life
(ASC 350-30-35-1)
Yes, at least annually
(ASC 350-30-35-18)
Yes, as facts warrant
(ASC 350-30-35-14; ASC
360-10-35-17 through 35-35)
¶ 304 GOODWILL
In this section of the chapter, you will learn that:
• Goodwill and other intangible assets may arise in a business combination.
• At least annually, an entity must assess goodwill for impairment at the level of
the entity’s reporting units.
• An entity must disclose any loss due to impairment of goodwill on the face of
(and in the 39s to) the entity’s financial statements.
Intangible Assets Arising from a Business Combination
Goodwill is an intangible asset that arises from a business combination (or an acquisition by a not-for-profit entity). Goodwill represents future economic benefits that aren’t
identified individually or recognized separately (ASC Master Glossary, “Goodwill; ASC
350-10-20; ASC 350-20-05-3; ASC 958-805-25-29) Goodwill is recognized initially as part of
accounting for a business combination. Other intangible assets may be added to an
entity’s balance sheet as a result of a business combination.
As you learned previously, an intangible asset is an asset, other than a financial
asset, that lacks physical substance. GAAP—and this chapter—use the term to refer to
any intangible asset other than goodwill (ASC Master Glossary, “Intangible Assets;
ASC 350-10-20).
Let’s first review how goodwill and other intangible assets are identified, measured,
and initially recognized as part of a business combination.
The authoritative GAAP on business combinations is set out primarily in Topic 805,
Business Combinations (ASC 805), and focuses on the acquisition method (ASC
805-10-05-4; ASC 805-10-25-1; ASC 958-805) Under the acquisition method, an entity has
to:
• Identify the acquirer.
• Determine the acquisition date.
• Identify any rights and obligations bought as acquirer—assets acquired, liabilities assumed, and noncontrolling interests.
• Measure the items acquired initially at their fair value.
• Identify any goodwill or bargain-purchase gain by comparing the amount of
consideration the entity exchanged with the fair value of what the entity bought.
• Recognize all of the preceding items.
OBSERVATION: A not-for-profit entity may get control of a business or
nonprofit activity (ASC Master Glossary terms “Business, “Acquisition by a Notfor-Profit Entity, and “Not-for-Profit Entity; ASC 805-10-20). If so, the not-for-profit
entity, as acquirer, typically must follow the authoritative guidance for business
combinations (ASC 985-805). References in this chapter to a business combination
typically include an acquisition by a not-for-profit entity.
OBSERVATION: Generally accepted accounting principles on measuring fair
value are set out in ASC 820, Fair Value Measurement.
¶ 304
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
As part of applying the acquisition method, the entity that is the acquirer has to identify,
classify, and measure all of the following items separately from goodwill (ASC
805-20-25-1; ASC 805-20-30-1; ASC Master Glossary Term “Identifiable):
• Identifiable assets acquired
• Liabilities assumed
• Noncontrolling interests
To be recognized as part of applying the acquisition method, identifiable assets must:
• Meet the definition of assets under FASB Statement of Financial Accounting
Concepts No. 6, Elements of Financial Statements (ASC 805-20-25-2; SFAC 6,
paragraph 25)
• Be part of what the acquirer and acquiree exchanged in the business combination—in contrast to being part of separate transactions (ASC 805-20-25-3)
Assets are “probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events (SFAC 6, paragraph 25).
Applying the acquisition method may result in an entity (as acquirer) recognizing
certain assets for the first time—that is, assets that the acquiree had not previously
recognized in the acquiree’s preacquisition financial statements (ASC 805-20-25-4). For
example, GAAP precludes an entity from recognizing certain intangible assets, such as
those the entity developed internally (ASC 350-30-25-3). The event of the business
combination, however, may trigger an entity (as acquirer) to recognize the intangible
assets.
EXAMPLE: Alpha Entity, a public business entity, gets control of Bravo
Entity, a business. Over the years, Bravo Entity has developed a customer list.
Although the list meets the definition of an intangible asset, Bravo Entity couldn’t
recognize the customer list as an asset because Bravo Entity developed the list
internally. Assume that the customer list meets the definition of identifiable. In
contrast, Alpha Entity must recognize the customer list as an identifiable intangible
asset as part of applying the acquisition method to its business combination
involving Bravo Entity.
There are two ways an asset can have the characteristic of being identifiable. (ASC
Master Glossary Term “Identifiable) The first way is if the item is separable (the
separability criterion). The second way is if the item arises from a legal right (the
contractual-legal criterion). An asset is identifiable if it meets either or both criteria.
Examples of intangible assets that are identifiable because they are separable
include (ASC Master Glossary term “Intangible Assets; ASC 805-20-55-2 through 55-10;
ASC 805-20-55-20; ASC 805-20-55-38; ASC 350, Intangibles—Goodwill and Other; ASC
350-30):
• Customer lists
• Noncontractual customer relationships
• Unpatented technology
• Databases (such as an insurance entity’s title plant)
EXAMPLE – Customer List is Separable:
A customer list can be sold. Whether or not the entity that owns the list
intends to ever sell the list, the list is separable and, by that, identifiable.
An asset may arise from a legal right, such as a contract. It is irrelevant whether the
entity can transfer or separate the right from the entity’s other rights and obligations
(ASC Master Glossary Term “Identifiable).
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EXAMPLE – Copyright is Legal Right:
An entity employs staff writers. The entity holds a copyright arising from
creation of each written work. Whether or not the entity can transfer or separate
the right, the right is identifiable.
Exhibit 3 sets out examples of intangible assets that identifiable because they arise
from legal rights.
EXHIBIT 3–Examples of Intangible Assets Arising from Legal Rights
Marketing Activities: (ASC 805-20-55-14)
Trademarks
Trade names
Collective marks
Certification marks
Newspaper mastheads
Internet domain names
Customers: (ASC 805-20-55-20)
Order backlog
Production backlog
Artistic or Literary Works (ASC 805-20-55-29)
Plays
Operas
Books
Magazines
Musical compositions
Song lyrics
Pictures
Photographs
Films
Music videos
Contract Based (ASC 805-20-55-31)
Licensing agreements
Royalty agreements
Advertising contracts
Construction contracts
Service contracts
Supply contracts
Construction permits
Franchise agreements
Servicing contracts
Technology (ASC 805-20-55-38)
Patented technology
Trade secrets
Service marks
Trade dress
Noncompetition agreements
Customer contracts
Ballets
Newspapers
Advertising jingles
Motion pictures
Television programs
Employment contracts
Standstill agreements
Management contracts
Leases
Operating and broadcast
rights
Use rights
Computer software
Computer mask works
Private Company Shortcut
A private company may elect a shortcut to not recognize the following identifiable
intangible assets acquired in a business combination (ASC Master Glossary term
“Private Company; ASC 805-20-15-2 through 15-4; ASC 805-20-25-30; ASC 805-20-65-2):
• Customer-related intangible assets that the entity would be unable to sell or
license independently from other assets of a business (that is, separable in this
specific way)
• Noncompetition agreements
The guidance provides four examples of customer-related intangible assets that, depending on the facts, may meet the criterion of being salable or licensable independently (ASC 805-20-25-31; ASC 805-20-65-2):
• Mortgage servicing rights
• Commodity supply contracts
• Core deposits of a depository institution
• Customer information
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Again, a private company may elect a shortcut to not recognize the preceding intangible
assets. A private company that chooses to apply the shortcut must also elect to amortize
any goodwill arising from the related business combination (ASC 805-20-15-4).
OBSERVATION: The private company shortcut became available in December 2014 (ASC 805-20-65-2).
STUDY QUESTION
1. Which of the following is a true statement about accounting for intangible assets?
a. An entity must not amortize any intangible asset.
b. An intangible asset may be recognized as an asset only as the result of a
business combination.
c. The primary authoritative guidance on accounting for impairment of goodwill
and indefinite-lived intangible assets is set out in ASC 350-20 and ASC 350-30,
respectively
d. Goodwill is an asset that has physical substance.
Testing Goodwill for Impairment
Once recognized, goodwill must not be amortized. Rather, an entity has to test goodwill
for impairment annually (ASC 350-20-35-1).
Interim testing of goodwill is required if something happens (an event or a change
in circumstances) that more likely than not would create an impairment—that is, that
would reduce the reporting unit’s fair value below its carrying amount (ASC
350-20-35-30). More likely than not is a likelihood of more than 50 percent.
PRACTICE POINTER: As long as an entity performs the impairment test at
the same time each fiscal year, the test for each reporting unit can be at any time
during the fiscal year. For example, an entity with four reporting units could test
one reporting unit each quarter as long as it repeats the tests for the specified
reporting units at the same time every year thereafter (ASC 350-20-35-28). An entity
would also want to consider the information it must gather for each assessment to
determine whether or not doing the assessments separately would be useful.
The test of goodwill for impairment must be performed at the level of a reporting unit.
A reporting unit is defined as an operating segment or a component (one level below
an operating segment) (ASC Master Glossary, “Operating Segment and “Reporting
Unit; ASC 350-20-35-34; ASC 350-20-20; ASC 280-10-50).
Goodwill is considered impaired if the recognized amount of goodwill exceeds the
fair value of the goodwill (ASC 350-20-35-2). Any excess is an impairment loss (Exhibit
4).
EXHIBIT 4: Calculation of Impairment Loss
Carrying Amount
of
Reporting Unit’s
Goodwill
Minus
Fair Value of
Reporting Unit’s
Goodwill
Equals
Impairment Loss
(if a positive
amount)
Calculating any excess is straightforward. The complication is that an entity cannot
identify goodwill directly; rather, goodwill is the remainder from a calculation. If an
entity cannot identity goodwill directly, it follows that the entity cannot measure the fair
value of goodwill directly (ASC 350-20-35-3). For these reasons, the intangibles guidance
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
sets out a method for inferring the fair value of goodwill for each reporting unit, which
the guidance calls the implied fair value of goodwill (ASC 350-20-35-3).
PRACTICE POINTER: GAAP requires impairment tests for various tangible
and intangible assets. Again, goodwill is a remainder of a calculation involving the
value of various assets and liabilities. If an entity tests an asset (or asset group) for
impairment at the same time the entity tests goodwill for impairment, the entity
must apply the asset test before the goodwill test (ASC 350-20-35-31). This may
also happen when an asset is part of a group of items to be disposed of.
EXAMPLE: Hotel Entity has a significant group of long-lived assets that it
must test for impairment under ASC 360-10. Hotel Entity should apply the ASC
360-10 impairment test to the asset group before testing the corresponding reporting unit’s goodwill for impairment. Most important, if Hotel Entity has to recognize
impairment of the asset group, Hotel Entity must recognize the impairment loss for
the asset group before proceeding with its test of the corresponding reporting
unit’s goodwill for impairment (ASC 350-20-35-31).
Although the goodwill impairment guidance (ASC 350-20) refers to a two-step process,
there are various amounts to be identified and calculated before and in addition to
applying the two steps.
To begin with, an entity must first:
• Identify each reporting unit.
• For each reporting unit, decide whether to perform a qualitative assessment.
Identifying Each Reporting Unit
The identity of each reporting unit depends on the nature of the entity’s operating
segments and components that make up each operating segment. (ASC Master Glossary “Reporting Unit; ASC 350-20-35-34; ASC 350-20-20). For this reason, an entity has
to identify its operating segments and components (ASC 350-20-55-1 through 55-2).
OBSERVATION: The entity has to identify its reporting units using the
operating segments guidance in ASC 280 whether or not the entity reports
operating segments (ASC 350-20-35-33; ASC 350-20-35-38).
An operating segment is a component of an entity that meets all of the following
conditions (ASC 280-10-50-1; ASC Master Glossary, “Operating Segment; ASC
350-20-20):
• The component engages in business activities for which it may recognize
revenues and expenses.
• The component’s operating results are reviewed regularly by the chief operating
decision maker to assess performance and allocate resources.
• The component’s discrete financial information is available.
OBSERVATION: Although the definition of an operating segment is defined
as a component “of a public entity, every nonpublic entity—including a private
company that does not apply the shortcut—must still use the segment reporting
guidance (ASC 280) when identifying its reporting units for purposes of testing
goodwill for impairment.
An entity also has to consider whether any component one level below the operating
segment has all of the following characteristics (ASC 350-20-35-34; ASC Master Glossary term “Business; “ASC Master Glossary term “Nonprofit Activity; ASC 350-20-20;
ASC 805-10):
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• The component is either a business or a nonprofit activity.
• The component’s operating results are reviewed regularly by the segment
manager.
• The component’s discrete financial information is available.
OBSERVATION: A segment manager is not a title, but a function that does
the following (ASC 280-10-50-7):
• Is directly accountable to the chief operating decision maker
• Maintains regular contact with the chief operating decision maker to
discuss:
- Operating activities
- Financial results
- Forecasts
- Plans for the component
An operating segment is the reporting unit in any of the following circumstances (ASC
350-20-35-36):
• None of the components of the operating segment have all of the preceding
characteristics,
• All of the components of the operating segment are similar economically, or
• The operating segment is made up of just one component.
If two or more components of an operating segment are economically similar, the entity
must aggregate the components as a single reporting unit (ASC 350-20-35-35; ASC
280-10-50-11).
The number of reporting units for purposes of testing impairment depends on the
nature of the entity.
Qualitative Assessment
After identifying its reporting units, an entity may choose whether or not to take a first
pass at assessing goodwill using qualitative factors.
The qualitative factors—such as the current market for the entity’s goods or
services, general economic conditions, and regulatory or political developments—are
addressed in more detail later in this chapter. The qualitative evidence includes
anything that could affect the future economic benefit represented by the recorded
goodwill qualitatively.
The qualitative assessment for each unit is entirely optional and answers the
following question:
Given the qualitative evidence, is it more likely than not (that is, a likelihood of
more than 50 percent) that the fair value of the given reporting unit is less than
the reporting unit’s carrying amount?
If the answer to this question is NO, the entity is done with its assessment for the
reporting unit and must test again in the next year (or in the interim if facts warrant).
In contrast, if the answer is YES, the entity must proceed to gather more information and perform the next step (Step 1).
EXAMPLE: Charlie Entity’s recognized assets include goodwill, which resulted from a single business combination in 20X3. At June 30, 20X4, Charlie Entity
decides to test the carrying amount of the goodwill for impairment.
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53
Charlie Entity has identified three reporting units: Reporting Unit A, Reporting
Unit B, and Reporting Unit C. Charlie Entity identifies various qualitative factors,
including those specific to each reporting unit.
Beginning with Reporting Unit A, Charlie Entity assesses the qualitative
evidence, and concludes—solely based on qualitative evidence—that there is more
than a 50 percent likelihood that the fair value of Reporting Unit A is less than
Reporting Unit A’s carrying amount at June 30, 20X4. Accordingly, Charlie Entity
must proceed to gather additional information and apply Step 1 of the goodwill
impairment test.
Assume Charlie Entity’s separate qualitative assessments of Reporting Unit B
and Reporting Unit C both result in conclusions that there is less than a 50 percent
likelihood that each reporting unit’s fair value is less than the reporting unit’s
carrying amount. For Reporting Unit B and Reporting Unit C, Charlie Entity has
completed its annual testing for goodwill impairment. Unless facts warrant action
in the interim, Charlie Entity simply must assess Reporting Unit B and Reporting
Unit C again for impairment in one year’s time (June 30, 20X5).
Said another way, if it is more likely than not that a reporting unit’s carrying amount
exceeds the reporting unit’s fair value, the entity must proceed to gather information
and perform Step 1 of the goodwill impairment test in the same way it would had the
entity not taken time to perform the qualitative assessment.
To be exact, the entity (and any entity that does not choose to perform a qualitative
assessment) must next:
• Assign acquired assets and assumed liabilities to reporting units
• Assign goodwill to reporting units
• Identify the carrying amount of each reporting unit
• Estimate the fair value of each reporting unit
• Determine whether the reporting unit’s carrying amount exceeds the reporting
unit’s fair value (Step 1)
Assigning Acquired Assets and Assumed Liabilities to Reporting Units
An entity has to assign any acquired asset or assumed liability to a reporting unit (as of
the acquisition date) if the item will be considered in estimating the reporting unit’s fair
value and either (ASC 350-20-35-39; ASC 350-20-35-45 through 35-46):
• The entity will employ the acquired asset in the operations of the reporting unit
• The assumed liability relates to the operations of the reporting unit
OBSERVATION: The acquisition date is the date at which the entity gets
control of another entity (ASC Master Glossary term “Acquisition Date; ASC
805-10-20).
This is true even if the entity considers the acquired asset or assumed liability to be a
corporate asset or liability (ASC 350-20-35-39). If the item meets the preceding conditions with respect to two or more reporting units, the entity needs to document and
apply a method to assign the item. The entity’s method must be reasonable and
supportable (ASC 350-20-35-40). For example, an item might be assigned based on the
relative benefits received by the respective reporting units.
EXAMPLE: Charlie Entity has three reporting units. Charlie Entity has a $15
liability for postretirement benefits. Charlie Entity decides that it would be reasonable to assign the liability to reporting units based on the relative payroll expense of
each reporting unit given the relationship of the liability to payroll costs. Charlie
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Entity documents its support for using the method, then applies the method to
determine the amount of the liability to allocate to Reporting Unit A.
(A)
Payroll
Expense
Reporting Unit A
Reporting Unit B
Reporting Unit C
Total
(B)
= (A) ÷ $80
Relative
Percentage
(C)
= $150 × (B)
Allocated
Liability
$40
25
15
50.00%
31.25%
18.75%
$7.50
4.70
2.80
$80
100.00%
$15.00
After addressing all other assets and liabilities, Charlie Entity identifies the
following total carrying amounts of assets and liabilities of Reporting Unit A:
Assets
Liabilities
Carrying
Amount
$1,200
(350)
Net assets
$ 850
Assigning Goodwill to Reporting Units
To assign goodwill, the entity has to identify the reporting units that the entity expects
will benefit from the synergies of the business combination (ASC 350-20-35-41). It
doesn’t matter whether or not the entity assigned any acquired assets or assumed
liabilities to the reporting unit.
The guidance does not specify a single method for assigning goodwill. Instead, an
entity has to document and apply a reasonable and supportable method (ASC
350-20-35-41; ASC 350-20-35-43 through 35-44). Conceptually, the method should assign
goodwill in a way that is similar to how goodwill is measured in a business combination
(ASC 350-20-35-42; ASC 805-20).
EXAMPLE: Charlie Entity has goodwill of $240, which arose from a single
business combination. Based on the way Charlie Entity measured goodwill in the
business combination, Charlie Entity assigns goodwill to each of its reporting units
as follows:
Goodwill
Reporting Unit A
Reporting Unit B
Reporting Unit C
Total
$150
60
30
$240
Identifying the Carrying Amount of Each Reporting Unit
An entity has to identify the carrying amount of each reporting unit (including
goodwill).
The carrying amount of a reporting unit must include any deferred income taxes no
matter what the entity assumes about the taxability of a hypothetical sale when
estimating the reporting unit’s fair value (ASC 350-20-35-7).
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
55
EXAMPLE: As noted earlier, Charlie Entity identified the following carrying
amounts of assets and liabilities of Reporting Unit A:
Carrying
Amount
Assets
Liabilities
$1,200
(350)
Net assets
$ 850
Charlie Entity assigned goodwill with a carrying amount of $150 to Reporting
Unit A.
Given this information, Charlie Entity calculates the total carrying amount of
Reporting Unit A as follows:
Carrying
Amount
Net assets
Goodwill
Deferred tax assets (liabilities)
Total carrying amount
$ 850
150
$1,000
The carrying amount of a reporting unit may be zero or less (ASC 350-20-35-6). If so, the
entity has to decide whether it is more likely than not that the reporting unit’s goodwill
is impaired. In other words, the entity has to conclude whether there is more than a 50
percent likelihood that the reporting unit’s goodwill is impaired. In doing so, the entity
has to (ASC 350-20-35-8A):
• Assess the situation qualitatively (refer to Exhibit 6 in the next section of this
chapter) (ASC 350-20-35-3C; ASC 350-20-35-3F through 35-3G)
• Consider any significant difference between the carrying amount and fair value
of the reporting unit’s assets and liabilities
• Identify whether any significant unrecognized intangible assets exist
If the entity concludes qualitatively that there is more than a 50 percent likelihood that
the reporting unit’s goodwill is impaired, the entity must next proceed directly to
measure any impairment (Step 2) (ASC 350-20-35-8A).
In contrast, if the carrying amount of the reporting unit is positive (greater than
zero), the entity must next:
• Estimate the fair value of each reporting unit
• Determine whether the reporting unit’s carrying amount exceeds the reporting
unit’s fair value (Step 1)
Estimating the Fair Value of Each Reporting Unit
An entity must estimate the amount it would receive if the entity sold the reporting unit
as a whole in an orderly transaction between market participants at the measurement
date (ASC 350-20-35-22 through 35-24). Subject to the guidance on fair value measurements, this may involve various methods, such as (ASC 820; ASC 350-20-35-22 through
35-24; ASC 350-20-50-2):
• Quoted market prices
• Prices of comparable businesses or nonprofit activities
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• A present value technique
• Some other valuation technique
• Some combination of methods
Before estimating the fair value, the entity has to assume whether or not the sale would
be taxable based on the facts (ASC 350-20-35-25 through 35-27; ASC 350-20-55-10
through 55-23). If the entity assumes the transaction is not taxable, then the existing
income tax bases are relevant. If the entity assumes the transaction is taxable, the new
income tax bases are relevant (ASC 350-20-35-10- through 35-21).
EXAMPLE: Charlie Entity considers what it would receive to sell Reporting
Unit A at June 30, 20X4, in an orderly transaction with a market participant, and
estimates Reporting Unit A’s fair value at June 30, 20X4, to be $985.
Comparing Carrying Amount and Fair Value of Reporting Unit (Step
1)
If the carrying amount (including goodwill) of a reporting unit is greater than zero, the
entity must compare the carrying amount with the reporting unit’s fair value.
If the reporting unit’s carrying amount is less than or equal to the reporting unit’s
fair value, there is no impairment of goodwill for the reporting unit (ASC 350-20-35-6).
The entity simply needs to test for impairment again in the next year (unless facts
warrant an interim test).
Step 1 is summarized in Exhibit 5.
EXHIBIT 5: Reporting Unit’s Carrying Amount versus Fair Value (Step 1)
Carrying Amount of
Reporting Unit
Carrying Amount of
Reporting Unit
Fair value of
Reporting Unit
Fair value of
Reporting Unit
<=
>
Stop
Proceed to Step 2
If the reporting unit’s carrying amount is more than the reporting unit’s fair value, then
the entity has to proceed to measure any impairment (Step 2).
To be exact, the entity next:
• Determines the implied fair value of goodwill of the reporting unit
• Measures any impairment loss by determining whether the carrying amount of
the reporting unit’s goodwill exceeds the fair value of the reporting unit’s
goodwill (Step 2)
• Recognizes any excess of the goodwill’s carrying amount over its fair value as an
impairment loss and an adjustment of goodwill
EXAMPLE: Charlie Entity estimates the carrying amount of Reporting Unit A
is $1,000 and the fair value of Reporting Unit A is $985.
Reporting Unit A’s
Carrying Amount
$1,000
>
Reporting Unit A’s
Fair Value $985
Proceed
to
Step 2
Because the carrying amount exceeds the fair value, Charlie Entity must
determine the implied fair value of Reporting Unit A’s goodwill and proceed to Step
2 to measure any impairment.
Note that Step 1 focuses on values related to the reporting unit as a whole. Step 2 will
focus more narrowly on values specific to goodwill assigned to the reporting unit.
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
PRACTICE POINTER: An entity’s calculations with respect to impairment
relate only to the accounting for goodwill; the calculations do not justify any
adjustment of the entity’s accounting for liabilities or for any asset other than
goodwill (ASC 350-20-35-17). For example, an entity must not adjust the carrying
amount of liabilities or assets other than goodwill. Further, an entity must not
recognize a previously unrecognized intangible asset based on the process of
allocating amounts to reporting units.
Determining the Implied Fair Value of Goodwill of Each Reporting
Unit
An entity estimates the fair value of each reporting unit’s goodwill for impairment
testing in the same way the entity estimated that amount upon initially recognizing the
goodwill (ASC 350-20-35-14; ASC 805-20).
To be exact, the entity first assigns the fair value of each reporting unit to all of the
reporting unit’s assets and liabilities—including research and development assets and
unrecognized intangible assets (ASC 350-20-35-14; ASC 350-20-35-15; ASC 350-20-35-39;
ASC 805-20).
The entity next calculates any excess of the assigned fair value over the carrying
amount of the assets and liabilities to arrive at the implied fair value of goodwill for the
reporting unit (ASC 350-20-35-16).
EXAMPLE: Charlie Entity has determined that Reporting Unit A’s carrying
amount of $1,000 exceeds Reporting Unit A’s fair value of $985.
Charlie Entity next estimates the fair value of Reporting Unit A’s net assets as
$855. Charlie Entity then calculates the implied fair value of Reporting Unit A’s
goodwill as follows:
Fair
Value
Fair value of Reporting Unit A
Minus: Fair value of net assets
of Reporting Unit A
$ 985
(855)
Implied fair value of goodwill
of Reporting Unit A
$ 130
Measuring Any Impairment Loss (Step 2)
An entity calculates the impairment loss as the excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill
(ASC 350-20-35-11).
EXAMPLE: Charlie Entity assigned goodwill with a carrying amount of $150
to Reporting Unit A. Charlie Entity calculated the implied fair value of Reporting
Unit A’s goodwill as $130. Charlie Entity now calculates the impairment loss for
Reporting Unit A’s goodwill as follows:
Carrying amount
Less: implied fair value
Impairment loss
$150
(130)
$ 20
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Charlie Entity records the following journal entry:
Journal Entry (At Measurement Date)
Dr. Impairment loss
Cr. Goodwil
Note: To recognize impairment of goodwill of Reporting Unit A.
$20
$20
The impairment loss must not exceed the reporting unit’s carrying amount (ASC
350-20-35-11). An entity must not subsequently reverse any impairment loss or related
adjustment to goodwill (ASC 350-20-35-13). The adjusted carrying amount becomes the
new basis on which later impairment tests are made (ASC 350-20-35-12).
Presentation
In its balance sheet, an entity must present a separate line item for the aggregate
amount of goodwill (ASC 350-20-45-1).
For the aggregate amount of any goodwill impairment losses associated with
discontinued operations, an entity must present a separate income-statement line item,
net of taxes, within the results of discontinued operations (ASC 205-20-15-2; ASC
350-20-45-3).
For the aggregate amount of any goodwill impairment losses other than those
associated with discontinued operations, an entity must present a separate incomestatement line item before the subtotal of income from continuing operations (or similar
caption) (ASC 350-20-45-2).
Disclosures
An entity is required to present changes in the carrying amount of goodwill during the
reporting period. This includes showing a separate amount for impairment losses
recognized during the reporting period (ASC 350-20-50-1(e)).
In separate footnote disclosures about any impairment loss, the entity must (ASC
350-20-50-2):
• Describe the facts leading to impairment
• The amount of the impairment loss
• How the entity estimated the fair value of the associated reporting unit
If the entity recognizes an impairment loss based on an estimate that is not yet finalized,
the entity has to explain why (ASC 350-20-50-2(c)). In subsequent periods the entity
must also disclose (ASC 350-20-50-2(c)):
• The amount of adjustments to the initial estimate
• The nature of the adjustment
STUDY QUESTIONS
2. Alpha Entity is performing an impairment test under ASC 360 of an asset group that
includes goodwill. Which of the following is the correct order in which Alpha Entity
should test the impairment of its tangible and intangible assets other than goodwill
(ASC 360), and its test of goodwill impairment (ASC 350-20)?
a. Goodwill should be tested for impairment first and adjusted, and then the test
for impairment of all other tangible and intangible assets should be done.
b. All assets should be combined and tested for impairment simultaneously under
ASC 360.
c. All assets other than goodwill in the asset group should be tested and adjusted
(ASC 360) before the goodwill impairment test is performed (ASC 350-20).
d. Goodwill and all intangible assets should be tested together separately.
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
59
3. Once the carrying amount of goodwill has been adjusted for a recognized impairment loss, the carrying amount of goodwill __________
a. Is adjusted for recoveries up to the carrying amount measured upon initial
recognition
b. Is adjusted for recoveries without limit
c. Is not adjusted for any recovery
d. Is adjusted for recoveries if certain conditions are met.
4. Which of the following is a true statement about the results of the two steps for
testing goodwill for impairment?
a. If Step 1 is failed, it is still possible to pass Step 2. That is, if a reporting unit’s
carrying amount exceeds the reporting unit’s fair value (Step 1), it is still
possible that the carrying amount of the reporting unit’s goodwill is less than
the fair value of the reporting unit’s goodwill (Step 2).
b. If Step 1 is failed, there will automatically be an impairment loss to be
measured and recognized in Step 2.
c. If Step 1 is failed, there will automatically be no impairment loss to be
measured or recognized in Step 2.
d. If Step 1 is passed, it is still possible to fail Step 2. That is, if a reporting unit’s
carrying amount is less than the reporting unit’s fair value (Step 1), it is still
possible that the carrying amount of the reporting unit’s goodwill exceeds the
fair value of the reporting unit’s goodwill (Step 2).
5. India Entity has an impairment loss for goodwill. The impaired goodwill is not
associated with a discontinued operation. India Entity should present the impairment
loss ___________.
a. In the income statement as a separate line item before the subtotal of income
from continuing operations
b. In the statement of comprehensive income as an element of other comprehensive income, net of taxes
c. In the income statement as a separate line item, net of taxes
d. Within the continuing operations section of the income statement in a line item
India Entity deems appropriate
¶ 305 QUALITATIVE ASSESSMENTS
In this section of the chapter, you will learn some of the factors that are part of
qualitatively assessing impairment of goodwill and other indefinite-lived intangible
assets.
As you learned earlier in this chapter, GAAP on impairment of goodwill allows an
entity to choose whether or not to first make a qualitative assessment of the intangible
asset. It’s possible that the entity will conclude, based on the qualitative assessment,
that the likelihood of impairment is less than 50 percent, thus avoiding further effort.
However, the qualitative assessment step is entirely voluntary. GAAP on impairments of
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other indefinite-lived intangible assets also allows an optional qualitative assessment,
but with a different context.
As you have learned, the qualitative assessment involving the reporting unit (and,
ultimately, for goodwill), addresses the following question:
Given the qualitative evidence, is it more likely than not that the fair value of a
reporting unit is less than the reporting unit’s carrying amount?
In contrast, the qualitative assessment involving an indefinite-lived intangible asset
(other than goodwill), addresses the following question (ASC 350-35-18C through
35-20):
Given the qualitative evidence, is it more likely than not that the indefinitelived intangible asset is impaired given the potential effect on significant inputs
used to determine the fair value of the indefinite-lived intangible asset?
Although the authoritative GAAP discusses the qualitative factors separately for goodwill and for indefinite-lived intangible assets, the qualitative factors have much in
common. Also, the qualitative factors identified in GAAP are not meant to be exhaustive,
they are merely examples. For this reason, this chapter is addressing the qualitative
factors collectively. The GAAP examples of qualitative factors to be considered in either
situation are set out in Exhibit 6.
EXHIBIT 6: Examples of Qualitative Factors
Macroeconomic Conditions
• Deterioration in general economic conditions
• Limitations on accessing capital
• Fluctuations in foreign exchange rates
• Other developments in equity and credit
markets
Industry and Market Considerations
• Deterioration in the operating environment
• Increasingly competitive environment
• Decline in market-dependent multiples or
metrics (in absolute terms and relative to
peers)
• Change in markets for the entity’s goods or
services
Cost Factors
• Increases in raw materials, labor, or other
costs that have a negative effect on earnings
and cash flows.
Overall Financial Performance
• Negative or declining cash flows
• A decline in actual or planned revenue or
earnings compared with actual and projected
results of relevant prior periods
Events Affecting a Reporting Unit
¶ 305
Goodwill
Other than Goodwill
ASC 350-20-35-3C(a)
ASC 350-30-35-18B(f)
ASC 350-20-35-3C(b)
ASC 350-30-35-18B(e)
ASC 350-20-35-3C(c)
ASC 350-30-35-18B(a)
ASC 350-20-35-3C(d)
ASC 350-30-35-18B(b)
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
A change in the composition or carrying
amount of the reporting unit’s net assets
• A more-likely-than-not expectation of selling or
disposing of all, or a portion, of a reporting unit
• Testing for recoverability of a significant asset
group within the reporting unit
• Recognition of a goodwill impairment loss in
the financial statements of a subsidiary that is
a component of a reporting unit
Other Entity-Specific Events
• Changes in any of the following:
–Management
–Key personnel
–Strategy
–Customers
• Contemplation of bankruptcy
• Litigation
Other Factors
• A regulatory or political development
• A sustained decrease in share price (in both
absolute terms and relative to peers)
• Legal, contractual, business, or other factors,
including asset-specific factors
Goodwill
Other than Goodwill
ASC 350-20-35-3C(f)
-
ASC 350-20-35-3C(e)
ASC 350-30-35-18B(d)
ASC 350-20-35-3C(b)
ASC 350-30-35-18B(e)
ASC 350-20-35-3C(g)
-
-
ASC 350-30-35-18B(c)
•
In addition, the impairment guidance for intangible assets other than goodwill explains
that a market for an entity’s goods or services could be affected by changes in any of the
following (ASC 350-30-35-18B):
• Obsolescence
• Demand
• Competition
• Other economic factors
With respect to the last bullet, the guidance states that other economic factors could
include (ASC 350-30-35-18B):
• The stability of the industry
• Known technological advances
• Legislative action that results in an uncertain or changing business environment
• Expected changes in distribution channels
Besides the preceding factors, an entity evaluating the impairment of an indefinite-lived
intangible asset other than goodwill has to consider (ASC 350-30-35-18C):
• Any positive or mitigating qualitative factors
• Any changes in the carrying amount of the item
• If the entity has recently calculated the item’s fair value, the difference between
the item’s carrying amount and the item’s fair value
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STUDY QUESTIONS
6. In making a qualitative assessment, which event or condition on its face would
typically not increase the likelihood of impairment?
a. Stable foreign exchange rates
b. Significant decline in revenue
c. Loss of key personnel
d. Negative political developments
7. Which of the following is a false statement about qualitative assessments?
a. If the qualitative assessment is passed—that is, if the likelihood of impairment
is less than 50 percent—the entity has completed the periodic test.
b. The qualitative test is optional except if the item was impaired in the immediately preceding reporting period.
c. The entity must consider relevant events and circumstances, including any not
listed in the authoritative guidance.
d. The entity may or may not save time and effort by performing the qualitative
test.
¶ 306 INDEFINITE-LIVED INTANGIBLE ASSETS OTHER
THAN GOODWILL
In this section of the chapter, you will learn the following about impairment of indefinitelived intangible assets other than goodwill:
• An entity has to identify the useful life of any recognized intangible asset (other
than goodwill).
• An entity may choose whether or not to begin its impairment testing by
assessing qualitative factors.
• Any excess of an intangible asset’s carrying amount over its fair value is an
impairment loss.
• Two or more intangible assets operated as a single asset form a single unit of
account for impairment testing.
• An entity must disclose certain information about recognized impairment losses.
Identifying an Intangible Asset’s Useful Life
To subsequently measure a recognized intangible asset (other than goodwill), an entity
has to determine whether the item’s useful life is finite or indefinite (ASC 350-30-35-1).
(Refer to items a. and b. in Exhibit 7.) This determination focuses on the item’s useful
life to the reporting entity.
EXHIBIT 7: Types of Assets
I. Financial
II. Nonfinancial
A. Tangible
B. Intangible
1. Goodwill
2. Other than goodwill
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a. Indefinite useful life (indefinite-lived)
b. Finite useful life (finite-lived)
OBSERVATION: Illustrations of how an entity assesses the useful life of an
intangible are provided in Examples 1 through 9B of the intangibles guidance
(ASC 350-30-35-5; ASC 350-30-55-2 through 55-28F).
An intangible asset’s useful life is the time period over which the reporting entity
expects the intangible asset to contribute to the reporting entity’s cash flows (ASC
350-30-35-2; ASC Master Glossary “Useful Life; ASC 350-30-20). An intangible asset’s
useful life is indefinite if there is no foreseeable limit on the time period over which the
reporting entity expects the intangible asset to contribute to the reporting entity’s cash
flows (ASC 350-30-35-4). This is a meaning different from infinite or indeterminate (ASC
350-30-35-4).
An entity must consider the useful life to be indefinite if the useful life to the
reporting entity is not limited by any anything, such as a limitation of any of the
following types (ASC 350-30-35-4):
• Legal
• Regulatory
• Contractual
• Competitive
• Economic
For example, if an intangible asset is based on legal rights, then the cash flows to the
reporting entity—and, by that, the useful life—may last only as long as the legal rights
last (ASC 350-30-35-3(c)) In this situation, the useful life typically is finite if the legal
right is finite.
PRACTICE POINTER: Certain intangible assets used in research and development activities are considered to have indefinite lives until the entity completes
or abandons the research and development efforts (ASC 350-30-35-17A; ASC
350-10-35-49).
PRACTICE POINTER: As part of a business combination, an entity may
effectively buy back a right previously given to the acquired entity (ASC
805-20-25-14). The reacquired right typically is an identifiable intangible asset. If so,
the entity must amortize the reacquired right over the remaining contractual
period of the contract in which the right was granted (ASC 805-20-35-2).
Other factors an entity has to consider include all of the following (ASC 360-30-35-3):
• How the entity expects to use the intangible asset
• The useful life the entity expects for another related asset or asset group
• The entity’s experience with the life of similar arrangements
• Assumptions that the entity concludes market participants would use
• The expenses of maintaining (rather than enhancing) cash flows from the asset
EXAMPLE: In 20X1, Joe’s Medium City Taxi Service purchases a competitor’s business that includes 30 taxi licenses (medallions). Out of the total purchase
price of $10 million, $7 million is assigned to the 30 taxi licenses based on fair
value. The licenses may be renewed annually by paying a small renewal fee. The
entity concludes that the intangible asset representing the licenses has an indefinite life.
Once an entity has identified the useful life of any intangible assets, the entity must
apply the appropriate subsequent accounting (See Exhibit 2).
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An entity may incur costs to develop intangible assets (including goodwill) internally (ASC 350-20-15-2(b)). An entity may also incur costs to maintain or restore these
intangible assets (including goodwill). An entity has to expense all of these costs
incurred if any of the following conditions are met (ASC 350-20-25-3):
• The intangible asset cannot be identified specifically.
• The intangible asset has an indeterminate life.
• The intangible asset is both:
- Inherent in a continuing business
- Related to the entity as a whole
Impairment
If an intangible asset (other than goodwill) has an indefinite useful life, the entity must
not amortize the intangible asset (ASC 250-30-35-1). Instead, the entity must test the
intangible asset for impairment at least every year (ASC 350-30-35-18).
EXAMPLE (Continued):
The $7 million of cost Joe’s Medium City Taxi Service allocated to the
indefinite-lived intangible asset (taxi licenses) must not be amortized. However, at
least annually the entity must test the indefinite-lived intangible asset for
impairment.
If it is more likely than not that an intangible asset is impaired due to an interim change
in circumstances, the entity has to evaluate impairment more frequently (ASC
350-30-35-18). More likely than not is a likelihood of more than 50 percent.
To test impairment of an indefinite-lived intangible asset (other than goodwill), the
entity may choose whether or not to first perform a qualitative assessment (ASC
350-30-35-18A). Every time an entity must test for impairment, the entity may choose
whether or not to assess qualitative factors (ASC 350-30-35-18A).
If an entity chooses not to assess qualitative factors, the entity must estimate the
item’s fair value and calculate any excess of the carrying amount over the item’s fair
value (Exhibit 8) (ASC 350-30-35-18F; ASC 350-30-35-19).
EXHIBIT 8: Calculation of Impairment Loss
Carrying Amount
of
Indefinite-Lived
Intangible Asset
Minus
Fair Value of
Indefinite-Lived
Equals
Impairment Loss
(if a positive
amount)
An entity must recognize any calculated excess of the item’s carrying amount over the
item’s fair value as both (ASC 350-30-35-19):
• An impairment loss
• An adjustment of the item’s carrying amount
The adjusted carrying amount becomes the item’s new accounting basis, including for
future impairment tests (ASC 350-30-35-19). An entity must not reverse an impairment
loss after recognizing that loss (ASC 350-30-35-20).
EXAMPLE (Continued):
At November 30, 20X2, Joe’s Medium City Taxi Service tests impairment of its
indefinite-lived intangible asset. The entity estimates the fair value of the indefinitelived intangible asset representing its acquired taxi licenses is $6.5 million based
on a significant number of recent transactions. The excess of the $7 million
carrying amount over the $6.5 million fair value is an impairment loss.
¶ 306
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MODULE 1 - CHAPTER 3 - Impairment of Goodwill
11/30/X2
Carrying amount
Minus: Fair value
Impairment loss
$6,500,000
(7,000,000)
$ 500,000
As a result, Joe’s Medium City Taxi Service records the following journal
entry:
Journal Entry (November 30, 20X2)
Dr. Impairment loss
Cr. Intangible assets
Note: To recognize impairment indefinite-lived intangible asset.
$500,000
$500,000
The entity also presents the impairment loss in its income statement and
discloses the required information.
In contrast, an entity may choose first to assess qualitative factors affecting significant
inputs to its estimate of fair value of the intangible asset and, thus, impairment of the
intangible asset. The qualitative factors, which also are relevant to impairment testing of
goodwill, were discussed earlier in this chapter. The decision of whether or not to make
a qualitative assessment can be different every year.
If an entity does choose to assess qualitative factors, the entity answers the
following question:
Is it more likely than not that the indefinite-lived intangible asset is impaired given the
potential effect (of the factors) on significant inputs used to determine the fair value of the
indefinite-lived intangible asset?
If the answer is YES, the entity must estimate the item’s fair value and calculate any
excess of the carrying amount over the item’s fair value, and recognize any excess as
previously discussed (ASC 350-30-35-18F; ASC 350-30-35-19).
EXAMPLE (Continued):
Assume that, in November 20X3, instead of immediately estimating the fair
value of its indefinite-lived intangible asset representing its acquired taxi licenses,
Joe’s Medium City Taxi Service decided to make a qualitative assessment.
The entity considers various qualitative factors, including the effect ridesharing companies have on demand for the entity’s taxi services. Given the various
factors, assume the entity reaches the judgment that there is a greater than 50
percent chance that the intangible asset representing its taxi licenses is impaired
given the potential effect of the factors on medallion prices in relevant transactions.
The entity must then proceed to estimate the intangible asset’s fair value and test
the intangible asset for impairment.
If the answer is NO, the entity may stop. This said, the entity also may choose voluntarily
to estimate the item’s fair value and calculate any excess of the carrying amount over
the item’s fair value (ASC 350-330-35-18E; ASC 350-30-35-19).
EXAMPLE (Continued):
Assume that, in November 20X4, instead of immediately estimating the fair
value of its indefinite-lived intangible asset representing its acquired taxi licenses,
Joe’s Medium City Taxi Service decides to make a qualitative assessment.
After considering the relevant qualitative factors, the entity concludes at
November 30, 20X4, that the likelihood is less than 50 percent that the intangible
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asset is impaired based on the effects on significant inputs to its estimate of fair
value. The entity does not need to estimate fair value and simply must test
impairment again in a year (or less, if facts warrant).
Alternatively, assume that, despite a positive qualitative assessment, the entity
chooses voluntarily to proceed to estimate the intangible asset’s fair value. Assume
that, using significant recent transactions for medallions, the entity estimates that
the fair value of the intangible asset at November 30, 20X4 is $6.6 million. Because
the carrying amount of $6.6 million exceeds the carrying amount of $6.5 million,
there is no impairment. (Even though the intangible asset’s fair value exceeds the
intangible asset’s carrying amount, the entity must not reverse the impairment loss
recognized previously.)
Circumstances may change such that the useful life of an intangible asset becomes
finite (ASC 350-30-35-15). For this reason, each reporting period, an entity has to
evaluate whether the facts support an indefinite useful life (ASC 350-30-35-16). If the
entity concludes that an intangible asset’s life has become finite, the entity performs the
impairment test for indefinite-lived intangible assets a final time. An event that causes a
useful life to become finite may or may not also raise questions about impairment. After
accounting for any impairment, the entity then prospectively accounts for the item as
finite-lived (ASC 350-30-35-17).
EXAMPLE (Continued):
Assume that, on March 31, 20X5, the Medium City government enacts amendments to its law such that all taxi licenses will become null and void as of March 31,
20X9. At March 31, 20X5, the useful life of the intangible asset representing the taxi
licenses is now finite, with four years remaining.
Given this event, Joe’s Medium City Taxi Service concludes qualitatively that
an impairment is more likely than not. Accordingly, the entity must make an
interim test for impairment.
The entity estimates the fair value of the intangible asset and recognizes any
resulting impairment. The entity must begin amortizing the adjusted carrying
amount over the four-year period (April 1, 20X5 through March 31, 20X9) following
the guidance for finite-lived intangible assets. Thereafter, the entity would subsequently apply the guidance for finite-lived intangible assets.
Impairment: Unit of Account for Impairment Testing
An entity has to identify any indefinite-lived intangible assets (other than goodwill) that
the entity operates as a single asset. The entity must combine such items operated as a
single asset as a single unit of account (ASC 350-30-35-21).
Judging the unit of account is subjective.
Facts that weigh toward viewing the items as a single unit of account include that
the intangible assets (ASC 350-30-35-23):
• Will be used together
• Would have been recognized as a single asset had they been acquired at the
same time
• As a group, represent highest and best use
• Are complementary (based on a marketing or branding strategy)
Facts that weigh against viewing the items as a single unit of account include that the
intangible assets (ASC 350-30-35-24):
¶ 306
MODULE 1 - CHAPTER 3 - Impairment of Goodwill
•
•
•
•
67
Generate independent cash flows
Would likely be sold separately
Are used exclusively by different asset groups
Have useful lives that are affected by different limits on those lives
Illustrations of how an entity assesses the unit of account are set out in Examples 10
through 12 of the guidance (ASC 350-30-35-28; ASC 350-30-55-29 through 55-38).
The unit of account involves only indefinite-lived intangible assets other than
goodwill. That is, the unit of account for impairment testing does not include finite-lived
intangible assets or goodwill (ASC 350-30-35-26 through 35-27).
Presentation and Disclosures
An entity must present at least a single balance-sheet line item that aggregates all
intangible assets other than goodwill. Otherwise, an entity may present separate line
items for individual intangible assets or classes of intangible assets (ASC 350-30-45-1).
An entity must present impairment losses for indefinite-lived intangible assets in
the income-statement line item deemed appropriate within continuing operations (ASC
350-30-45-2).
For each impairment loss an entity recognizes for any intangible asset other than
goodwill, the entity must disclose all of the following in the financial statements for the
reporting period (ASC 350-30-50-3 through 50-3A; ASC 280, Segment Reporting):
• What the impaired intangible asset is (a description)
• The facts surrounding the impairment
• How the entity estimated fair value
• Which financial statement line item includes the impairment loss
• Which segment includes the impaired intangible asset (if the entity is required
to report operating segments)
STUDY QUESTIONS
8. Which of the following is a false statement about potential impairment of an
indefinite-lived intangible asset?
a. An entity must test each indefinite-lived intangible asset individually at least
annually for impairment.
b. An entity that assesses qualitative factors still must quantitatively test for
impairment if, given qualitative evidence, it is more likely than not that the
indefinite-lived intangible asset is impaired.
c. An impairment loss exists if the carrying amount of the indefinite-lived intangible asset exceeds its fair value.
d. An entity’s disclosure about a recognized impairment loss includes, among
other things, a description of the indefinite-lived intangible asset, the facts
surrounding the impairment, and how the entity estimated fair value
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9. Bravo Entity performs a qualitative assessment of an indefinite-lived intangible asset
for impairment at June 30, 20X7. The item fails the qualitative test—that is, Bravo Entity
concludes that, given the qualitative evidence, it is more likely than not that the item is
impaired. Bravo then calculates that the item’s carrying amount exceeds the item’s fair
value by $10. Which of the following is a false statement?
a. Bravo Entity must test the indefinite-lived intangible asset for impairment
again on June 30, 20X8, unless facts warrant an interim evaluation.
b. Bravo Entity must recognize an impairment loss of $10 in its income statement,
and adjust the carrying amount of the indefinite-lived intangible asset downward by $10.
c. Bravo Entity must present the impairment loss in its income statement within
continuing operations in whichever income-statement line item Bravo Entity
deems appropriate.
d. Bravo Entity must perform a qualitative assessment in all subsequent annual
impairment tests.
CPE NOTE: When you have completed your study and review of chapters 1-3, which
comprise Module 1, you may wish to take the Quizzer for this Module. Go to CCHGroup.com/PrintCPE to take this Quizzer online.
¶ 306
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MODULE 2: FINANCIAL STATEMENT
REPORTING—CHAPTER 4: Going Concern
Disclosures
¶ 401 WELCOME
This chapter discusses ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern and the interrelation of the new GAAP rules in the ASU with the
auditing standards found in AU-C 570.
¶ 402 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Identify the period of time for which the going concern assessment must be
made under ASU 2014-15
• Explain the measurement threshold that is used for management’s assessment
of going concern under ASU 2014-15
¶ 403 INTRODUCTION
The objective of ASU 2014-15, Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern is to provide guidance in GAAP about management’s responsibility to
evaluate whether there is substantial doubt about an entity’s ability to continue as a
going concern, and to provide related footnote disclosures. This chapter addresses the
interrelation of the new GAAP rules in ASU 2014-15 with the auditing standards found in
AU-C 570.
¶ 404 BACKGROUND
ASU 2014-15 was issued in August 2014. With the introduction of ASU 2014-15, now
both management and the auditor must perform their own separate going concern
assessments of the same entity.
In measuring financial statements, GAAP uses the “going concern basis of accounting model under which it assumes that an entity will continue as a going concern.
Under the going concern basis of accounting, financial statements are prepared using a
hybrid of methods that include cost, lower of cost or market, fair value, etc. If and when
liquidation becomes imminent, financial statements must be prepared using the liquidation basis of accounting and follow the guidance found in ASC 205-30, Presentation of
Financial Statements—Liquidation Basis of Accounting.
Under current GAAP, there is no guidance that requires management to evaluate
an entity’s ability to continue as a going concern or to provide related footnote
disclosures.
On the auditing side, U.S. auditing standards and federal securities law require an
auditor to evaluate an entity’s ability to continue as a going concern. The rules for going
concern have been found in auditing literature within AU-C Section 570, The Auditor’s
Consideration of an Entity’s Ability to Continue as a Going Concern (formerly SAS No.
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59), which requires an auditor to assess whether an entity has the ability to continue as
a going concern for a reasonable period of time (measured one year from the balance
sheet date). Thus, prior to the issuance of ASU 2014-15, auditors were the only parties
performing a going concern assessment.
The SEC also has guidance on disclosures that it expects from an entity when an
auditor’s report includes an explanatory paragraph that reflects substantial doubt about
an entity’s ability to continue as a going concern for a reasonable period of time.
Although auditing standards require an auditor to evaluate going concern, no such
requirement exists for management to perform its own assessment, even though the
responsibility for the financial statements belongs to management.
According to the FASB, it received input indicating that because of the lack of
guidance in GAAP and the differing views about when there is substantial doubt about
an entity’s ability to continue as a going concern, and when and how an entity discloses
the relevant conditions and events in its footnotes.
In August 2014, the FASB issued ASU 2014-15, which provides guidance in GAAP
about management’s responsibility to evaluate whether there is substantial doubt about
an entity’s ability to continue as a going concern and to provide related footnote
disclosures.
More specially, ASU 2014-15 does the following:
• Requires management to make an evaluation of going concern every reporting
period, including interim periods
• Requires an evaluation for a period of one year after the date that the financial
statements are issued (or available to be issued if a nonpublic entity)
• Defines the term “substantial doubt about an entity’s ability to continue as a
going concern based on use of the term “probable found in ASC 450’s contingency rules.
• Provides that management should consider the mitigating effect of management’s plans only to the extent it is probable the plans will be effectively
implemented and will mitigate the conditions or events giving rise to substantial
doubt.
• Requires certain disclosures when substantial doubt is alleviated as a result of
consideration of management’s plans
• Requires an explicit statement in the notes that there is substantial doubt and
other disclosures when substantial doubt is not alleviated
¶ 405 DEFINITIONS
The ASU includes the following definitions that are now incorporated into ASC 205-40,
Presentation of Financial Statements—Going Concern.
Available to Be Issued: Financial statements are considered available to be
issued when they are complete in a form and format that complies with GAAP and all
approvals necessary for issuance have been obtained, for example, from management,
the board of directors, and/or significant shareholders. The process involved in creating and distributing the financial statements will vary depending on an entity’s management and corporate governance structure as well as statutory and regulatory
requirements.
Issued: Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in
a form and format that complies with GAAP.
¶ 405
MODULE 2 - CHAPTER 4 - Going Concern Disclosures
71
Liquidation: The process by which an entity converts its assets to cash or other
assets and settles its obligations with creditors in anticipation of the entity ceasing all
activities. Upon cessation of the entity’s activities, any remaining cash or other assets
are distributed to the entity’s investors or other claimants (albeit sometimes indirectly).
Liquidation may be compulsory or voluntary. Dissolution of an entity as a result of that
entity being acquired by another entity or merged into another entity in its entirety and
with the expectation of continuing its business does not qualify as liquidation.
Probable: The future event or events are likely to occur.
Substantial Doubt about an Entity’s Ability to Continue as a Going Concern:
Conditions and events, considered in the aggregate, indicate that it is probable that the
entity will be unable to meet its obligations as they become due within one year after
the date that the financial statements are issued (or within one year after the date that
the financial statements are available to be issued when applicable).
¶ 406 RULES FOR IMPLEMENTATION
The guidance in ASU 2014-15 applies to all entities.
GAAP requires that financial statements be prepared using the “going concern basis
of accounting.” Under the going concern basis of accounting, continuation of an entity as
a going concern is presumed as the basis for financial reporting unless or until the
entity’s liquidation becomes imminent. If liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting under ASC 205-30,
Liquidation Basis of Accounting.
Liquidation is imminent when either of the following occurs:
• A plan for liquidation has been approved by the person or persons with the
authority to make such a plan effective, and the likelihood is remote that either
of the following will occur:
- Execution of the plan will be blocked by other parties (e.g., those with
shareholder rights).
- The entity will return from liquidation.
• A plan for liquidation is imposed by other forces (for example, involuntary
bankruptcy), and the likelihood is remote that the entity will return from
liquidation.
NOTE: The ASU states that even if an entity’s liquidation is not imminent,
there may be conditions and events, considered in the aggregate, that raise
substantial doubt about the entity’s ability to continue as a going concern. In such
situations, financial statements continue to be prepared under the going concern
basis of accounting, but the guidance in ASU 2015-14 should be followed to
determine whether to disclose information about the relevant conditions or events.
STUDY QUESTION
1. In accordance with ASC 205-30, an entity should use the liquidation basis of
accounting when liquidation is _________________.
a. Reasonably possible
b. Probable
c. More likely than not
d. Imminent
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¶ 407 EVALUATING CONDITIONS AND EVENTS THAT
MAY RAISE SUBSTANTIAL DOUBT
In connection with preparing financial statements for each annual and interim reporting
period, ASU 2014-15 requires that an entity’s management shall evaluate whether there
are:
Conditions and events, considered in the aggregate, indicate that it is
probable that the entity will be unable to meet its obligations as they become
due within one year after the date that the financial statements are issued (or
within one year after the financial statements are available to be issued).
The term “probable is used consistently with its use in ASC 450 on contingencies,
which is “likely to occur.
An entity that meets either of the following criteria uses the date the financial
statements are issued (definitions of “issued and “available to be issued are based on
definitions found in ASC 855-10, Subsequent Events— Overall) as the beginning date of
the one-year assessment period.
• It is a SEC filer.
• It is a conduit bond obligor for conduit debt securities that are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market,
including local or regional markets).
All entities other than those in above (such as a non-SEC entity) shall use the date that
the financial statements are available to be issued instead of the date the financial
statements are issued.
OBSERVATION: In issuing ASU 2014-15, the FASB considered several
assessment periods. At one point, a 24-month period was discussed and included in
a 2013 exposure draft. In the final ASU, the FASB eliminated the 24-month period
and chose a one-year period that commences with the date the financial statements
are issued (or available to be issued). In making that decision, the FASB decided to
adopt existing guidance and terminology in ASC 855-10, Subsequent Events—
Overall, to achieve consistency between the assessment date used for subsequent
events as found in ASC 855. Moreover, the later one-year period would provide
users with more current information from a rolling period that is one full year from
the date the financial statements are issued. In dropping the 24-month period, the
FASB noted that many respondents were concerned that management could not
reasonably assess going concern beyond one year. There was also the potential for
expanded legal liability in that an extended assessment period could lead to greater
uncertainty in predicting unknown events.
Management’s evaluation of going concern shall be based on relevant conditions and
events that are known and reasonably knowable at the date that the financial statements
are issued.
Management shall evaluate whether relevant conditions and events, considered in
the aggregate, indicate that it is probable that an entity will be unable to meet its
obligations as they become due within one year after the date that the financial statements
are issued (or available to be issued if it is a non-SEC entity). The evaluation initially shall
not take into consideration the potential mitigating effect of management’s plans that
have not been fully implemented as of the date that the financial statements are issued.
EXAMPLE: The evaluation shall not take into account plans to raise capital,
borrow money, restructure debt, or dispose of an asset that have been approved
¶ 407
MODULE 2 - CHAPTER 4 - Going Concern Disclosures
73
but that have not been fully implemented as of the date that the financial statements are issued.
NOTE: The FASB incorporated in GAAP certain aspects of U.S. auditing
standards, including the examples of management’s plans and related
considerations.
Further, the FASB introduced guidance emphasizing that management’s plans often
should be approved before the date that the financial statements are issued (or available
to be issued) to further highlight this principle. Finally, the Board wanted to ensure that
a plan to liquidate is not considered a mitigating event because an entity that plans to
liquidate should not be able to conclude, on the basis of its planned liquidation, that
there is no substantial doubt about its ability to continue as a going concern.
When evaluating an entity’s ability to meet its obligations, management shall
consider both quantitative and qualitative information about the following conditions
and events, among other relevant conditions and events known and reasonably knowable at the date that the financial statements are issued:
• The entity’s current financial condition, including its liquidity sources at the date
that the financial statements are issued (e.g., available liquid funds and available
access to credit)
• The entity’s conditional and unconditional obligations due or anticipated within
one year after the date that the financial statements are issued (regardless of
whether those obligations are recognized in the entity’s financial statements)
• The funds necessary to maintain the entity’s operations considering its current
financial condition, obligations, and other expected cash flows within one year
after the date that the financial statements are issued
• The other conditions and events, when considered in conjunction with the
above, that may adversely affect the entity’s ability to meet its obligations within
one year after the date that the financial statements are issued, such as:
- Negative financial trends, for example, recurring operating losses, working
capital deficiencies, negative cash flows from operating activities, and other
adverse key financial ratios
- Other indications of possible financial difficulties, for example, default on loans
or similar agreements, arrearages in dividends, denial of usual trade credit from
suppliers, a need to restructure debt to avoid default, noncompliance with
statutory capital requirements, and a need to seek new sources or methods of
financing or to dispose of substantial assets
- Internal matters, for example, work stoppages or other labor difficulties,
substantial dependence on the success of a particular project, non-financial longterm commitments, and a need to significantly revise operations
- External matters, for example, legal proceedings, legislation, or similar matters
that might jeopardize the entity’s ability to operate; loss of a key franchise,
license, or patent; loss of a principal customer or supplier; or an uninsured or
underinsured catastrophe such as a hurricane, tornado, earthquake, or flood
NOTE: The above list has examples of adverse conditions and events that
may raise substantial doubt about an entity’s ability to continue as a going concern.
The ASU notes that the existence of one or more of these conditions or events
does not determine that there is substantial doubt about an entity’s ability to
continue as a going concern. Similarly, the absence of those conditions or events
does not determine that there is no substantial doubt about an entity’s ability to
continue as a going concern. Determining whether there is substantial doubt
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depends on an assessment of relevant conditions and events, in the aggregate, that
are known and reasonably knowable at the date that the financial statements are
issued (or at the date the financial statements are available to be issued when
applicable). An entity should weigh the likelihood and magnitude of the potential
effects of the relevant conditions and events, and consider their anticipated timing.
STUDY QUESTION
2. Company X’s management is performing its assessment of going concern. X is a
non-SEC entity. Which of the following is the date on which the assessment period
begins?
a. Balance sheet date
b. Date the financial statements are issued
c. Date the financial statements are available to be issued
d. Date the audit engagement begins
¶ 408 CONSIDERATION OF MANAGEMENT’S PLANS
WHEN SUBSTANTIAL DOUBT IS RAISED
If there is substantial doubt about the entity’s ability to continue as a going concern,
management shall evaluate whether its plans that are intended to mitigate those
conditions and events, when implemented, will alleviate substantial doubt about the
entity’s ability to continue as a going concern.
The mitigating effect of management’s plans shall be considered in evaluating
whether the substantial doubt is alleviated only to the extent that information available
as of the date that the financial statements are issued indicates both of the following:
• It is probable that management’s plans will be effectively implemented within
one year after the date that the financial statements are issued.
• It is probable that management’s plans, when implemented, will mitigate the
relevant conditions or events that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the
financial statements are issued.
The evaluation of whether it is probable that management’s plans will be effectively
implemented within one year after the date that the financial statements are issued shall
be based on the feasibility of implementation of management’s plans in light of an
entity’s specific facts and circumstances. Generally, to be considered probable of being
effectively implemented, management (or others with the appropriate authority) must
have approved the plan before the date that the financial statements are issued.
Following are examples of plans that management may implement to mitigate
conditions or events that raise substantial doubt about an entity’s ability to continue as a
going concern:
• Plans to dispose of an asset or business:
- Restrictions on disposal of an asset or business, such as covenants that limit
those transactions in loans or similar agreements, or encumbrances against the
asset or business
- Marketability of the asset or business that management plans to sell
- Possible direct or indirect effects of disposal of the asset or business
¶ 408
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• Plans to borrow money or restructure debt:
- Availability and terms of new debt financing, or availability and terms of
existing debt refinancing such as term debt, lines of credit, or arrangements for
factoring receivables or sale-leaseback of assets
- Existing or committed arrangements to restructure or subordinate debt or to
guarantee loans to the entity
- Possible effects on management’s borrowing plans of existing restrictions on
additional borrowing or the sufficiency of available collateral
• Plans to reduce or delay expenditures:
- Feasibility of plans to reduce overhead or administrative expenditures, to
postpone maintenance or research and development projects, or to lease rather
than purchase assets
- Possible direct or indirect effects on the entity and its cash flows of reduced or
delayed expenditures
• Plans to increase ownership equity:
- Feasibility of plans to increase ownership equity, including existing or committed arrangements to raise additional capital
- Existing or committed arrangements to reduce current dividend requirements
or to accelerate cash infusions from affiliates or other investors
The mitigating effect of management’s plans that are not probable of being effectively
implemented within one year after the date that the financial statements are issued shall
not be considered in evaluating whether substantial doubt about an entity’s ability to
continue as a going concern is alleviated. Management shall further assess its plans that
are probable of being effectively implemented to determine whether it is probable that
those plans will mitigate the conditions or events that raise substantial doubt about an
entity’s ability to continue as a going concern. In this assessment, management shall
consider the expected magnitude and timing of the mitigating effect of its plans in
relation to the magnitude and timing of the relevant conditions or events that those
plans intend to mitigate.
A plan to meet an entity’s obligations as they become due through liquidation (as
defined in ASC 205-30 on the liquidation basis of accounting) shall not be considered as
part of management’s plans in evaluating whether substantial doubt is alleviated even if
liquidation is probable of occurring.
¶ 409 DISCLOSURES
Disclosures When Substantial Doubt is Raised but is Alleviated by
Management’s Plans (Substantial Doubt Does Not Exist)
If, after considering management’s plans, substantial doubt about an entity’s ability to
continue as a going concern is alleviated as a result of consideration of management’s
plans, an entity shall disclose in the footnotes information that enables users of the
financial statements to understand all of the following (or refer to similar information
disclosed elsewhere in the footnotes):
• Principal conditions or events that raised substantial doubt about the entity’s
ability to continue as a going concern (before consideration of management’s
plans)
• Management’s evaluation of the significance of those conditions or events in
relation to the entity’s ability to meet its obligations
• Management’s plans that alleviated substantial doubt about the entity’s ability to
continue as a going concern.
¶ 409
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Disclosures When Substantial Doubt is Raised and is not Alleviated
(Substantial Doubt Exists)
If, after considering management’s plans, substantial doubt about an entity’s ability to
continue as a going concern is not alleviated, the entity shall include a statement in the
footnotes indicating that there is substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued
(or available to be issued).
Additionally, the entity shall disclose information that enables users of the financial
statements to understand all of the following:
• Principal conditions or events that raise substantial doubt about the entity’s
ability to continue as a going concern
• Management’s evaluation of the significance of those conditions or events in
relation to the entity’s ability to meet its obligations
• Management’s plans that are intended to mitigate the conditions or events that
raise substantial doubt about the entity’s ability to continue as a going concern
If conditions or events continue to raise substantial doubt about an entity’s ability to
continue as a going concern in subsequent annual or interim reporting periods, the
entity shall continue to provide the required disclosures in those subsequent periods.
Disclosures should become more extensive as additional information becomes available
about the relevant conditions or events and about management’s plans.
An entity shall provide appropriate context and continuity in explaining how
conditions or events have changed between reporting periods. For the period in which
substantial doubt no longer exists (before or after consideration of management’s
plans), an entity shall disclose how the relevant conditions or events that raised
substantial doubt were resolved.
¶ 410 IMPLEMENTATION GUIDANCE
ASU 2014-15 provides a flowchart that illustrates the decision process to follow for
evaluating whether there is substantial doubt about an entity’s ability to continue as a
going concern and determining related disclosure requirements.
¶ 410
MODULE 2 - CHAPTER 4 - Going Concern Disclosures
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¶ 410
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¶ 411 TRANSITION AND EFFECTIVE DATE
ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim
periods within annual periods beginning after December 15, 2016. Early application is
permitted for annual or interim reporting periods for which the financial statements
have not previously been issued.
¶ 412 GOING CONCERN GAAP VERSUS AUDITING
STANDARDS
ASU 2014-15 addresses the GAAP rules for management to follow in assessing going
concern for a company. The ASU 2014-15 rules are separate and distinct from those that
an auditor must follow in making his or her own going concern assessment under AU-C
570.
Do the GAAP Rules Alleviate the Auditor’s Responsibilities to Assess
an Entity’s Ability to Continue as a Going Concern?
The GAAP rules found in ASU 2014-15 have nothing to do with the auditor’s assessment
of going concern in AU-C 570, nor an assessment of going concern performed by an
accountant in a review engagement under SSARS No. 21. Thus, an auditor or an
accountant is not alleviated from performing his or her responsibilities under auditing
or review standards, simply because management is also performing its own going
concern assessment.
In fact, in September 2014, the Public Company Accounting Oversight Board
(PCAOB) published Staff Audit Practice Alert No. 13, Matters Related to the Auditor’s
Consideration of a Company’s Ability to Continue as a Going Concern (SAPA 13). In that
Alert, the PCAOB stated that auditors should assess management’s going concern
assessment and, in doing so, should look at the requirements of the applicable financial
reporting framework (GAAP in this case). The auditor’s assessment is done independent of management’s assessment.
The GAAP-Auditing Standards Differences in Performing a Going
Concern Assessment
Although one would expect that the GAAP rules should mirror those rules found in
auditing standards (AU-570), there are differences. After the issuance of ASU 2014-15,
there were certain inconsistencies between GAAP and auditing rules for dealing with
going concern. Although there was no requirement that the GAAP and auditing rules be
identical, having significant differences between the two has made the assessment
process inefficient and somewhat redundant.
In particular, the one-year assessment period of time for evaluating going concern
was different as follows:
• AU-C 570 uses a reasonable period of time as the period for which an auditor
should evaluate going concern. Generally, in practice, that period is one-year
period from the balance sheet date.
• ASU 2014-15 uses a one-year period from the date the financial statements are
issued or available to be issued.
Thus, after the FASB issued ASU 2014-15, the GAAP one-year going concern period
extended several months beyond the one-year period used by auditors under AU-C 570.
The following chart illustrates the differences that existed between GAAP’s oneyear assessment period and the one-year period required by auditing standards.
¶ 411
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Comparison of One-Year Going Concern Assessment Period GAAP Versus
Auditing Standards
* If a non-SEC entity, the date is the date the financial statements are available to be
issued.
Auditing Standards Board Makes Changes Through Interpretation
In response to the differences in the one-year assessment period found in ASU 2014-15
versus the period required by AU-C 570, in January 2015, the Auditing Standards Board
(ASB) issued an interpretation, AU-C Section 9570, The Auditor’s Consideration of an
Entity’s Ability to Continue as a Going Concern: Auditing Interpretations of AU-C Section
570. The auditing interpretation addresses conflicting issues related to GAAP’s ASU
2014-15 and the going concern rules found in AU-C 570.
The purpose of the interpretation is to clarify how AU-C 570’s requirements for an
auditor addressing going concern interrelate with the GAAP rules found in ASU
2014-15. The auditing interpretation brings the auditing rules for dealing with going
concern in parity with the new GAAP rules found in ASU 2014-15.
The auditing interpretation states that when an applicable financial reporting
framework (such as GAAP) includes a definition of substantial doubt about an entity’s
ability to continue as a going concern, that definition should be used by the auditor
when applying his or her going concern assessment.
EXAMPLE: If an entity is required to comply with, or has elected to adopt,
ASU 2014-15, the definition of substantial doubt about an entity’s ability to continue
as a going concern found in GAAP would be used by the auditor.
When the applicable financial reporting framework (such as GAAP) requires management to evaluate whether there are conditions and events that raise substantial doubt
for a period of time greater than one year from the date of balance sheet, the auditor’s
assessment of management’s going concern evaluation should be for the same period of
time as required by the applicable financial reporting framework (such as GAAP).
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EXAMPLE: If an entity is required to comply with ASU 2014-15, the auditor’s
assessment of management’s going concern evaluation should be for the same
period of time as required by ASU 2014-15 (i.e., one year after the date that the
financial statements are issued or available to be issued).
When the applicable financial reporting framework (such as GAAP) provides disclosure
requirements related to management’s evaluation of substantial doubt, the auditor’s
assessment of the financial statement effects under AU-C section 570 should be based
on the disclosure requirements of the applicable financial reporting framework (such as
GAAP).
What is the Impact of the Auditing Interpretation on an Auditor’s
Assessment of Going Concern?
The interpretation states the auditor should do all of the following:
• Follow GAAP’s definition of substantial doubt (based on a probable threshold)
• Follow GAAP’s one-year assessment period from the date the financial statements are issued or available to be issued
• Follow GAAP’s disclosure requirements
The auditing interpretation essentially states that in evaluating going concern, an
auditor should follow the same rules found in GAAP’s ASU 2014-15 with respect to the
period of time to which the evaluation should be applied. That period of time is one year
from the date the financial statements are issued (or available to be issued, if a non-SEC
entity). Thus, the period of time that has been used for auditors previously (one year
from the balance sheet date) is extended to be one year from the date the financial
statements are either issued (SEC entities) or available to be issued (non-SEC entities).
This change adds a few months to the going concern assessment period for an auditor.
It also means that it is important that the auditor conclude his or her audit and ensure
that the financial statements are issued quickly so that the one-year assessment period
commences. The later the financial statements are issued, the later the one-year going
concern period is extended.
Another important point is that the auditing interpretation states that auditors should
follow the GAAP definition of “substantial doubt in performing this going concern
assessment.
GAAP definition of substantial doubt is that:
Conditions and events, considered in the aggregate, indicate that it is
probable that the entity will be unable to meet its obligations as they
become due within one year after the date that the financial statements are
issued (or available to be issued, when applicable).
AU-C 570 does not use the term “probable to define substantial doubt.
Now, the auditing interpretation requires auditors to follow GAAP’s definition of substantial doubt. In doing so, an auditor achieves substantial doubt if he or she believes it
is “probable that the entity will be unable to meet its obligations within one year after
the date the financial statements are issued (or available to be issued). Surveys have
indicated that the term “probable is interpreted to mean a 90 percent or greater
likelihood of success. Compare that high threshold with several surveys that have
concluded that participants believe that substantial doubt represents a 50-70 percent
likelihood of an entity being unable to meet its obligation. (Paragraph BC 17, ASU
2014-15.)
¶ 412
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MODULE 2 - CHAPTER 4 - Going Concern Disclosures
Using ASU 2014-15’s “probable threshold suggests that auditors must now meet a
90 percent level of certainty to achieve substantial doubt, which is higher than the 50-70
percent level under AU-C 570, prior to the auditing interpretation issuance.
Are Auditors and Management of Nonpublic Entities Exposed to a
Longer Going Concern Assessment Period?
ASU 2014-15’s assessment period extends one year from the date the financial statements are issued (or available to be issued for a nonpublic entity). The January 2015
auditing interpretation states that auditors should follow the same rules as GAAP so that
the one-year assessment period is now the same for management and auditors: one year
beginning with the issuance of the financial statements (or for nonpublic entities, the
date on which the financial statements are available to be issued).
This means that the one-year period does not begin until the financial statements
are either issued or ready to be issued. For public companies, typically financial
statements are issued within three months of year-end, or by March 31 following yearend. But for nonpublic entities, it is common for companies to issue their financial
statements later than three months after year-end, sometimes as late as six to nine
months after year-end. What that does is extend the one-year assessment period open
thereby exposing management and the auditor to going concern risk.
What are the Rules for Going Concern in a Review Engagement?
In October 2014, the Accounting and Review Services Committee (ARSC) of the AICPA
issued SSARS No. 21, which represents a new codification of all of the compilation and
review standards with an effective date of calendar year-end 2015.
SSARS No. 21 states that during a review engagement:
an accountant should consider whether, during the performance of review
procedures, evidence or information came to the accountant’s attention
indicating that there could be an uncertainty about an entity’s ability to
continue as going concern for a reasonable period of time.
A reasonable period of time is defined as:
a period the same period of time required of management to assess going
concern when specified by the applicable financial reporting framework.
If the applicable financial reporting framework does not specify a period of time for
management (e.g., tax basis), a reasonable period of time is one year from the date of
the financial statements being reviewed (e.g., one year from the balance sheet date).
Assuming the applicable financial reporting framework is GAAP, a reasonable period of
time for purposes of assessing going concern in a review engagement is the same
assessment period that is required for management to assess going concern under
GAAP per ASU 2014-15.
Therefore, under SSARS No. 21, the accountant should use GAAP’s one-year
window in assessing going concern. That window is one year from the date the financial
statements are available to be issued because an entity to which a review engagement is
performed must be nonpublic.
The date the financial statements are available to be issued is the same as the
report date in a review engagement. What this means is that now, finally, the going
concern assessment period for management in GAAP financial statements, and for an
accountant/auditor in a review or audit engagement, is the same – one year from the
date on which the financial statements are either issued (SEC company) or available to
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be issued (for a non-SEC company). The previous “one-year from the balance sheet
going concern assessment period is essentially gone.
STUDY QUESTION
3. An auditing interpretation makes changes to the way in which an auditor assesses
an entity’s going concern. Which of the following is correct as to the changes the
interpretation makes?
a. The auditor should follow GAAP’s definition of substantial doubt.
b. The auditor should follow the existing assessment period found in AU-C 570.
c. The auditor should follow an abbreviated version of GAAP disclosures.
d. The auditor should eliminate the report modifications.
¶ 413 IMPACT OF GOING CONCERN REPORT
MODIFICATIONS ON COMPANY SURVIVAL
In 2014, Audit Analytics issued a report in which it performed a 14-year study of goingconcern opinions. The report, which samples financial statements through 2013, identifies the following trends:
• 2013 going concern report modifications were at the lowest level over a 14-year
period, as noted in the following chart:
Year
Going
Concern
Opinions
2013
2,384
2012
2,532
2011
2,644
2010
2,978
2009
3,103
2008
3,352
Source: Audit Analytics
• 16.6 percent of auditor opinions filed in 2013 contained a going concern report
modification. (The highest percentage was 21.1 percent in 2008, and lowest was
14.2 percent in 2000.)
• Going concern report modifications peaked at 3,352 in 2008 and dropped to
2,384 in 2013.
What Percentage of Companies Recover from a Going Concern
Report Modification?
Interestingly, only a small percentage (ranging from five to nine percent) of companies
that had going concern report modifications rebounded with a clean opinion in the
subsequent year.
¶ 413
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MODULE 2 - CHAPTER 4 - Going Concern Disclosures
The following table shows the details:
Number of Clean Opinions in Subsequent Year to Going Concern Report Modification
Year
# Going Concerns
# Clean Opinions
% Recovery in
Prior Year
Current Year, Going
Subsequent Year
Concern Prior
Year
2013
2,532
2012
2,644
2011
2,978
2010
3,103
2009
3,352
2008
3,309
2007
2,878
Source: Audit Analytics, as modified by Author.
183
140
207
277
266
200
253
7.2%
5.3%
7.0%
8.9%
7.9%
6.0%
8.8%
OBSERVATION: The previous table illustrates a key point with respect to
going concern report modifications. If such a report modification is made, it can be
the “kiss of death for a company in the subsequent years. A very low percentage
of companies subsequently survive a going concern report modification.
Does a Going Concern Report Modification Protect the Auditor?
In 2012, Steven E. Kaplan and David D. Williams published the results of a study in a
paper entitled: “Do going concern audit reports protect auditors from litigation? A simultaneous equations approach. Their study was conducted to look at the issue of whether an
auditor of a financially stressed entity reduces litigation risk by issuing a going concern
report modification.
The study reached the following conclusions:
• Auditors make going concern reporting decisions strategically, considering the
litigation risk of their financially stressed clients.
• Auditors use going concern reporting as a preemptive action in response to
elevated levels of litigation risk.
• Issuing a going concern report is associated with a lower likelihood of the
auditor being named in a class action lawsuit. Investors consider the auditor’s
report when making litigation decisions for their financially stressed
investments.
• Going concern reports deter investors from filing class action lawsuits against
auditors.
NOTE: When investors see a going concern report for financially stressed
companies, they are apparently less likely to blame the auditor for their investment
losses. Issuing a going concern report offers the auditor protection against claims
of negligence due to reporting, but not other claims of auditor negligence. For
example, a going- concern report is unlikely to deter investors from naming the
auditor in a lawsuit in situations involving allegations of auditor negligence for
fraudulent financial statements.
• Issuing a going concern audit report increases the likelihood that management
will initiate a switch in auditors in the next year.
Is the Language in the Auditor’s Going Concern Report Modification
Effective?
Since the issuance of AU-C 570, the going concern report modification has come under
scrutiny. In the early 2000s, criticism was placed on the auditing profession that too
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many companies that filed bankruptcy did not have a going concern report modification
issued prior to filing bankruptcy.
The language found in AU-C 570 is as follows:
Emphasis of Matter Regarding Going Concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note X to
the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note X. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
Financial statement users continue to criticize the going concern report modification
language for several reasons. (Going Concern: Where Is It Going? Clemense Ehoff Jr.,
Central Washington University, USA Ahli Gray, Keiser)
• The language used in AU-C 570 is vague, allowing for broad interpretation. The
terms substantial doubt” and for a reasonable period of time are not clearly
understood by third party users.
• AU-C 570 places the responsibility for evaluating whether there is substantial
doubt about the entity’s ability to continue as a going concern for a reasonable
period of time squarely on the auditor’s shoulders and not management.
• The auditor is required to assess the effectiveness of management’s plans for
mitigating the going concern issue even though the auditor is not responsible
for predicting future conditions or events.
• Management is responsible for predicting future conditions or events, but
management is not responsible for the going concern issue.
• Investors and bankers complain that the current language found in the going
concern report modification causes alarm to the market and adversely affects
the auditor. The language in the going concern report modification creates bad
financial distress and sends investors and bankers quickly running away.
• The language in both the report and disclosure adversely affects the auditor.
The language leaves the auditor with either:
- A client with a recovery plan destined for failure
- A client that is looking for another auditor who is willing to avert the going
concern disclosure, commonly known as “opinion shopping
In either case, the auditor is faced with the risk of losing revenue if he or she
inserts a going concern disclosure.
¶ 413
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MODULE 2: FINANCIAL STATEMENT
REPORTING—CHAPTER 5: Discontinued
Operations
¶ 501 WELCOME
This chapter discusses ASU 2014-08, Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity. It also provides an overview of the
GAAP rules that existed prior to the implementation of ASU 2014-08.
¶ 502 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Recognize at least one reason why companies are motivated to shift losses from
continuing operations to discontinued operations
• Identify at least one reason why the previous definition of discontinued operations is criticized
• Recognize some of the criteria that must be met for a disposal to qualify as
discontinued operations under ASU 2014-08
• Identify how discontinued operations should be presented on the income statement and balance sheet under the ASU 2014-08 rules
¶ 503 INTRODUCTION
Discontinued operations relates to presentation issues involving the income statement.
The changes made to the presentation of discontinued operations represent a concerted
effort by the FASB to reduce or eliminate the presentation of this item on the income
statement.
¶ 504 BACKGROUND
Over the past two years, the FASB has made efforts to essentially eliminate two items
that are presented on the statement of income on a net of tax basis. They are:
• Discontinued operations
• Extraordinary items
In 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity, which tightens the discontinued
operations rules so that fewer transactions now qualify as discontinued operations.
¶ 505 OVERVIEW OF PREVIOUS GAAP FOR
DISCONTINUED OPERATIONS
Under previous GAAP, discontinued operations are presented on the income statement
on a net of tax basis. Prior to the issuance of FAS 154 (currently ASC 250, Accounting
Changes and Error Corrections), GAAP had a third item, cumulative effect of an
accounting change, that was also presented on a net of the tax basis. FAS 154 eliminated
¶ 505
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the cumulative effect of an accounting change. Now, a company that has a change in
accounting principle is required to restate retained earnings for the effect of an
accounting change, and not present the change as a cumulative effect on the income
statement.
Previous GAAP required discontinued operations to be presented below income
from continued operations, net of the tax effect, as follows:
Income from continuing operations before income taxes
Income taxes
$XX
XX
Income from continuing operations
Extraordinary item (net of taxes of $XX)
XX
(XX)
Net income
$XX
In April 2014, the FASB issued ASU 2014-08 to change the definition of discontinued
operations and expand its disclosures. In general, ASU 2014-08 applies for years
beginning in 2015. Until that time, current GAAP still permits companies significant
latitude in classifying discontinued operations below continuing operations, particularly
with respect to single transactions involving losses.
Prior to the effective date of ASU 2014-08, GAAP found ASC 205, Presentation of
Financial Statements, stated:
The results of operations of a component of an entity that either has been
disposed of or is classified as held for sale, is reported in discontinued
operations if both of the following conditions are met:
• The operations and cash flows of the component have been (or will
be) eliminated from the ongoing operations of the entity as a result
of the disposal transaction, and
• The entity will not have any significant continuing involvement in
the operations of the component after the disposal transaction.
A component of an entity is defined as operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity, and may consist of a reportable segment, operating segment, reporting unit,
subsidiary, or an asset group.
NOTE: The definition of a discontinued operation, and the criteria for reclassifying asset disposals as discontinued operations, has changed over time. The
original APB Opinion No. 30, Reporting the Results of Operations, provided that only
dispositions of “business segments could qualify as being reported as discontinued operations. APB No. 30 defined a business segment as a “major line of
business or a customer class. The current definition (before the changes made by
ASU 2014-08) found in ASC 205, Presentation of Financial Statements, uses the
“component of an entity as a more liberal threshold that replaced the business
segment concept.
¶ 506 GAMES ARE PLAYED IN CLASSIFICATION
SHIFTING
The purpose of this section is to explain the actions companies have been taking to shift
transactions on their income statements from continuing operations into discontinued
operations. In particular, shifting losses and expenses into discontinued operations has
a correlating effect on an entity’s income from continued operations. By shifting loss
transactions and expenses to discontinued operations, an entity increases its income
¶ 506
MODULE 2 - CHAPTER 5 - Discontinued Operations
87
from continued operations. In practice, income from continued operations is a key
benchmark used to measure financial performance and is the starting point for measurements that include core earnings, EBITDA, and certain cash flow measurements.
Classification shifting is one particular reason why the FASB chose to reduce and
eliminate discontinued operations and extraordinary items.
Is a Company Motivated to Move Losses and Expenses into
Discontinued Operations?
Companies are highly motivated to shift losses and expenses from continuing operations into the discontinued operations category. Conversely, those same entities seek to
retain income and gain items within continuing operations. For years, discontinued
operations have been subject to classification manipulation. Companies with losses from
discontinued operations have been motivated to position that item below the line, out of
income from continuing operations.
By moving an expense or loss into discontinued operations, a company can
increase three key measurements that can drive stock price and value:
• Operating income
• Income from continuing operations
• Core earnings
Stock price value for a public company and the value of a nonpublic company’s stock are
driven by multiples of earnings, whether core earnings or earnings before interest,
taxes, depreciation and amortization (EBITDA). Both measurements start with income
from continuing operations. If a company shifts a loss or expense item from continuing
operations to discontinued operations, that shift may increase the value of that entity’s
stock by a multiple of four to 10 times.
EXAMPLE: Company X has the following information for the year ended
December 31, 20X1:
X’s price-earnings multiple is 10 times. If the price-earnings multiple is 10
times, the value of the company is: $650,000 x 10 = $6,500,000, computed as
follows:
Operating income
Loss from sale of discontinued operations
Net income before income taxes
Income taxes (35%)
Net income
Multiple
Value of X’s stock
$1,100,000
(100,000)
1,000,000
(350,000)
$650,000
10
$6,500,000
Change the facts: X decides to classify the $100,000 loss as a discontinued
operation:
Income from continuing operations before income taxes
Income taxes (35%)
Income from continuing operations
Loss from discontinued operations (net of taxes of
$35,000)
Net income
Income from continuing operations
Multiple
Value of X’s stock
$1,100,000
(385,000)
715,000
(65,000)
$650,000
$715,000
10
$7,150,000
¶ 506
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Conclusion: By making a classification shift of the $100,000 loss from continuing
operations to discontinued operations, the stock value increases from $6,500,000 to
$7,150,000, all done without changing net income.
Change the facts: Assume the company is nonpublic and its value is determined based
on six times EBITDA.
Without
DO Classification
Net income
Add back discontinued operations
With
DO Classification
$650,000
0
$650,000
65,000
650,000
715,000
350,000
100,000
50,000
385,000
100,000
50,000
EBITDA
Multiple factor
$1,150,000
6
$1,250,000
6
Value of Company X’s business
$6,900,000
$7,500,000
Income from continuing operations
Add backs:
Income taxes
Interest (GIVEN)
Depreciation/amortization (GIVEN)
Conclusion: Company X’s value, based on a multiple of EBITDA, increases from
$6,900,000 to $7,500,000 simply by classification shifting of the $100,000 loss from
continuing operations to discontinued operations.
OBSERVATION: Another area in which companies have used a shift of
transactions to discontinued operations is in valuing an entity for estate and gift
planning purposes. By shifting income (rather than losses) to discontinued operations, an entity effectively reduces the valuation by a multiple of the amount
shifted.
For example, if an entity can justify shifting a $100,000 gain to discontinued operations,
that $100,000 gain will not be included in EBITDA so that the valuation will be reduced
by $100,000 before applying any discounts.
Is There Evidence That Companies Have Engaged in Classification
Shifting to Manipulate Earnings and Stock Value?
There have been several studies that have concluded that companies continue to play
the game of “classification shifting by moving transactions from continuing operations
to discontinued operations. This trend has occurred particularly with respect to losses
and expenses. Two studies provide empirical evidence that companies have and continue to shift losses and expenses from continuing operations to discontinued operations or extraordinary items. They are Earnings Management Using Classification
Shifting: An Examination of Core Earnings and Special Items (Sarah Elizabeth McVay)
and Earnings Management Using Discontinued Operations (Abhijit Barua, Steve Lin, and
Andrew M. Sbaraglia, Florida International University).
One of the studies focuses on the shift of losses to discontinued operations.
Following are some of the conclusions reached by the two studies:
• Companies are highly motivated to shift loss and expense items from continuing
operations to discontinued operations to manipulate stock value. Unlike accrual
and reserve manipulation, classification shifting requires no “settling-up in the
future for past earnings management. If a manager decides to increase earnings
using accrual or reserve adjustments, at some point in the future, the accruals
¶ 506
MODULE 2 - CHAPTER 5 - Discontinued Operations
89
and reserves must reverse. The future reversal reduces future reported earnings. In contrast, classification shifting involves simply reporting recurring
expenses in a nonrecurring classification on the income statement, having no
implications for future earnings. Because classification shifting does not change
net income, it is potentially subject to less scrutiny by auditors and regulators
than other forms of earnings management that change net income. Shifting
losses and expenses from continuing operations to discontinued operations is an
easy form of managed earnings to increase stock price without changing net
income. With classification shifting, net income does not change, but operating
income, income from continuing operations, and core earnings do change.
• There is empirical evidence that companies have actually engaged in classification shifting to augment operating income, income from continuing operations,
and core earnings:
- Companies regularly classify losses from continuing operations to discontinued
operations to increase core earnings.
- Companies classify operating expenses as part of discontinued operations.
Such a shift is not easy for investors to identify because the details of discontinued operations are not disclosed.
- One key reason why there has been an expansion in classification shifting to
discontinued operations is due to the issuance of FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (now part of ASC 360). FAS 144
(now ASC 360) broadened the definition of discontinued operations by replacing
the business segment requirement under APB No. 30 with the component of an
entity concept.
NOTE: The ability of asset disposals to be classified as discontinued operations has changed over time. The original APB Opinion No. 30 provided that only
dispositions of “business segments could qualify for being reported as discontinued operations. APB No. 30 defined a business segment as a “major line of
business or a customer class.
Next, the FASB liberalized the definition of discontinued operations with the issuance of
FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (now part of
ASC 360). ASC 360 reduced the threshold for recognition of discontinued operations
treatment by replacing the concept of “business segment with a broader concept of
“component of an entity. ASC 360’s current definition of a component of an entity treats
a component separately from the rest of the entity because the component has its own
clearly defined operations and cash flows. Moreover, a component can be a reportable
segment, an operating segment, a reporting unit, a subsidiary, or an asset group. ASC
360’s reduction in the threshold for discontinued operations has encouraged companies
to classify more asset disposals as discontinued operations. Thus, if those disposals
result in losses, management has the perfect situation in which to shift those losses into
discontinued operations.
Classification Shifting—Less Risk to the CEO and CFO
One reason why management of a company might engage in classification shifting to
discontinued operations is because it creates far less exposure to the CEO and CFO,
due to the fact that the classification shifting does not alter net income. This is because:
¶ 506
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• Sarbanes-Oxley Section 302 certification of the financial statements (for SEC
companies only) focuses on net income.
• Sarbanes-Oxley Section 304 and Dodd-Frank Section 954 clawback provisions
are triggered based on restatement of net income and not necessarily affected
by restatements due to classification shifting.
• It is difficult for a CEO or CFO to be charged with financial statement fraud due
to classification shifting which is very subjective and does not impact net
income.
The result is that classification shifting may be the most effective technique used by
unscrupulous executives who want to drive stock price and entity value, without
affecting net income.
FASB Gradually Attacks Discontinued Operations
Over the past decade, the FASB has taken actions to reduce the number of transactions
that qualify as discontinued operations. The FASB has issued ASU 2014-08, Discontinued Operations, which restricts the scope of transactions that qualify as discontinued
operations.
STUDY QUESTIONS
1. With respect to GAAP for discontinued operations prior to the effective date of ASU
2014-08, GAAP provides that the results of operations of a component that has been
disposed of, or classified as held for sale, shall be reported in discontinued operations if
certain conditions are met that include which one of the following?
a. The operations of the component have been retained in the ongoing
operations.
b. The entity will have significant continuing involvement in the operations of the
component.
c. The cash flows of the component will be eliminated from the ongoing
operations.
d. The entity will replace the component with a similar component.
2. Which of the following is correct with respect to companies shifting losses from
continuing operations to discontinued operations?
a. Such a shift requires a settling up in the future.
b. Net income does not change but core earnings may change.
c. It is a difficult form of managed earnings.
d. It is illegal in most cases.
¶ 507 ASU 2014-08, PRESENTATION OF FINANCIAL
STATEMENTS (TOPIC 205) AND PROPERTY, PLANT AND
EQUIPMENT (TOPIC 360): REPORTING DISCONTINUED
OPERATIONS AND DISCLOSURES OF DISPOSALS OF
COMPONENTS OF AN ENTITY
The objective of ASU 2014-08 is to develop improved reporting and disclosures for
discontinued operations including:
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MODULE 2 - CHAPTER 5 - Discontinued Operations
91
• Changing the definition of discontinued operation that facilitate convergence of
U.S. GAAP and international standards
• Enhancing disclosures about discontinued operations and individually significant components of an entity that have been (or will be) disposed
The amendments in the ASU affect an entity that has either of the following:
• A component of an entity that either is disposed of, or is classified as held for
sale
• A business or nonprofit activity that, on acquisition, is classified as held for sale
The authority for classifying transactions as discontinued operations is found in ASC
205-20, Presentation of Financial Statements—Discontinued Operations. Under current
rules (prior to the effective date of ASU 2014-08), ASC 205-20-45 states that the results of
operations of a component of an entity that either has been disposed of, or is classified
as held for sale, must be reported in discontinued operations if two conditions are met:
• The operations and cash flows of the component have been (or will be)
eliminated from the ongoing operations of the entity as a result of the disposal
transaction.
• The entity will not have any significant continuing involvement in the operations
of the component after the disposal transaction.
Currently, ASC 205 provides that if a component of an entity qualifies as discontinued
operations, the results of operations (including any gain or loss from the disposal), is
presented on the income statement as a separate component of income before extraordinary items, net of the applicable tax effect.
Investors have noted that the current definition of discontinued operations is broad,
and has resulted in the following:
• Too many disposals of single transactions have been classified as discontinued
operations.
• Many disposals of small groups of assets that are recurring in nature have been
classified as discontinued operations.
• Some of the guidance on reporting discontinued operations has resulted in
higher costs for preparers because those rules can be complex and difficult to
apply.
• There has been not enough emphasis of the impact of discontinued operations
on the balance sheet.
One example where the current rules have been too broad is where an entity that sells
one single asset (such as a commercial building) might be able to classify that
transaction as a discontinued operation as long as there is no significant involvement
after the disposal date. In doing so, the gain or loss on disposal, (and net rental income)
is presented below the line in discontinued operations, and outside of income from
continuing operations. Financial statement users have asked the FASB to narrow the
definition of discontinued operations so that a disposal activity should be presented in
discontinued operations only when an entity has made a strategic shift in its operations.
Thus, the goal of the FASB has been to create a definition of discontinued operations
that precludes the sale of most single assets and groups of small assets from being
classified as a discontinued operation.
The key objectives of the discontinued operations project were to:
• Develop an improved definition of discontinued operations that also enhances
convergence of U.S. GAAP and IFRS
• Reduce complexity of the current rules
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• Enhance disclosures about discontinued operations including the disclosures
and expanded presentation of the balance-sheet effects of discontinued
operations
In April 2013, the FASB issued an exposure draft entitled, Presentation of Financial
Statements (Topic 205): Reporting Discontinued Operations. The FASB received 45
letters of comment to the exposure draft. In April 2014, the FASB issued the final
statement as ASU 2014-08.
The ASU affects an entity that has either of the following:
• A component of an entity that either is disposed of, or is classified as held for
sale
• A business or nonprofit activity that, on acquisition, is classified as held for sale
There is a new definition of discontinued operations that limits discontinued operations
reporting. The new definition provides that a disposal of a component (or group of
components) of an entity is required to be reported in discontinued operations only if
the disposal represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results.
NOTE: Under current U.S. GAAP, many disposals, some of which may be
routine in nature and not a change in an entity’s strategy, are reported in discontinued operations.
There are expanded disclosures about discontinued operations to provide users more
information about assets, liabilities, revenues, and expenses of discontinued operations.
The ASU requires an entity to disclose the pretax profit or loss (or change in net assets
for a not-for-profit entity) of an individually significant component of an entity that does
not qualify for discontinued operations reporting. Within the disclosures, there are
certain reconciliations and cash flow information required related to a discontinued
operation.
There are several changes to the Accounting Standards Codification to improve the
organization and readability of ASC 205-20, Discontinued Operations, and ASC 360-10,
Property, Plant, and Equipment—Overall, including the addition of flowcharts to help
stakeholders implement the disclosure requirements.
The ASU eliminates several transactions that were exempt from discontinued
operations.
Under the amendments in ASU 2014-08, the definition of discontinued operations
differs from current U.S. GAAP as follows:
• Under the new rules, only those disposals of components of an entity that
represent a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results will be reported as discontinued operations in
the financial statements. Currently, a component of an entity that is a reportable
segment, an operating segment, a reporting unit, a subsidiary, or an asset group
is eligible for discontinued operations presentation.
• The current definition of discontinued operations has been removed, which
requires that:
- The operations and cash flows of the component must have been (or will be)
eliminated from the ongoing operations of the entity as a result of the disposal
transaction.
- The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.
¶ 507
MODULE 2 - CHAPTER 5 - Discontinued Operations
93
• A business or nonprofit activity that, on acquisition, meets the criteria to be
classified as held for sale may now be reported in discontinued operations.
Currently, U.S. GAAP does not include a business or nonprofit activity in the
definition of discontinued operations.
• A disposal of an equity method investment that meets the definition of discontinued operations may now be reported in discontinued operations. Currently,
disposals of equity method investments are not in the scope of discontinued
operations found in ASC 205-20.
• The new definition of discontinued operations in ASU 2014-08 is now similar to
the definition of discontinued operation in IFRS 5, Noncurrent Assets Held for
Sale and Discontinued Operations. Part of the definition of discontinued operations in the ASU is based on the guidance in IFRS 5 indicating that a discontinued operation should represent a separate major line of business or
geographical area of operations.
Definitions
ASU 2014-08 makes the following amendments to definitions found in the Master
Glossary of ASC 360:
Disposal Group: A disposal group for a long-lived asset or assets to be disposed of
by sale or otherwise, represents assets to be disposed of together as a group in a single
transaction and liabilities directly associated with those assets that will be transferred in
the transaction. A disposal group may include a discontinued operation along with other
assets and liabilities that are not part of the discontinued operation.
Business: An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the form of dividends,
lower costs, or other economic benefits directly to investors or other owners, members,
or participants.
Component of An Entity: Comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity. A component of an entity may be a reportable segment or an operating segment,
reporting unit, subsidiary, or an asset group.
Nonprofit Activity: An integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing benefits, other than goods
or services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or
mission (e.g., goods or services to beneficiaries, customers, or members). As with a notfor-profit entity, a nonprofit activity possesses characteristics that distinguish it from a
business or a for-profit business entity.
Firm Purchase Commitment: A firm purchase commitment is an agreement with
an unrelated party, binding on both parties and usually legally enforceable, that meets
both of the following conditions:
• It specifies all significant terms, including the price and timing of the
transaction.
• It includes a disincentive for nonperformance that is sufficiently large to make
performance probable.
Not-for-Profit Entity: An entity that possesses the following characteristics, in
varying degrees, that distinguish it from a business entity:
• Contributions of significant amounts of resources from resource providers who
do not expect commensurate or proportionate pecuniary return
• Operating purposes other than to provide goods or services at a profit
• Absence of ownership interests like those of business entities.
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Entities that clearly fall outside this definition include the following:
• All investor-owned entities
• Entities that provide dividends, lower costs, or other economic benefits directly
and proportionately to their owners, members, or participants, such as mutual
insurance entities, credit unions, farm and rural electric cooperatives, and
employee benefit plans
Probable: The future event or events are likely to occur.
Public Business Entity: A public business entity is a business entity meeting any
one of the criteria below: (Neither a not-for-profit entity nor an employee benefit plan is
a business entity)
• It is required by the U.S. Securities and Exchange Commission (SEC) to file or
furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial
statements or financial information are required to be or are included in a filing).
• It is required by the Securities Exchange Act of 1934 (the Act), as amended, or
rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
• It is required to file or furnish financial statements with a foreign or domestic
regulatory agency in preparation for the sale of, or for purposes of issuing
securities that are not subject to contractual restrictions on transfer.
• It has issued, or is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market.
• It has one or more securities that are not subject to contractual restrictions on
transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP
financial statements (including footnotes) and make them publicly available on a
periodic basis (for example, interim or annual periods). An entity must meet
both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial
statements or financial information is included in another entity’s filing with the SEC. In
that case, the entity is only a public business entity for purposes of financial statements
that are filed or furnished with the SEC.
Scope and Scope Exceptions
The scope of ASU 2014-08 applies to either of the following:
• A component or a group of components of an entity that is disposed of, or is
classified as held for sale that has been disposed of, or alternatively, has been
classified as held for sale
• A business or nonprofit activity that, on acquisition, is classified as held for sale
• The scope of the ASU does not apply to oil and gas properties that are accounted
for using the full-cost method of accounting as prescribed by the U.S. Securities
and Exchange Commission (SEC)
The list of activities excluded from discontinued operations has been reduced
under ASU 2014-08 as noted in the following table:
¶ 507
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MODULE 2 - CHAPTER 5 - Discontinued Operations
Activities Excluded from Discontinued Operations
GAAP
ASC 205-20
New GAAP
[Pre-ASU 2014-08]
ASU 2014-08
•
•
•
•
•
•
•
•
•
Goodwill
Intangible assets not amortized
Servicing assets
Financial instruments
Deferred policy acquisition costs
Deferred tax assets
Unproved oil and gas properties accounted for
using the successful-efforts method of
accounting
Oil and gas properties accounted for using the •
full-cost method
Certain other long-lived assets in specialized
industries
Oil and gas properties accounted for using the
full-cost method
OBSERVATION: Prior to the effective date of ASU 2014-08, ASC 205-20
excluded certain types of assets from the scope of discontinued operations including goodwill, servicing assets, and unproved oil and gas properties that are
accounted for using the full-cost method of accounting. In issuing ASU 2014-08, the
FASB decided that all of the previous scope exceptions should be eliminated
except for the scope exception for oil and gas properties that are accounted for
using the full-cost method of accounting.
Rules in ASU 2014-08
ASU 2014-08 discusses the conditions under which a transaction is presented as a
discontinued operation in an entity’s financial statements.
A discontinued operation may include either of the following:
• A component (or group of components) of an entity that either has been
disposed of or is classified as held for sale
• A business or nonprofit activity that, on acquisition, is classified as held for sale
NOTE: If a component of an entity that either has been disposed of or is
classified as held for sale does not meet the conditions to be reported in discontinued operations, ASC 360-10-45, Property, Plant and Equipment, Overall, Other
Presentation Matters, provides guidance on presenting disposal gains and losses
and impairment losses on assets classified as held for sale.
The ASU carries over the existing definition of a component which:
. . . comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the
entity. A component of an entity may be a reportable segment or an
operating segment, reporting unit, subsidiary, or an asset group.
Discontinued operation comprising a component or a group of components of an
entity
A disposal of a component of an entity or a group of components of an entity shall be
reported in discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results when any of
the following occurs:
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• The component of an entity or group of components of an entity meets the
criteria to be classified as held for sale.
• The component of an entity or group of components of an entity is disposed of
by either:
- Sale
- Other than sale (e.g., disposal occurs by abandonment, exchange, spinoff, or in
a distribution to owners).
Examples of a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results could include a disposal of any of the following:
• A major geographical area
• A major line of business
• A major equity method investment
• Other major parts of an entity
The ASU does not define the threshold for “major effect. FASB (and SEC) unofficially
use a threshold of 15-20 percent of total assets, total revenue, or net income to satisfy
the “major effect threshold.
Discontinued operation comprising a business or nonprofit activity
A business or nonprofit activity that, on acquisition, meets the criteria to be classified as
held for sale is a discontinued operation.
Below is a list of the criteria that must be satisfied to meet the held-for-sale threshold:
Criteria for Classification of Held for Sale
A component of an entity (or component) or a group of components of an entity (or
component), or a business or nonprofit activity (the entity (or component) to be sold),
shall be classified as held for sale in the period in which all of the following criteria are
met:
• Management, having the authority to approve the action, commits to a plan to
sell the entity (or component) to be sold.
• The entity (or component) to be sold is available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of
such entities to be sold. (Examples 5 through 7 [paragraphs 360- 10-55-37
through 55-42], Property, Plant and Equipment, provides illustrations of when
this criterion would be met.)
• An active program to locate a buyer or buyers and other actions required to
complete the plan to sell the entity (or component) to be sold, have been
initiated.
• The sale of the entity (or component) to be sold is probable, and transfer of the
entity (or component) to be sold is expected to qualify for recognition as a
completed sale, within one year, except as permitted by the “Extension of the
one-year rule paragraph below.
• The entity (or component) to be sold is being actively marketed for sale at a
price that is reasonable in relation to its current fair value.
• The price at which an entity (or component) to be sold is being marketed is
indicative of whether the entity (or component) currently has the intent and
ability to sell the entity (or component) to be sold.
• A market price that is reasonable in relation to fair value indicates that the entity
(or component) to be sold is available for immediate sale, whereas a market
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MODULE 2 - CHAPTER 5 - Discontinued Operations
97
price in excess of fair value indicates that the entity (or component) to be sold is
not available for immediate sale.
• Actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.
If at any time the above criteria are no longer met (except as permitted by
“Extension of the one-year rule below), an entity (or component) to be sold that is
classified as held for sale shall be reclassified as held and used and measured in
accordance with ASC 360-10-35-44, Property, Plant and Equipment.
Extension of the one-year rule. Events or circumstances beyond an entity (or
component’s) control may extend the period required to complete the sale of an entity
(or component) to be sold beyond one year. An exception to the one-year requirement
shall apply in the following situations in which those events or circumstances arise:
• If, at the date that an entity (or component) commits to a plan to sell an entity
(or component) to be sold, the entity (or component) reasonably expects that
others (not a buyer) will impose conditions on the transfer of the entity (or
component) to be sold that will extend the period required to complete the sale
and both of the following conditions are met:
- Actions necessary to respond to those conditions cannot be initiated until after
a firm purchase commitment is obtained, and
- A firm purchase commitment is probable within one year.
• If an entity (or component) obtains a firm purchase commitment and, as a result,
a buyer or others unexpectedly impose conditions on the transfer of an entity
(or component) to be sold previously classified as held for sale that will extend
the period required to complete the sale and both of the following conditions are
met:
- Actions necessary to respond to the conditions have been or will be timely
initiated.
- A favorable resolution of the delaying factors is expected.
• If during the initial one-year period, circumstances arise that previously were
considered unlikely and, as a result, an entity (or component) to be sold
previously classified as held for sale is not sold by the end of that period and all
of the following conditions are met:
- During the initial one-year period, the entity (or component) initiated actions
necessary to respond to the change in circumstances
- The entity (or component) to be sold is being actively marketed at a price that
is reasonable given the change in circumstances, and
- The criteria in paragraph (1) are met.
NOTE: Examples 8-11 in ARC 360-10-55-43 through 48, Property, Plant and
Equipment, provide illustrations that address the application of the held-for-sale
rules.
OBSERVATION: In choosing a definition of a discontinued operation, the
FASB considered numerous elements. In the end, the FASB concluded that the
nature of the disposal and its effect on an entity’s operations and financial results
matter more than the composition of the transaction. Therefore, the FASB decided
that a discontinued operation could include different parts of an entity other than
an entire major line of business or a major geographical area of operations, as long
as those parts together represent a strategic shift that has a major effect on an
entity’s operations and financial results. The FASB also decided that strategic shifts
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reported in discontinued operations should include only those disposals of components of an entity that have (or will have) a major effect on an entity’s operations
and financial results.
Do the new rules permit the effects of a sale of a single asset to be presented as
discontinued operations?
Under the current rules for discontinued operations, many companies have taken
liberty to classify sales of individual assets as part of discontinued operations. This has
been an effective strategy for companies to shift losses from sales of certain assets, such
as real estate, out of income from continuing operations. Now, the issue is whether the
new rules allow for the effects of a sale of a single asset to be presented as part of
discontinued operations. In the case of the sale of a single piece of real estate, the effect
of such a sale would include not only presenting the gain or loss on sale, but also the net
rental income, in the discontinued operations section of the income statement, net of
the applicable tax effect.
Let’s look at the analysis of a single-asset transaction. Recall that the new rules in
ASU 2014-08 state the following:
A disposal of a component of an entity or a group of components of an entity
shall be reported in discontinued operations if the disposal represents a
strategic shift that has (or will have) a major effect on an entity’s operations
and financial results.
The new definition requires two elements: First, the disposal must represent a strategic
shift, and second, it must have a major effect on the entity’s operations and financial
results.
The ASU further provides examples of events that may represent a “strategic shift
that has, or will have, a “major effect to include a disposal of any of the following:
• A major geographical area
• A major line of business
• A major equity method investment
• Other major parts of an entity
The ASU is clear that the simple sale of one major asset is not enough to qualify for
discontinued operations classification because the disposal must involve a “strategic
shift.
The author suggests the following transactions and his unofficial opinion on each:
Sale of a major single asset that does not represent a
shift of operations away from a particular geographic
area or product line
Sale of a major single asset that represents a planned
or strategic shift away from a particular geographic
region or product line
Strategic Shift?
Major Effect?
Discontinued
Operation?
No
Yes
No
Yes
Yes
Yes
In reviewing the previous chart, rarely will the sale of a single asset represent strategic
shift in an entity’s operations even if such a sale meets the “major effect threshold.
Thus, discontinued operations treatment for a single asset sale is unlikely under the
new ASU 2014-08 definition. In order for that single sale to satisfy the “strategic shift
criterion, it must represent a shift away from a particular geographic region or product
line. In particular, a one-off sale of an asset most likely does not represent a shift away
from a geographic region or product line.
¶ 507
MODULE 2 - CHAPTER 5 - Discontinued Operations
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What is the threshold for determining whether a strategic shift has or will have a
major effect on the entity’s operations and financial results?
The ASU does not quantify how to determine whether a strategic shift has, or will have,
a major effect. The FASB staff has indicated that the SEC has provided its own input and
suggested that in order for a transaction to meet the “major effect threshold, it must
represent 15 to 20 percent of an entity’s total assets, revenue or net income, although
that threshold is not codified in any authoritative document. In fact, in the various
examples given by the FASB in ASU 2014-08, those examples offer 15 to 20 percent
thresholds.
The fact that the SEC (and FASB) have a higher threshold of 15 to 20 percent
illustrates the importance the discontinued operations changes have and the overall
goal to minimize the volume of transactions that qualify for discontinued operations
treatment. After all, the higher the percentage threshold, the fewer transactions that
qualify to be classified as discontinued operations.
EXAMPLE: Company X is a mall owner and owns 20 malls across the United
States. X is concerned about the New England market and overall competition in
that market. As a result, X decides to divest of one of its malls located in
Burlington, Massachusetts, and invest the net proceeds into other parts of the
country in which growth is more likely. The mall represents about 18 percent of X’s
revenue, profitability and total assets. There is a loss on sale. Should X present the
loss on sale and the net rental income from the Burlington Mall in discontinued
operations?
Probably. The sale represents a strategic shift of its operations out of New
England. Further, the sale will have a major effect on X’s operations and financial
results given the fact that the mall represents about 18 percent of its revenue,
profitability and total assets.
EXAMPLE: Company Y is a real estate rental company that owns and
operates numerous residential and commercial real estate along the East Coast. Y
decides to sell one large commercial building in North Carolina because Y is
offered an excellent price from a competitor. The sale is completed and yields a
gain. The building represents about 20 percent of Y’s revenue. Should Y present
the gain on sale and the net rental income from the commercial building in
discontinued operations?
Probably not. It is true that the sale will have a major effect on X’s operations
and financial results based on the fact that the building represents 20 percent of Y’s
revenue. However, there is no evidence that the sale of this one asset represents a
strategic shift of its operations. Instead, the sale is a one-off and isolated sale that
does not appear to be driven by a strategy to shift away from a geographic area or
product line. Thus, the gain on sale and the net rental income for the year of sale
should not be presented in discontinued operations. Instead, they should remain as
part of income from continuing operations.
STUDY QUESTIONS
3. Under the new discontinued operation rules found in ASU 2014-08, which of the
following is an element that a disposal must have to qualify for discontinued operation
classification?
a. There must be a strategic shift.
b. The operations of the component must have been eliminated from operations.
c. The entity must not have any continued involvement in the operations of the
component.
d. There must have been a sale of a component.
¶ 507
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4. Company Y is disposing of a component of its business. Which of the following
thresholds might qualify the disposal as a discontinued operation classification?
a. The component disposed of represents 10 percent of total assets.
b. The component disposed of has revenue of 19 percent of total entity revenue.
c. The net income of the component disposed of represents 12 percent of the
entity’s total assets.
d. The liabilities of the component represent 25 percent of the entity’s total
liabilities.
5. Company Z, a wholesale company, is selling a single building and wants to classify
the loss as part of discontinued operations. The building represents 24 percent of the
entity’s total assets but is not a key part of Z’s core business. Which of the following is
correct?
a. Z satisfies the criteria to classify the transaction as a discontinued operation.
b. The transaction does not qualify as a discontinued operation because the
transaction does not have a major effect on Z’s operations.
c. The transaction does not qualify as a discontinued operation because the
transaction does not represent a strategic shift in Z’s business.
d. The transaction does not qualify as a discontinued operation because none of
the criteria for discontinued operations treatment are satisfied.
Statement of Income Reporting—Discontinued Operations
If a transaction qualifies as a discontinued operation, ASU 2014-08 requires the following
be presented in the income statement:
• The income statement (or the statement of activities of a not-for-profit entity
(NFP)) shall report the following in the period in which a discontinued operation either has been disposed of or is classified as held for sale:
- Results of operations of the discontinued operation
- Any gain or loss recognized on the disposal
NOTE: The results of operations and any gain or loss related to discontinued
operations are presented net of applicable income taxes or benefit.
• The results of all discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income before extraordinary
items (if applicable).
• A gain or loss recognized on the disposal (or loss recognized on classification as
held for sale) shall be disclosed either:
- Presented separately on the face of the income statement (parenthetically or
otherwise)
- Disclosed in the notes to financial statements
NOTE: A gain or loss recognized on the disposal (or loss recognized on
classification as held for sale) of a discontinued operation shall be calculated in
accordance with other GAAP. For example, if a discontinued operation is within
¶ 507
MODULE 2 - CHAPTER 5 - Discontinued Operations
101
the scope of ASC 360, Property, Plant, and Equipment, an entity shall follow the
guidance in paragraphs 360-10-35-37 through 35-45 and 360-10-40-5 for calculating
the gain or loss recognized on the disposal (or loss on classification as held for
sale) of the discontinued operation.
• Adjustments to amounts previously reported in discontinued operations in a
prior period shall be presented separately in the current period in the discontinued operations section of the statement where net income is reported. Examples
of circumstances in which those types of adjustments may arise include the
following:
- The resolution of contingencies that arise pursuant to the terms of the disposal
transaction, such as the resolution of purchase price adjustments and indemnification issues with the purchaser
- The resolution of contingencies that arise from and that are directly related to
the operations of the discontinued operation before its disposal, such as environmental and product warranty obligations retained by the seller, and
- The settlement of employee benefit plan obligations (pension, postemployment
benefits other than pensions, and other postemployment benefits), provided that
the settlement is directly related to the disposal transaction.
NOTE: A settlement is directly related to the disposal transaction if there is a
demonstrated direct cause-and-effect relationship and the settlement occurs no
later than one year following the disposal transaction, unless it is delayed by events
or circumstances beyond an entity’s control.
• ASU 2014-08 carries over the existing rule found in ASU 205-20-45-3 that if a
transaction is presented in discontinued operations in the current period income
statement, the results of operations and gain or loss, if any, for those operations
shall be reclassified into discontinued operations for the prior periods presented
comparatively.
• ASC 205-20-45, (paragraphs 6 through 9), provides rules for allocating interest
and overhead to discontinued operations:
- Interest on debt to be assumed by the buyer and on debt required to be repaid
due to the disposal is allocated to discontinued operations.
- Consolidated interest that is not directly attributable to other operations of the
entity is permitted to be allocated to discontinued operations.
- Other consolidated interest that cannot be attributed to other operations is
allocated based on the ratio of net assets to be sold less debt to be repaid, to the
sum of total net assets of the consolidated entity plus consolidated debt other
than certain identified debt.
- General corporate overall is not allocated to discontinued operations.
Following is an example of the presentation of discontinued operations on the income
statement:
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Discontinued operations
Loss from operations of discontinued Component X
(including loss on disposal of $XX) (a)
Adjustment to previously reported discontinued
operation (b)
$XX
(XX)
XX
(XX)
XX
¶ 507
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Income tax benefit
Loss on discontinued operations
Income before extraordinary gain
Extraordinary gain (net of tax effect of $XX)
XX
(XX)
XX
XX
$XX
Net income
(a) The ASU permits the loss from disposal to be presented on the face of the income statement
(parenthetically or otherwise) or notes to financial statements.
(b) The ASU requires that any adjustments to amounts previously reported in discontinued operations
in a prior period be presented separately in the current period.
Balance Sheet Reporting—Discontinued Operations
In the period(s) in which a discontinued operation is classified as held for sale and for
all prior periods presented, the assets and liabilities of the discontinued operation shall
be presented separately in the asset and liability sections, respectively, of the statement
of financial position.
Those assets and liabilities shall not be offset and presented as a single amount. If a
discontinued operation is part of a disposal group that includes other assets and
liabilities that are not part of the discontinued operation, an entity may present the
assets and liabilities of the disposal group separately in the asset and liability sections,
respectively, of the statement of financial position.
NOTE: The ASU requires that the prior years’ balance sheets be reclassified
to reflect the discontinued operations by reclassifying the assets and liabilities
related to the discontinued operations in the prior years’ balance sheets. The ASU
states that the reclassification of the prior years’ balance sheets is required when
there is a discontinued operation that is classified as held for sale. It does not state
that such a reclassification is required if there is an actual sale of an asset or asset
group in the current period. (The author has addressed this issue with the FASB
staff which has unofficially stated that the reclassification of the prior years’
balance sheets is required if there is a current year discontinued operation from an
actual disposal or a transaction held for sale. Apparently, there was an oversight
within the language found in the ASU.)
If a discontinued operation is disposed of before meeting the criteria to be classified as
held for sale, an entity shall present the assets and liabilities of the discontinued
operation separately in the asset and liability sections, respectively, of the statement of
financial position for the periods presented in the statement of financial position before
the period that includes the disposal.
NOTE: When an entity separately presents in prior periods the assets and
liabilities of a discontinued operation, the entity shall not apply the guidance in
ASC 360-10-35-43, Property, Plant and Equipment, as if those assets and liabilities
were held for sale in those prior periods. Thus, the requirement found in ASC
360-10-35-43 that an asset held for sale be recorded at the lower of carrying amount
or fair value less costs to sell, is ignored.
For any discontinued operation initially classified as held for sale in the current period,
an entity shall either present on the face of the statement of financial position or
disclose in the notes to financial statements, the major classes of assets and liabilities of
the discontinued operation classified as held for sale for all periods presented in the
statement of financial position. Any loss recognized on a discontinued operation classified as held for sale in the income statement shall not be allocated to the major classes
of assets and liabilities of the discontinued operation.
¶ 507
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MODULE 2 - CHAPTER 5 - Discontinued Operations
A long-lived asset classified as held for sale, but not qualifying for presentation as a
discontinued operation in the statement of financial position, shall be presented separately in the statement of financial position of the current period.
OBSERVATION: Currently, U.S. GAAP requires that if in the current year
there is a transaction that is classified as a discontinued operation, the income
statement for the prior period presented should also be reclassified in discontinued
operations.
Although GAAP requires that the income statement must be reclassified for the prior
period, prior GAAP did not specify whether the balance sheet of a discontinued
operation should be reclassified for prior periods. The FASB included a question in the
proposed ASU asking whether U.S. GAAP should provide further guidance on reclassification of the balance sheet. Some respondents suggested requiring reclassification of a
discontinued operation’s balance sheet for prior periods. Those respondents noted that
reclassifying the prior year balance sheet is necessary to evaluate an entity’s balance
sheet in prior periods without the discontinued operation, which would promote comparability across reporting periods.
In the final ASU 2014-08, the FASB included language requiring reclassification of
discontinued operations in the balance sheet for prior periods. The FASB noted that
reclassifying prior periods in the balance sheet provides information about historical
trends related to the entity’s continuing operations and discontinued operations, including the ability to better analyze trends in return on assets and leverage. As to the
income statement, the ASU does not change the current rules that require that the
income statement for the prior periods presented also be reclassified to present the
results of operations and gain or loss in the discontinued operations section of the prior
periods’ income statements that are presented comparatively.
EXAMPLE: In 2015, Company X issues financial statements. In 2016, X
decides to sell its widget product line and places the line on the market for sale. At
the end of 2016, the product line has not been sold but satisfies the criteria to be
held for sale and to be classified as discontinued operations.
Conclusion: For 2016, X must classify the assets and liabilities of the discontinued
operation separately in the asset and liability sections of the 2016 balance sheet. Those
assets and liabilities shall not be offset and presented as a single amount. Further, X
must reclassify the 2015 balance sheet by separating the assets and liabilities of the
widget product line, for the discontinued operation on that 2015 balance sheet.
As to X’s income statement, in 2016, the results of operations and loss from any
writedown, if any, for the held for sale assets, is presented in discontinued operations in
the income statement, net of the tax effect. Because the transaction is presented as a
discontinued operations in 2016, X must reclassify its income statement for 2015 to
present the results of operations of the widget product line in the discontinued operations section of the income statement for that year.
X’s 2016 and 2015 balance sheets and income statements are presented below:
Company X
Balance Sheets
December 31, 2016 and 2015
2016
Assets
Current assets:
Cash
Trade receivables
2015
(a)
$XX
XX
$XX
XX
¶ 507
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Company X
Balance Sheets
December 31, 2016 and 2015
2016
2015
Inventories
Assets held for sale
Total current assets
XX
XX
XX
XX
XX
XX
Property, plant and equipment, net:
Cost
Less accumulated depreciation
Total property, plant, and equipment
XX
XX
XX
XX
XX
XX
$XX
$XX
Current liabilities:
Accounts payable
Accrued expenses
Debt related to assets held for sale
Current portion of long-term debt, all other debt
Total current liabilities
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
Long-term debt:
XX
XX
Stockholders’ equity:
Common stock
Retained earnings
Total stockholders’ equity
XX
XX
XX
XX
XX
XX
Liabilities and Stockholders’ Equity
$XX
$XX
(a) ASU 2014-08 requires that the balance sheet for the prior year be reclassified to reflect the assets
and liabilities of the transaction related to the 2016 discontinued operation. If the balance sheet is
reclassified in the prior year, the assets are not revalued under the held-for-sale rules.
Company X
Statements of Income
For the Years Ended December 31, 2016 and 2015
2016
2015
$XX
XX
(c)
$XX
XX
Gross profit on sales
Operating expenses
XX
XX
XX
XX
Income from operations
Other income and expenses
XX
XX
XX
XX
Income from continuing operations before income taxes
Income taxes
XX
(XX)
XX
(XX)
Income from continuing operations
Discontinued operations
Loss from operations of discontinued Component X
(including loss on disposal of $XX) (a)
XX
XX
(XX)
(XX)
Net sales
Cost of sales
¶ 507
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MODULE 2 - CHAPTER 5 - Discontinued Operations
Company X
Statements of Income
For the Years Ended December 31, 2016 and 2015
2016
Adjustment to previously reported discontinued
operation (b)
Income tax benefit
Loss on discontinued operations
2015
XX
XX
(XX)
XX
XX
(XX)
XX
XX
XX
XX
Income before extraordinary gain
Extraordinary gain (net of tax effect of $xx)
$XX
$XX
Net income
(a) The ASU permits the loss from disposal to be presented on the face of the
income statement (parenthetically or otherwise) or notes to financial
statements.
(b) The ASU requires that any adjustments to amounts previously reported in discontinued operations
in a prior period be presented separately in the current period.
(c) Although the discontinued operation occurred in 2016, GAAP requires that the income statement
for the prior year 2015 be reclassified to reflect the revenue and expenses and gain/loss of the
transaction in discontinued operations for 2015.
How do the rules apply when a transaction is held for sale?
The discontinued operations rules apply to a disposal transaction, and a held-for-sale
transaction. Under the held-for-sale rules, if a transaction satisfies certain criteria in the
current year, the transaction is classified as held for sale. Under the discontinued
operation rules, a held-for-sale transaction is treated the same as an actual disposal. The
exception is that a held for sale transaction does not have a recognized gain or loss on
disposal because the transaction has not been completed.
The ASU carries over a list of criteria from ASC 360, Property, Plant and Equipment that determine whether a transaction should be classified as held for sale in the
current period. Those criteria include:
• Management commits to a plan to sell the components to be sold.
• The components to be sold are available for immediate sale in their present
condition subject only to terms that are usual and customary for such sales.
• An active program to sell has been initiated.
• The sale of the component(s) to be sold is probable, and transfer is expected to
qualify for recognition as a completed sale, within one year.
• The components to be sold are being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
• Actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.
If an entity satisfies the above criteria, the transaction is classified as held for sale in the
current period with the prior year financial statements reclassified, as well.
Once the above criteria are met, GAAP requires that the components (asset(s) and
liabilities) to be sold be measured at the lower of carrying amount or fair value less
costs to sell as follows:
Carrying amount (a)
Fair value less costs to sell (b)
= Lower of (a) or (b)
$XX
XX
$XX
¶ 507
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Entry:
Unrealized loss
Assets held for sale
dr
cr
XX
XX
Once the assets and liabilities have been written down to the lower of carrying amount
or fair value (less costs to sell), a few rules apply to the balance sheet:
• The asset(s) classified as held for sale:
- Are not depreciated (or amortized) while it is classified as held for sale
- Are presented separately in the balance sheet
• The assets and liabilities held for sale should be presented separately as current
assets and liabilities unless the sale is not expected to be completed within one
year or the operating cycle.
The next step is to determine whether the held-for-sale assets qualify as a discontinued
operation using the ASU 2014-08 rules. That is, does the pending disposal represent a
“strategic shift that will have a major effect on an entity’s operations and financial
results? If so, the held-for-sale transaction is presented in discontinued operations in
the current year with the prior year comparative income statement and balance sheet
being reclassified to reflect the discontinued operation.
There is one key point worth noting. If a held-for-sale transaction is measured and
presented in discontinued operations in the current year, the ASU requires that the
prior year’s balance sheet be reclassified by separately presenting the assets and
liabilities of the transaction in the prior year’s balance sheet. The ASU also states that
although the prior year’s assets and liabilities are reclassified, they are not revalued
under the lower of carrying amount or fair value rules.
If the assets are held for sale, that means they have not been sold. Therefore, in the
discontinued operations section of the income statement, the elements of the held for
sale assets and liabilities reflect the following elements:
• Income or loss from operations
• Unrealized loss from writedown to lower of carrying amount and fair value (less
costs to sell)
Following is an example of the format of the income statement presentation:
2015
2014
Income from continuing operations
XX
XX
Discontinued operations
Income from operations of discontinued Component X
XX
XX
Unrealized loss on writedown of assets held for sale
(b) (XX)
(a) Income tax benefit
XX
XX
Income (loss) on discontinued operations
(XX)
(XX)
(a) The prior year income statement (and balance sheet) should reflect the reclassification of the
discontinued operations transaction. There is no writedown of the 2014 prior year’s balance sheet to
reflect the lower of carrying amount and fair value.
(b) Current year 2015 writedown of assets and liabilities held for sale to lower of carrying amount and
fair value (less costs to sell).
¶ 507
MODULE 2 - CHAPTER 5 - Discontinued Operations
107
STUDY QUESTIONS
6. Company K is about to sell an asset and wants to determine whether the sale
qualifies as a held-for-sale transaction under ASC 360. Which of the following is a
criterion that K should considered in determining whether the transaction should be
classified as held for sale?
a. K is about to decide to sell the asset.
b. The components to be sold by K will be actively marketed within the next six
months.
c. There are likely to be significant changes to K’s plan to sell the asset.
d. K’s management commits to a plan to sell the components to be sold.
7. Company B has certain depreciable assets that B has classified as held for sale.
Which of the following is the correct treatment for B to follow in accounting for the
assets under the held-for-sale rules?
a. B should start depreciating the assets over the remaining useful lives up to the
estimated date of sale.
b. B should write off the net assets to zero.
c. B should not depreciate the assets while classified as held for sale.
d. B should depreciate the assets over standard GAAP lives as if the assets are
not being sold.
¶ 508 DISCLOSURES
Disclosures Required for All Types of Discontinued Operations
The following shall be disclosed in the notes to financial statements that cover the
period in which a discontinued operation either has been disposed of, or is classified as
held for sale:
• A description of both of the following:
- The facts and circumstances leading to the disposal or expected disposal
- The expected manner and timing of that disposal
• If not separately presented on the face of the income statement (or statement of
activities for a not-for-profit entity) as part of discontinued operations, the gain or
loss recognized on disposal (or loss on classification as held for sale) of a
discontinued operation.
• If applicable, the segment(s) in which the discontinued operation reported
under ASC 280, Segment Reporting.
Change to a Plan of Sale
In the period in which the decision is made to change the plan for selling the
discontinued operation, an entity shall disclose in the notes to financial statements:
• A description of the facts and circumstances leading to the decision to change
• The change’s effect on the results of operations for the period and any prior
periods presented
Adjustments to Previously Reported Amounts
An entity shall disclose the nature and amount of adjustments to amounts previously
reported in discontinued operations that are directly related to the disposal of a
discontinued operation in a prior period.
¶ 508
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Continuing Involvement
An entity shall disclose information about its significant continuing involvement with a
discontinued operation after the disposal date.
Examples of continuing involvement with a discontinued operation after the disposal date include:
• A supply and distribution agreement
• A financial guarantee
• An option to repurchase a discontinued operation
• An equity method investment in the discontinued operation
An entity shall disclose the following in the notes to financial statements for each
discontinued operation in which the entity retains significant continuing involvement
after the disposal date:
• A description of the nature of the activities that give rise to the continuing
involvement
• The period of time during which the involvement is expected to continue
• For all periods presented, both of the following:
- The amount of any cash inflows or outflows from, or to the discontinued
operation after the disposal transaction
- Revenues or expenses presented, if any, in continuing operations after the
disposal transaction that before the disposal transaction were eliminated in the
consolidated financial statements as intra-entity transactions
• For a discontinued operation in which an entity retains an equity method
investment after the disposal (the investee), information that enables users of
financial statements to compare the financial performance of the entity from
period to period assuming that the entity held the same equity method investment in all periods presented in the statement where net income is reported (or
statement of activities for a not-for-profit entity). The disclosure shall include all
of the following until the discontinued operation is no longer reported separately
in discontinued operations:
- For each period presented in the statement where net income is reported (or
statement of activities for a not-for-profit entity) after the period in which the
discontinued operation was disposed of, the pretax income of the investee in
which the entity retains an equity method investment
- The entity’s ownership interest in the discontinued operation before the
disposal transaction
- The entity’s ownership interest in the investee after the disposal transaction
- The entity’s share of the income or loss of the investee in the period(s) after
the disposal transaction and the line item in the statement where net income is
reported (or statement of activities for a not-for-profit entity) that includes the
income or loss.
NOTE: The previously noted disclosures are required until the results of
operations of the discontinued operation in which an entity retains significant
continuing involvement are no longer presented separately as discontinued operations in the statement where net income is reported (or statement of activities for a
not-for-profit entity).
¶ 508
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MODULE 2 - CHAPTER 5 - Discontinued Operations
Disclosures Required for a Discontinued Operation Comprising a
Component or Group of Components of an Entity
An entity shall disclose, to the extent not presented on the face of the financial
statements is part of discontinued operations, all of the following in the notes to financial
statements:
• The pretax profit or loss (or change in net assets for a not-for-profit entity) of the
discontinued operation for the periods in which the results of operations of the
discontinued operation are presented in the statement where net income is
reported (or statement of activities for a not-for-profit entity)
• The major classes of line items constituting the pretax profit or loss (or change
in net assets for a not-for-profit entity) of the discontinued operation (e.g.,
revenue, cost of sales, depreciation and amortization, and interest expense) for
the periods in which the results of operations of the discontinued operation are
presented in the statement where net income is reported (or statement of
activities for a not-for-profit entity).
• Cash flows information: Either of the following:
- The total operating and investing cash flows of the discontinued operation for
the periods in which the results of operations of the discontinued operation are
presented in the statement where net income is reported (or statement of
activities for a not-for-profit entity)
- The depreciation, amortization, capital expenditures, and significant operating
and investing noncash items of the discontinued operation for the periods in
which the results of operations of the discontinued operation are presented in
the statement where net income is reported (or statement of activities for a notfor-profit entity)
• If the discontinued operation includes a noncontrolling interest, the pretax profit
or loss (or change in net assets for a not-for-profit entity) attributable to the
parent for the periods in which the results of operations of the discontinued
operation are presented in the statement where net income is reported (or
statement of activities for a not-for-profit entity)
• The carrying amount(s) of the major classes of assets and liabilities included as
part of a discontinued operation classified as held for sale for the period in which
the discontinued operation is classified as held for sale and all prior periods
presented in the statement of financial position. Any loss recognized on the
discontinued operation classified as held for sale shall not be allocated to the
major classes of assets and liabilities of the discontinued operation
• Additional disclosures: If an entity provides the disclosures required by the
above in the notes to financial statements, the entity shall disclose for the initial
period in which the disposal group is classified as held for sale and for all prior
periods presented in the statement of financial position, a reconciliation of both
of the following:
- The amounts disclosed in the paragraph above concerning carrying amounts
- Total assets and total liabilities of the disposal group classified as held for sale
that are presented separately on the face of the statement of financial position
NOTE: If the disposal group includes assets and liabilities that are not part of
the discontinued operation, an entity shall present those assets and liabilities in
line items in the reconciliations that are separate from the assets and liabilities of
the discontinued operation.
¶ 508
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Sample Disclosure:
Reconciliation of the Major Classes of Line Items Constituting Pretax Profit (Loss) of
Discontinued Operations That Are Disclosed in the Notes to Financial Statements to the AfterTax Profit or Loss of Discontinued Operations That Are Presented in the Income Statement
Major classes of the items constituting pretax profit (loss) of
20X5
20X4
discontinued operations:
Revenue
$XX
$XX
Cost of sales
(XX)
(XX)
Selling, general and administrative expenses
(XX)
(XX)
Interest expense
(XX)
(XX)
Other income (expense) items that are not major
(XX)
(XX)
Pretax profit or loss of discontinued operations related to major
classes of pretax profit (loss)
XX
XX
Pretax gain or loss on the disposal of the discontinued operations
XX
XX
Total pretax gain or loss on discontinued operations
Income tax expense or benefit
XX
(XX)
XX
(XX)
Total profit or loss on discontinued operations that is presented in
the statement of income
$XX
$XX
• For the periods in which the results of operations of the discontinued operation
are reported in the income statement (or statement of activities for a not-forprofit entity), a reconciliation of both of the following:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of
the discontinued operation and the major classes of line items constituting the
pretax profit or loss (or change in net assets for a not-for-profit entity) of the
discontinued operation such as revenue, cost of sales, depreciation and amortization, and interest expense
- The after-tax profit or loss from discontinued operations presented on the face
of the income statement (or statement of activities for a not-for-profit entity)
NOTE: For purposes of the reconciliation, an entity may aggregate the
amounts that are not considered major and present them as one line item in the
reconciliation.
Sample Disclosure:
Reconciliation of the Major Classes of Line Items Constituting Pretax Profit (Loss) of
Discontinued Operations That Are Disclosed in the Notes to Financial Statements to the AfterTax Profit or Loss of Discontinued Operations That Are Presented in the Income Statement
Major classes of the items constituting pretax profit (loss) of
20X5
20X4
discontinued operations:
Revenue
$XX
$XX
Cost of sales
(XX)
(XX)
Selling, general and administrative expenses
(XX)
(XX)
Interest expense
(XX)
(XX)
Other income (expense) items that are not major
(XX)
(XX)
Pretax profit or loss of discontinued operations related to major
classes of pretax profit (loss)
XX
XX
Pretax gain or loss on the disposal of the discontinued operations
XX
XX
Total pretax gain or loss on discontinued operations
Income tax expense or benefit
XX
(XX)
XX
(XX)
Total profit or loss on discontinued operations that is presented in
the statement of income
$XX
$XX
¶ 508
MODULE 2 - CHAPTER 5 - Discontinued Operations
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Disclosures Required for a Discontinued Operation Comprising an
Equity Method Investment
For an equity method investment disposal that meets the criteria to be classified as a
discontinued operation, an entity shall disclose summarized information about the
assets, liabilities, and results of operations of the investee if that information was
disclosed in financial reporting periods before the disposal.
Disclosures for Long-Lived Assets Classified as Held for Sale or
Disposed of
For any period in which a long-lived asset (disposal group) either has been disposed of,
or is classified as held for sale, an entity shall disclose all of the following in the notes to
financial statements:
• A description of the facts and circumstances leading to the disposal or the
expected disposal
• The expected manner and timing of that disposal
• The gain or loss recognized
• If not separately presented on the face of the statement where net income is
reported (or in the statement of activities for a not-for-profit entity), the caption
in the statement where net income is reported (or in the statement of activities
for a not-for-profit entity) that includes that gain or loss.
• If not separately presented on the face of the statement of financial position, the
carrying amount(s) of the major classes of assets and liabilities included as part
of a disposal group classified as held for sale. Any loss recognized in the
disposal group classified as held for sale shall not be allocated to the major
classes of assets and liabilities of the disposal group.
• If applicable, the segment in which the long-lived asset (disposal group) is
reported under ASC 280, Segment Reporting.
Other Disclosures
In addition to the disclosures above, if a long-lived asset (disposal group) includes an
individually significant component of an entity that either has been disposed of or is
classified as held for sale, and does not qualify for presentation and disclosure as a
discontinued operation, a public business entity (and a not-for-profit entity that has
issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market) shall disclose the following information:
• For a public business entity (and a not-for-profit entity that has issued, or is a
conduit bond obligor for, securities that are traded, listed, or quoted on an
exchange or an over-the-counter market), disclose both of the following:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of
the individually significant component of an entity for the period in which it is
disposed of or is classified as held for sale, and for all prior periods that are
presented in the income statement (or statement of activities for a not-for-profit
entity) calculated in accordance with the rules found in ASC 205-20-45-6 through
45-9.
- If the individually significant component of an entity includes a noncontrolling
interest, the pretax profit or loss (or change in net assets for a not-for-profit
¶ 508
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entity) attributable to the parent for the period in which it is disposed of or is
classified as held for sale, and for all prior periods that are presented in the
income statement (or statement of activities for a not-for-profit entity).
• For all other entities, (including non-public entities), disclose both of the
following:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of
the individually significant component of an entity for the period in which it is
disposed of, or is classified as held for sale calculated in accordance with the
allocation rules found in ASC 205-20-45-6 through 45-9.
- If the individually significant component of an entity includes a noncontrolling
interest, the pretax profit or loss (or change in net assets for a not-for-profit
entity) attributable to the parent for the period in which it is disposed of or is
classified as held for sale.
What about the statement of cash flows?
Prior GAAP did not require a separate disclosure of cash flows related to discontinued
operations. In ASU 2014-08, the FASB added a new requirement to include disclosure of
either of the following:
• The total operating and investing cash flows of the discontinued operation
• The depreciation, amortization, capital expenditures, and significant operating
and investing noncash items of the discontinued operation
This requirement is a disclosure that is not required to be presented on the face of the
statement of cash flows. The result is that the impact of a discontinued operation is not
segregated on the statement of cash flows. Instead, the transaction is accounted for on
the statement of cash flows just like any other transaction. For example, the gain or loss
from a disposal is an adjustment to net income using the indirect method, while any
proceeds from the sale of the disposed asset(s) are presented as a cash inflow in the
investing activities section of the statement of cash flows.
Finally, if there is a discontinued operations gain or loss on the income statement,
in the statement of cash flows, the indirect method presentation of cash from operating
activities starts with net income and not net income from continuing operations.
¶ 509 COMPARISON OF KEY PROVISIONS OF ASU
2014-08 VERSUS PREVIOUS GAAP
The following chart summarizes the key provisions of ASU 2014-08 as compared with
the rules found in previous GAAP in ASC 205, Discontinued Operations.
Comparison of Key Provisions of Discontinued Operations
Previous GAAP Versus New ASU 2014-08
Previous GAAP
New ASU 2014-08
Definition of discontinued operation
The results of operations of a component of an
A disposal of a component of an entity or a group
entity that either has been disposed of or is
of components of an entity shall be reported in
classified as held for sale shall be reported in
discontinued operations if the disposal represents
discontinued operations if both:
a strategic shift that has (or will have) a major
effect on an entity’s operations and financial results
when any of the following occurs:
a. The operations and cash flows of the
a. The component of an entity or group of
component have been (or will be) eliminated
components of an entity meets the criteria to
from the ongoing operations of the entity as a
be classified as held for sale.
result of the disposal transaction.
¶ 509
MODULE 2 - CHAPTER 5 - Discontinued Operations
113
b. The entity will not have any significant
b. The component of an entity or group of
continuing involvement in the operations of the
components of an entity is disposed of by sale.
component after the disposal transaction.
c. The component of an entity or group of
components of an entity is disposed of other
than by sale (e.g., abandonment, exchange,
spinoff or distribution).
Currently, a single component (asset) of an entity Under the new definition, a single component or
that is a reportable segment, an operating
asset of a segment, reporting unit, subsidiary, or
segment, a reporting unit, a subsidiary, or an asset asset group is not eligible for discontinued
group is eligible for discontinued operations
operations unless the disposal represents a
presentation.
“strategic shift that has a “major effect on the
entity’s operations and financial results.
Current definition requires that there be no
Under the new definition, a disposal qualifies as a
significant continuing involvement in the
discontinued operation even if there is significant
component after the disposal.
continuing involvement in the component after
the disposal.
If there is significant continuing involvement,
additional disclosure is required.
Previous GAAP definition of a discontinued
A discontinued operation includes:
operation does not include:
Business or nonprofit activity that, on acquisition,
A business or nonprofit activity in the definition of meets the criteria to be classified as held for sale
a discontinued operation.
Disposal of an equity method investment that
Disposal of an equity method investment
meets the definition of a discontinued operation.
Scope Exceptions
Currently, ASC 205-20 excludes the following from The scope of ASU 2014-08 does not apply to oil and
discontinued operations:
gas properties that are accounted for using the
full-cost method of accounting.
• Goodwill
All other exceptions are eliminated.
• Intangible assets not amortized
• Servicing assets
• Financial Instruments
• Deferred policy acquisition costs
• Deferred tax assets
• Unproved oil and gas properties accounted for
using the successful-efforts method of
accounting
• Oil and gas properties accounted for using the
full-cost method
• Certain other long-lived assets in specialized
industries
Definition of a Component
Component of an entity: Comprises operations and No change
cash flows that can be clearly distinguished,
operationally and for financial reporting purposes,
from the rest of the entity. A component of an
entity may be a reportable segment or an operating
segment, reporting unit, subsidiary, or an asset
group.
Allocation of Interest and Overhead to Discontinued Operations
Current GAAP has the following rules for
No change
allocating interest and overhead to discontinued
operations:
Interest:
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1) Interest on debt that is to be assumed by the
buyer and interest on debt that is required to
be repaid as a result of a disposal transaction
shall be allocated to discontinued operations.
2) The allocation to discontinued operations of
other consolidated interest that is not directly
attributable or related to other operations of
the entity is permitted, but not required.
3) Other consolidated interest that cannot be
attributed to other operations of the entity, is
allocated based on the ratio of net assets to be
sold or discontinued, less debt that is required
to be paid as a result of the disposal transaction
to the sum of total net assets of the
consolidated entity plus consolidated debt
other than the following:
• Debt of the discontinued operation that will
be assumed by the buyer
• Debt that is required to be paid as a result
of the disposal transaction
• Debt that can be directly attributed to other
operations of the entity
Overhead:
General corporate overhead shall not be allocated
to discontinued operations.
Income Statement Presentation
The results of all discontinued operations, less
No change
applicable income taxes (benefit), shall be reported
as a separate component of income before
extraordinary items (if applicable).
A gain or loss recognized on the disposal (or loss
recognized on classification as held for sale) shall
be disclosed by a separate presentation on the face
of the income statement, or disclosed in the notes
to financial statements.
Adjustments to amounts previously reported in
Essentially the same with minor changes to
discontinued operations that are directly related to language.
the disposal of a component of an entity in a prior
period shall be classified separately in the current
period in discontinued operations.
Presentation of Assets and Liabilities of Discontinued Operations
Current year assets and liabilities that are held for No change
sale are presented separately in the asset and
liability sections of the statement of financial
position.
Prior year presentation: Current GAAP does not Prior year presentation: The ASU requires that
specify whether an entity should reclassify assets assets and liabilities for prior periods be
and liabilities as held for sale in the statement of
reclassified to held for sale in the statement of
financial position for periods before the
financial position for prior periods presented.
reclassification.
Disclosures
Various disclosures are required under previous
Disclosures expanded to include:
GAAP.
• Cash flows of the discontinued operations
• Reconciliation of pretax profit or loss and
major classes of line items of pretax profit or
loss of the discontinued operation
¶ 509
MODULE 2 - CHAPTER 5 - Discontinued Operations
115
STUDY QUESTIONS
8. Which of the following is not an example of an event in which an entity has
continuing involvement with a discontinued operation after the disposal date?
a. A financial guarantee
b. An interest in possibly securing a future distribution agreement
c. A supply agreement
d. An option to repurchase a discontinued operation
9. Company J has a transaction properly classified as part of discontinued operations.
How should J account for the transaction on the statement of cash flows?
a. Disclose total financing cash flows in the notes
b. Disclose total operating and investing cash flows of the discontinued
operations
c. Disclose on the face of the statement of cash flows total operating and
investing cash flows of the discontinued operations
d. Disclose nothing separate from all other transactions
¶ 510 ILLUSTRATIONS
The following examples are extracted from ASU 2014-08 and modified by the author.
First, let’s do a quick review.
In order for a transaction to be classified as a discontinued operation, it must consist of
either a:
• Component (or group of components) of an entity that either has been disposed
of, or is classified as held for sale
• Business or nonprofit activity that, on acquisition, is classified as held for sale
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity.
A disposal of a component a group of components of an entity shall be reported in
discontinued operations if the disposal represents a strategic shift that has (or will have)
a major effect on an entity’s operations and financial results when any of the following
occurs:
• The component of an entity or group of components of an entity meets the
criteria to be classified as held for sale.
• The component of an entity or group of components of an entity is disposed of
by:
- Sale
- Other than sale (e.g., disposal occurs by abandonment, exchange, spinoff, or in
a distribution to owners)
Examples of a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results could include a disposal of any of the following:
• A major geographical area
• A major line of business
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• A major equity method investment
• Other major parts of an entity
EXAMPLE 1: Consumer Products Manufacturer
Facts: Company X manufactures and sells consumer products that are
grouped into five major product lines as follows:
• Discount cleaning products (DOG)
• Premium cleaning products (STAR)
• Candy and confectionery products
• Cereals
• Soups
Each product line includes several brands that comprise operations and cash
flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of X. Therefore, for X, each major product line includes a
group of components.
X has experienced high growth in its discount cleaning product line that has
lower price points than its premium cleaning product line. Total revenues from the
discount cleaning product line are 15 percent of X’s total revenues; however, the
discount cleaning product line will require significant future investment to increase
its profits. Therefore, X decides to shift its strategy of selling cleaning products at
multiple price points and focus solely on selling cleaning products at a premium
cleaning products line. As a result, X sells the discount cleaning product line for a
small gain.
Conclusion: First, the fact that each product line can be clearly distinguished, operationally and for financial reporting purposes, means that each product line meets the
definition of a component. Next, the question is whether the disposal of a component
(discount cleaning product line) qualifies to be a discontinued operation.
The disposal represents a strategic shift in X’s product lines by focusing on
premium cleaning products instead of discount cleaning products. Further, the discount
cleaning product line is one of five major product lines and its absence will have a major
effect on X’s operations and financial results. The “major effect threshold is satisfied
because total revenues from the disposed product line equal 15 percent of X’s total
revenues, which is the minimum percentage to achieve the “major effect.
Because the discount cleaning product line is a component, and its disposal
represents a strategic shift with its absence having a major effect on X’s operations and
financial results, the disposal of the discount cleaning product line should be reported in
discontinued operations. That means that the results of operations and the gain on sale
should be classified into discontinued operations on the income statement, net of the
applicable tax effect.
EXAMPLE 2: Processed and Packaged Goods Manufacturer
Facts: Company Y manufactures and sells food products that are grouped into
five major geographical areas as follows:
• Europe
• Asia
• Africa
• United States
• South America
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MODULE 2 - CHAPTER 5 - Discontinued Operations
117
Each major geographical area includes several brands that comprise operations and cash flows that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of Y. Therefore, for Y, each major
geographical area includes a group of components of the entity.
Y has experienced slower growth in its operations located in the South
America, which account for 20 percent of Y’s total assets. Therefore, Y decides to
shift its strategy of selling food products in the South America geographical area
and focus its resources on manufacturing and marketing food products in its other
four higher growth geographical areas. As a result, Y decides to sell its operations
in South America and, at year end, classifies the components of the South America
area as held for sale. In doing so, the net assets are written down to the lower of
carrying amount or fair value less selling costs, and an unrealized loss is recorded.
Conclusion: The disposal of the South America operations should be reported in
discontinued operations. The reasons are as follows:
• Each of the five major geographic areas is a separate component in that each
area’s operations and cash flows can clearly be distinguished, operationally and
for financial reporting purposes.
• The disposal represents a strategic shift in Y’s operations from South America to
the other four geographic areas.
• Y’s operation in South America is one of five major geographical areas and its
absence will have a major effect on Y’s operations and financial results. The
major effect threshold is satisfied based on the fact that the South America
region’s total assets represent 20 percent of Y’s total assets.
The result is that Y should present the results of operations, and the unrealized loss
on the writedown of the held-for-sale South American assets, in discontinued operations, net of taxes.
EXAMPLE 3: General Merchandise Retailer
Facts: Company Z is a general merchandise retailer and operates 1,000 retail
stores in two different store formats, all throughout the United States, as malls and
supercenter stores.
Z divides its stores into five major geographical regions:
• Northwest
• Southwest
• Midwest
• Northeast
• Southeast
For Z, each retail store comprises operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from the
rest of Z. Therefore, for Z, each retail store is a component of Z.
Z has experienced declining net income at its 200 stores located in malls
across all five major geographical regions. Historically, net income from the 200
stores in malls has been in a range of 30 to 40 percent of Z’s total net income. Total
net income from the 200 stores in malls is down to 15 percent of Z’s total net
income because of declining customer traffic in malls. Therefore, Z decides to shift
its strategy of selling products in malls and sells the 200 stores located in malls.
Conclusion: The disposal of the 200 stores should be reported in discontinued operations for the following reasons:
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• The 200 stores represent a group of components in that each retail store
comprises operations and cash flows can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the entity.
• The disposal of the 200 stores in malls and a focus solely on its supercenter
stores represents a strategic shift in its product lines and geography of
operations.
• The disposal of the 200 stores located in malls will have a major effect on Z’s
operations and financial results given the fact that the 200 stores represent 15
percent of Z’s total net income.
EXAMPLE 4: Oil and Gas Entity
Facts: Company X produces oil and gas in two major geographical areas
(Europe and Africa). Each area is divided into several regions. Each region
comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of X. Therefore, for X, each
major geographical area (Europe and Africa) includes a group of components of X.
In its Africa operations, X operates through a joint venture with another entity
that is accounted for by the reporting entity as an equity method investment. X’s
carrying amount of its investment in the joint venture is 20 percent of X’s total
assets. Because of significant investments needed in its operations in Europe, X
decides to shift its strategy away from operating in Africa to focus on its operations
in Europe. Thus, Company X sell its stake in the Africa joint venture.
Conclusion: The Africa disposal is reported in discontinued operations for the following reasons:
• Africa is a separate component of X that comprises operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
• The disposal of a component of X (the Africa joint venture) represents a
strategic shift in its geographic operations from Africa to a focus on Europe
where it maintains full control.
• The disposal of the Africa joint venture will have a major effect on X’s operations
and financial results, based on the fact that the joint venture asset represents 20
percent of X’s total assets.
EXAMPLE 5: Sports Equipment Manufacturer
Facts: Company Y, a manufacturer and seller of sports equipment, has two
product lines that serve the football and baseball markets. Each product line
includes several different brands that each comprise operations and cash flows that
can be clearly distinguished, operationally and for financial reporting purposes,
from the rest of Y. Therefore, for Y, each product line includes a group of
components of Y.
Y decides to shift its strategy away from selling products to the baseball
equipment market, which accounts for 40 percent of its revenues, and focus more
effort on serving its customers in the football equipment market. However, Y
decides to retain some exposure to the baseball equipment market by selling only
80 percent of the group of components in its baseball market product line to
another entity. Y completes the sale of 80 percent of its baseball product line.
Conclusion: The disposal of 80 percent of Y’s baseball line represents a discontinued
operation for the following reasons:
¶ 510
MODULE 2 - CHAPTER 5 - Discontinued Operations
119
• The baseball product line, with its several different brands, represents a group
of components, each comprising operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of Y.
• The disposal represents a strategic shift from selling products to the baseball
equipment market by selling 80 percent of the group of components in the
baseball product line.
• The 80 percent baseball interest sold will have a major effect on X’s operations
and financial results. That conclusion is reached based on the fact that the
baseball product line represents 40 percent of Y’s total revenue. If 80 percent of
the baseball product line is sold, X will lose 32 percent of its total revenue (40% x
80% = 32%).
The fact that Y has significant continuing involvement after the disposal date is not
a factor in determining whether the transaction should be classified as discontinued
operations. There are, however, additional disclosures that are required when there is
significant continuing involvement after the disposal.
EXAMPLE 6: Manufacturer of Two Plants
Facts: Company R is a manufacturer that has two plants, each of which is a
major part of R’s operations and financial results. Each plant comprises operations
and cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity.
R decides to consolidate its operations by selling one of its plants and merging
both operations into one plant. The plant that is disposed of represents 45 percent
of R’s total assets. After the disposal, there will be no change in the products sold
but profitability is expected to increase because of the consolidation of operations.
Conclusion: The disposal of the plant should qualify as a discontinued operation under
the ASU 2014-08 rules. The reasons are simple:
• First, the plant consists of a component of R in that its operations and cash flows
can be clearly distinguished operations and for financial reporting purposes,
from the rent of the entity.
• The disposal of the plant is a strategic shift in a major part of R’s business for the
purpose of consolidating operations.
• Lastly, the disposal will have a major effect on R’s operations and financial
results given the fact that the plant that is disposed of represents 45 percent of
R’s total assets.
Thus, the results of operations of the plant and any gain or loss on disposal should
be presented in discontinued operations, net of the tax effect.
EXAMPLE 7: Distributor with a Sale of a Single Building
Facts: Company K is a distributor. K owns a separate commercial building that it
rents to an unrelated party. The building is not related to its core business of being
a distributor even though its asset value and cash flow are a major portion of K’s
overall assets (approximately 20 percent of the carrying value of K’s assets). The
commercial building comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of
K.
K decides it wants to sell the building as the real estate market is hot. K places
the property on the market for sale and at December 31, 2015, the real estate
satisfies all of the requirements to be considered held for sale.
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Conclusion: Although the real estate is held for sale, it does not qualify as a discontinued operation. The reasons are as follows:
• First, the commercial real estate consists of a component of K in that its
operations and cash flows can clearly be distinguished, operationally and for
financial reporting purposes, from the rest of K.
• Although it is true that real estate is a major part of K’s business and financial
results (20 percent of total assets), the disposal of the real estate is not a
strategic shift in K’s business of distribution. Instead, the sale is a one-off
transaction.
Thus, the net rental income for 2015 and any unrealized loss from the writedown of
the held-for-sale asset should not be presented as discontinued operations.
¶ 511 TRANSITION AND EFFECTIVE DATE
A public business entity (and a not-for-profit entity that has issued, or is a conduit bond
obligor for securities that are traded, listed, or quoted on an exchange or an over-thecounter market) shall apply the ASU prospectively to both of the following:
• All disposals (or classifications as held for sale) of components of an entity that
occur within annual periods beginning on or after December 15, 2014, and
interim periods within those years.
• All businesses or nonprofit activities that, on acquisition, are classified as held
for sale that occur within annual periods beginning on or after December 15,
2014, and interim periods within those years.
All other entities (including non-public entities) shall apply the ASU prospectively to
both of the following:
• All disposals (or classifications as held for sale) of components of an entity that
occur within annual periods beginning on or after December 15, 2014, and
interim periods within annual periods beginning on or after December 15, 2015.
• All businesses or nonprofit activities that, on acquisition, are classified as held
for sale that occur within annual periods beginning on or after December 15,
2014, and interim periods within annual periods beginning on or after December
15, 2015.
An entity shall not apply the ASU to a component of an entity, or a business or nonprofit
activity that is classified as held for sale before the effective date even if the component
of an entity, or business or nonprofit activity, is disposed of after the effective date. Early
adoption is permitted, but only for disposals (or classifications as held for sale) that
have not been reported in financial statements previously issued or available for
issuance.
¶ 511
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MODULE 2: FINANCIAL STATEMENT
REPORTING—CHAPTER 6: Extraordinary
Items
¶ 601 WELCOME
This chapter discusses ASU 2015-01, Income Statement—Extraordinary and Unusual
Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items, issued in January 2015.
¶ 602 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Recognize a change made to the extraordinary item rules by ASU 2015-01
• Identify what is considered to be an “infrequency of occurrence
• Recognize the transaction types that have been eliminated from extraordinary
items
¶ 603 INTRODUCTION
Extraordinary items relate to presentation issues involving the income statement. The
changes made to the presentation of extraordinary items represent a concerted effort by
the FASB to reduce or eliminate the presentation of these items on the income
statement.
¶ 604 BACKGROUND
Over the past two years, the FASB has made efforts to essentially eliminate two items
that are presented on the statement of income on a net of tax basis. They are:
• Discontinued operations
• Extraordinary items
In 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity, which tightens the discontinued
operations rules so that fewer transactions now qualify as discontinued operations.
In 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and
Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates the concept of extraordinary
items altogether starting in 2016.
¶ 605 OVERVIEW OF EXISTING GAAP FOR
EXTRAORDINARY ITEMS
Under current GAAP, extraordinary items are presented on the income statement on a
net of tax basis. Prior to the issuance of FAS 154 (currently ASC 250, Accounting
Changes and Error Corrections), GAAP had an additional item, cumulative effect of an
accounting change, that was also presented on a net of the tax basis. FAS 154 eliminated
the cumulative effect of an accounting change. Now, a company that has a change in
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accounting principle is required to restate retained earnings for the effect of an
accounting change, and not present the change as a cumulative effect on the income
statement.
Prior to the effective date of ASU 2015-01, GAAP requires extraordinary items to be
presented below income from continued operations, net of the tax effect, as follows:
Income from continuing operations before income taxes
Income taxes
$XX
XX
Income from continuing operations
Extraordinary item (net of taxes of $XX)
XX
(XX)
Net income
$XX
ASC 225-20, Income Statement—Extraordinary and Unusual Items, defines an extraordinary item as events and transactions that are distinguished by both of the following
criteria being met:
• Unusual nature: The underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only incidentally
related to, the ordinary and typical activities of the entity, taking into account the
environment in which the entity operates.
• Infrequency of occurrence: The underlying event or transaction should be of
a type that would not reasonably be expected to recur in the foreseeable future,
taking into account the environment in which the entity operates.
STUDY QUESTION
1. Under GAAP before the effective date of ASU 2015-01, an item is categorized as
extraordinary if it satisfies certain criteria, one of which is __________.
a. Unusual nature
b. Frequency of occurrence
c. Limited application
d. Repetition of use
¶ 606 GAMES PLAYED IN CLASSIFICATION SHIFTING
The purpose of this chapter is to explain the actions companies have been taking to shift
transactions on their income statements from continuing operations into extraordinary
items. In particular, shifting losses and expenses into extraordinary items has a correlating effect on an entity’s income from continued operations. By shifting loss transactions
and expenses to extraordinary items, an entity increases its income from continued
operations. In practice, income from continued operations is a key benchmark used to
measure financial performance and is the starting point for measurements that include
core earnings, EBITDA and certain cash flow measurements. Classification shifting is
one particular reason why the FASB chose to eliminate extraordinary items.
Is a Company Motivated to Move Losses and Expenses into
Extraordinary Items?
Companies are highly motivated to shift losses and expenses from continuing operations into the extraordinary items category. Conversely, those same entities seek to
¶ 606
MODULE 2 - CHAPTER 6 - Extraordinary Items
123
retain income and gain items within continuing operations. For years, extraordinary
items have been subject to classification manipulation. Companies with losses from
extraordinary items have been motivated to position that item below the line, out of
income from continuing operations.
By moving an expense or loss into extraordinary items, a company can increase
three key measurements that can drive stock price and value:
• Operating income
• Income from continuing operations
• Core earnings
Stock price value for a public company and the value of a nonpublic company’s stock are
driven by multiples of earnings, whether core earnings or earnings before interest,
taxes, depreciation and amortization (EBITDA). Both measurements start with income
from continuing operations. If a company shifts a loss or expense item from continuing
operations to extraordinary items, that shift may increase the value of that entity’s stock
by a multiple of four to 10 times.
EXAMPLE: Company X has the following information for the year ended
December 31, 20X1:
X’s price-earnings multiple is 10 times. If the price-earnings multiple is 10
times, the value of the company is: $650,000 x 10 = $6,500,000, computed as
follows:
Operating income
Loss due to hurricane damage
Net income before income taxes
Income taxes (35%)
Net income
Multiple
Value of X’s stock
$1,100,000
(100,000)
1,000,000
(350,000)
$650,000
10
$6,500,000
Change the facts: X decides to classify the $100,000 loss as an extraordinary
item:
Income from continuing operations before income taxes
Income taxes (35%)
Income from continuing operations
Loss from extraordinary item (net of taxes of $35,000)
Net income
Income from continuing operations
Multiple
Value of X’s stock
$1,100,000
(385,000)
715,000
(65,000)
$650,000
$715,000
10
$7,150,000
Conclusion: By making a classification shift of the $100,000 loss from continuing
operations to an extraordinary item, the stock value increases from $6,500,000 to
$7,150,000, all done without changing net income.
Change the facts: Assume the company is nonpublic and its value is determined based
on six times EBITDA.
¶ 606
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Without
DO Classification
Net income
Add back extraordinary item
Income from continuing operations
Add backs:
Income taxes
Interest (GIVEN)
Depreciation/amortization (GIVEN)
With
DO Classification
$650,000
0
$650,000
65,000
650,000
715,000
350,000
100,000
50,000
385,000
100,000
50,000
EBITDA
Multiple factor
$1,150,000
6
$1,250,000
6
Value of Company X’s business
$6,900,000
$7,500,000
Conclusion: Company X’s value, based on a multiple of EBITDA, increases from
$6,900,000 to $7,500,000 simply by classification shifting of the $100,000 loss from
continuing operations to an extraordinary item.
Is There Evidence that Companies Have Engaged in Classification
Shifting to Manipulate Earnings and Stock Value?
There have been several studies that have concluded that companies continue to play
the game of “classification shifting by moving transactions from continuing operations
to discontinued operations and extraordinary items. This trend has occurred particularly with respect to losses and expenses. Two studies provide empirical evidence that
companies have and continue to shift losses and expenses from continuing operations
to discontinued operations or extraordinary items. They are Earnings Management
Using Classification Shifting: An Examination of Core Earnings and Special Items (Sarah
Elizabeth McVay) and Earnings Management Using Discontinued Operations (Abhijit
Barua, Steve Lin, and Andrew M. Sbaraglia, Florida International University)
Classification Shifting—Less Risk to the CEO and CFO
One reason why management of a company might engage in classification shifting to
extraordinary items is because it creates far less exposure to the CEO and CFO.
Because the classification shifting does not alter net income, there is less exposure
to the CEO or CFO for a few reasons:
• Sarbanes-Oxley Section 302 certification of the financial statements (for SEC
companies only) focuses on net income.
• Sarbanes-Oxley Section 304 and Dodd-Frank Section 954 clawback provisions
are triggered based on restatement of net income and not necessarily affected
by restatements due to classification shifting.
• It is difficult for a CEO or CFO to be charged with financial statement fraud due
to classification shifting which is very subjective and does not impact net
income.
The result is that classification shifting may be the most effective technique used by
unscrupulous executives who want to drive stock price and entity value, without
affecting net income.
¶ 607 FASB GRADUALLY ATTACKS EXTRAORDINARY
ITEMS
Over the past decade, the FASB has taken actions to reduce the number of transactions
that qualify as extraordinary items. The FASB has removed several transactions from
¶ 607
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MODULE 2 - CHAPTER 6 - Extraordinary Items
the list of transactions that specifically qualify as extraordinary, and more recently
eliminated extraordinary treatment altogether from GAAP with the issuance of ASU
2015-01.
To recap, under the rules in effect prior to the effective date of ASU 2015-01, an
entity is classified as extraordinary if it satisfies two requirements:
• Unusual nature: The underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only incidentally
related to, the ordinary and typical activities of the entity, taking into account the
environment in which the entity operates.
• Infrequency of occurrence: The underlying event or transaction should be of
a type that would not reasonably be expected to recur in the foreseeable future,
taking into account the environment in which the entity operates.
The FASB has eliminated certain specific transactions that had been codified as being
extraordinary regardless of whether they met the two criteria (infrequency of occurrence and unusual in nature.) Over the past decade, the FASB has issued several
statements to eliminate extraordinary treatment for several transactions that were
previously categorized as extraordinary:
• Extinguishment of debt should not be considered extraordinary unless it meets
the “unusual in nature and “infrequent in occurrence criteria (FAS 145,
Rescission of FAS 4, 44, and 64).
• FAS 109, Accounting for Income Taxes (now part of ASC 740), eliminated the rule
that the tax benefit of using a net operating loss carryforward should be
presented as an extraordinary item when recognized.
• The FASB eliminated the provision that in a business combination, a portion of
negative goodwill would be recorded as an extraordinary gain.
The following chart summarizes the history of events that has led to the current status
of extraordinary treatment prior to the effective date of ASU 2015-01:
Item
Extinguishment of debt
Tax benefit from using NOL
carryforward
Negative goodwill
Losses related to motor carriers
Net effect of discontinuing the
application of regulated operations
General rules:
Transaction that satisfies the two
criteria:
1) Unusual nature
2) Infrequency of occurrence
Status
Eliminated per FAS 145
Eliminated per FAS 109
Remaining extraordinary
[Prior to effective date of
ASU 2015-01]
Eliminated per FAS 141
Eliminated per FAS 145
X
X
The previous chart provides a list of transactions that were codified as being extraordinary regardless of whether they met the two criteria (infrequent and unusual) for
extraordinary treatment. Now, prior to the effective date of ASU 2015-01, all but one of
them has been eliminated. The result is that in order for a transaction to be presented
as an extraordinary item, it must satisfy the two criteria in that it must be unusual in
nature and infrequency of occurrence.
¶ 607
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Acts of God and Terrorist Attacks Don’t Make the Cut for
Extraordinary Treatment
In addition to the FASB pruning specific transactions from the extraordinary list, since
2001, the FASB and the AICPA have both had to address the issue as to whether acts of
God and terrorist attacks qualify for extraordinary item treatment.
In general, both the FASB and the AICPA have opined that transactions related to
acts of God (such as natural disasters) and terrorist attacks, by themselves, are not
categorized as extraordinary.
In 2001, the FASB Emerging Issues Task Force (EITF) ruled that the events of
September 11, 2001 did not rise to satisfying the two criteria for extraordinary treatment. The FASB EITF argued:
• The magnitude of the events did not result in the transaction being
extraordinary.
• Although the September 11th event was unusual in nature, it did not satisfy the
infrequency of occurrence criterion because the underlying event or transaction
(a terrorist attack) was not of a type that would not reasonably be expected to
recur in the foreseeable future, taking into account the environment in which
the entity operates.
The events of Hurricane Katrina were similarly not treated as extraordinary, although
there was a question as to whether any losses that were due to the failure of the levees
could be considered extraordinary rather than the losses due to the hurricane itself.
In 2011, the AICPA issued a non-authoritative technical practice Aid (TPA) in
which the AICPA followed the original guidance found in 2001 by stating that losses due
to natural disasters were not extraordinary unless they could satisfy the two criteria for
extraordinary treatment. In that TPA, the AICPA restated previous confirmation that the
magnitude of a transaction does not, in and of itself, result in the transaction being
categorized as extraordinary.
STUDY QUESTION
2. Under GAAP in place prior to the effective date of ASU 2015-01, how has the FASB
opined on how losses incurred as a result of a terrorist attack should be classified?
a. As an extraordinary item
b. As part of income from discontinued operations
c. As part of income from continuing operations
d. As part of retained earnings
International Standards Eliminate Use of Extraordinary Items
Going as far back as 2002, the IASB eliminated the extraordinary item category on the
income statement. IAS 1, Presentation of Financial Statements, states that an entity shall
not present any items of income or expense as extraordinary items, in the statement of
comprehensive income or the separate income statement (if presented), or in the notes.
According to the IASB, items treated as extraordinary result from the normal
business risks faced by an entity and do not warrant presentation in a separate
component of the income statement. The nature or function of a transaction or other
event, rather than its frequency, should determine its presentation within the income
¶ 607
MODULE 2 - CHAPTER 6 - Extraordinary Items
127
statement. Items currently classified as “extraordinary are only a subset of the items of
income and expense that may warrant disclosure to assist users in predicting an entity’s
future performance.
The IASB indicates that the elimination of the category of extraordinary items
eliminates the need for arbitrary segregation of the effects of related external events,
some recurring and others nonrecurring.
¶ 608 TRANSITION AND EFFECTIVE DATE
The amendments in ASU 2015-01 are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. The ASU may be applied
prospectively. It may also be applied retrospectively to all prior periods presented in the
financial statements.
Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public
business entities and all other entities.
For an entity that prospectively applies the guidance, there is a required transition
disclosure, if applicable, that describes both the nature and the amount of an item
included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption.
An entity retrospectively applying the guidance should provide the disclosures in
ASC paragraphs 250-10-50-1 through 50-2, Accounting Changes and Error Corrections,
which state that an entity shall disclose the following in the fiscal period in which a
change in accounting principle is made:
• The nature of and reason for the change in accounting principle, including an
explanation of why the newly adopted accounting principle is preferable
• The method of applying the change, including all of the following:
- A description of the prior-period information that has been retrospectively
adjusted, if any
- The effect of the change on income from continuing operations, net income (or
other appropriate captions of changes in the applicable net assets or performance indicator), any other affected financial statement line item, and any affected
per-share amounts for the current period and any prior periods retrospectively
adjusted. Presentation of the effect on financial statement subtotals and totals
other than income from continuing operations and net income (or other appropriate captions of changes in the applicable net assets or performance indicator)
is not required.
- The cumulative effect of the change on retained earnings or other components
of equity or net assets in the statement of financial position as of the beginning
of the earliest period presented
- If retrospective application to all prior periods is impracticable, disclosure of
the reasons therefore, and a description of the alternative method used to report
the change (see paragraphs 250-10-45-5 through 45-7)
• If indirect effects of a change in accounting principle are recognized, both of the
following shall be disclosed:
- A description of the indirect effects of a change in accounting principle,
including the amounts that have been recognized in the current period, and the
related per-share amounts, if applicable
- Unless impractical, the amount of the total recognized indirect effects of the
accounting change and the related per-share amounts, if applicable, that are
¶ 608
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attributable to each prior period presented Compliance with this disclosure
requirement is practicable unless an entity cannot comply with it after making
every reasonable effort to do so.
Financial statements of subsequent periods do not need to include these disclosures. If
a change in accounting principle has no material effect in the period of change but is
reasonably certain to have a material effect in later periods, the disclosures required
regarding the nature of and reason for the change in accounting principle, including an
explanation of why the newly adopted accounting principle is preferable, shall be
provided whenever the financial statements of the period of change are presented.
If interim financial statements are issued, they must provide the required disclosures in the financial statements of both the interim period of the change and the annual
period of the change.
STUDY QUESTION
3. ASU 2015-01:
a. Is effective for fiscal years beginning after December 15, 2015
b. Does not allow early adoption
c. Does not require any disclosures
d. May not be applied retrospectively
¶ 608
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MODULE 2: FINANCIAL STATEMENT
REPORTING—CHAPTER 7: Development
Stage Entities Reporting
¶ 701 WELCOME
This chapter discusses ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation, issued in June 2014.
¶ 702 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Recognize the current GAAP for reporting on development stage entities
• Identify changes made to the development stage entity rules by ASU 2014-10
• Identify sections of GAAP that are eliminated under ASU 2014-10
• Recognize the transition rules related to ASU 2014-10
¶ 703 INTRODUCTION
The objective of ASU 2014-10 is to improve financial reporting by reducing the cost and
complexity related to the concept of a development stage entity and its current incremental reporting requirements.
¶ 704 BACKGROUND
Current GAAP found in ASC 915, Development Stage Entities, requires a development
stage entity to present the same basic financial statements and apply the same recognition and measurement rules as established entities.
GAAP defines a development stage entity as one that devotes substantially all of its
efforts to establishing a new business and for which either of the following is true:
• Planned principal operations have not commenced.
• Planned principal operations have commenced, but have produced no significant
revenue.
Many startups and even long-lived organizations that have not yet begun their principal
operations or do not have significant revenue would be identified as development stage
entities.
However, beyond what established entities must disclose, ASC 915 requires development stage entities to present additional incremental information that includes all of
the following:
• Presenting inception-to-date information in the statements of income, cash flows,
and shareholder equity
• Labeling the financial statements as those of a development stage entity
• Disclosing a description of the development stage activities in which the entity is
engaged
• Disclosing in the first year in which the entity is no longer a development stage
entity, a reference to the fact in prior years it had been in the development stage.
¶ 704
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The incremental requirements in ASC 915 have resulted in start-up company financial
statements that were potentially more costly to prepare and audit than those of
established operating entities.
Most of the guidance in ASC 915 was previously included in FAS 7, Accounting and
Reporting by Development Stage Enterprises, which has not been amended significantly
since being issued in 1975.
The FASB has observed that users of financial statements of development stage
entities have told the FASB that GAAP’s development stage entity rules offer limited
relevance to financial statement users. Thus, both the inception-to-date information, and
certain other disclosures currently required under GAAP, have little value to users.
More specifically, the FASB notes the following:
• Development stage entities often remain in the development stage for many
years before the preparation of GAAP financial statements may be required and
before engaging an outside auditor.
• Start-up entities may incur significant audit costs related to efforts to gather
inception-to-date cumulative information in preparing their first financial statements under GAAP.
• Development stage entities often issue complex equity instruments, such as
warrants and preferred stock that can require numerous pages of disclosure
when presenting equity transactions from inception to the date for each reporting period.
• Many development stage entities mature or seek to become public companies,
which may result in a change in auditors. The new auditors may have to perform
detailed audit procedures related to the inception-to-date information, which
may result in significant increased costs.
As a result, the FASB added the development stage entity project to its agenda which
led to the November 2013 issuance of an exposure draft, Development Stage Entities
(Topic 915): Elimination of Certain Financial Reporting Requirements. In June 2014, the
FASB issued a final statement as ASU 2014-10, Development Stage Entities (Topic 915):
Elimination of Certain Financial Reporting Requirements, Including an Amendment to
Variable Interest Entities Guidance in Topic 810, Consolidation. ASU 2014-10 affects
entities that are development stage entities under U.S. GAAP.
The ASU amendments simplify accounting guidance by removing all incremental
financial reporting requirements for development stage entities. The amendments also
reduce data maintenance and audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income,
cash flows, and shareholder equity.
Specifically, the ASU makes the following amendments to ASC 915, Development
Stage Entities:
• It removes the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification (ASC), thereby removing the
financial reporting distinction between development stage entities and other
reporting entities from GAAP.
• It eliminates ASC 915 altogether along with the requirements for development
stage entities to:
¶ 704
MODULE 2 - CHAPTER 7 - Development Stage Entities Reporting
131
- Present inception-to-date information in the statements of income, cash flows,
and shareholder equity
- Label the financial statements as those of a development stage entity
Disclose a description of the development stage activities in which the entity is
engaged
- Disclose in the first year in which the entity is no longer a development stage
entity that in prior years it had been in the development stage
• It amends ASC 275, Risks and Uncertainties, to clarify that the risks and
uncertainties disclosure requirements (including the nature of operations) apply
to entities that have not commenced planned principal operations.
• It eliminates an exception related to the sufficiency of equity at risk for development stage entities from the guidance on variable interest entities found in ASC
810, Consolidation. Thus, the same consolidation guidance applies to all reporting entities. The elimination of the exception may change the consolidation
analysis, consolidation decision, and disclosure requirements for a reporting
entity that has an interest in an entity in the development stage.
STUDY QUESTION
1. In deciding to issue ASU 2014-10 with respect to development stage entities, which
one of the following was noted by the FASB as a factor influencing their decision?
a. Development stage entities typically have a short development stage.
b. The disclosures required by GAAP are brief and minimize the cost to the
entity.
c. Few development stage entities go public.
d. It is common for development stage entities to issue complex equity
instruments.
¶ 705 DEFINITIONS
Development Stage Entity: An entity that devotes substantially all of its efforts to
establishing a new business and for which a) Planned principal operations have not
commenced, or b) Planned principal operations have commenced, but have produced
no significant revenue.
Public Business Entity: A public business entity is a business entity meeting any
one of the criteria below (Neither a not-for-profit entity nor an employee benefit plan is a
business entity):
• It is required by the U.S. Securities and Exchange Commission (SEC) to file or
furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial
statements or financial information are required to be or are included in a filing).
• It is required by the Securities Exchange Act of 1934 (the Act), as amended, or
rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
• It is required to file or furnish financial statements with a foreign or domestic
regulatory agency in preparation for the sale of or for purposes of issuing
securities that are not subject to contractual restrictions on transfer.
¶ 705
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
• It has issued, or is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market. It has one or more
securities that are not subject to contractual restrictions on transfer, and it is
required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic
basis (e.g., interim or annual periods). An entity must meet both of these
conditions to meet this criterion.
Variable Interest Entity: An entity that is subject to consolidation according to the
provisions of the Variable Interest Entity Subsections of Subtopic 810-10.
¶ 706 RULES
The Accounting Standards Codification (ASC) is amended to make specific changes
related to development stage entities.
Change 1: Elimination of the Definition of Development Stage Entity
The definition of development stage entity, found in GAAP’s Master Glossary is
eliminated as follows:
The following is removed from GAAP’s Master Glossary altogether:
REMOVED:
Development Stage Entity
An entity devoting substantially all of its efforts to establishing a new business and for which either of
the following conditions exists:
a. Planned principal operations have not commenced, or
b. Planned principal operations have commenced, but there has been no significant revenue
therefrom.
After this change, the term “development stage entity will no longer exist in U.S.
GAAP.
Change 2: ASC 275, Risks and Uncertainties
The language found in ASC 275-10-05-2, Risks and Uncertainties—Overall, is amended to
add to the “nature of operations disclosure information regarding:
. . . the activities in which the entity is currently engaged if principal
operations have not commenced.
ASC 275-10-50-1 through 2 are amended with respect to disclosures of risks and
uncertainties as follows:
Disclosure ASC 275-10-50-1:
• ASC 275-10-50-1 is amended to include in the “nature of operations disclosure
information about “the activities in which the entity is currently engaged if
principal operations have not commenced.
• Reporting entities shall make disclosures in their financial statements about the
risks and uncertainties existing as of the date of those statements in the
following areas (new language is in bold italic):
- Nature of operations, including the activities in which the entity is currently
engaged if principal operations have not commenced
- Use of estimates in the preparation of financial statements
- Certain significant estimates
- Current vulnerability due to certain concentrations
¶ 706
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MODULE 2 - CHAPTER 7 - Development Stage Entities Reporting
Disclosure: ASC 275-10-50-2, Nature of Operations/Activities
ASC 275-10-50-2 is amended to add the following language:
If an entity has commenced planned principal operations, the entity’s financial statements shall include a description of the major products or services
the reporting entity sells or provides and its principal markets, including the
locations of those markets. If the entity operates in more than one business,
the disclosure also shall indicate the relative importance of its operations in
each business and the basis for this determination—for example, assets,
revenues, or earnings. Not-for-profit entities’ (NFPs’) disclosures should
briefly describe the principal services performed by the entity and the
revenue sources for the entity’s services. Disclosures about the nature of
operations or activities need not be quantified; relative importance could be
conveyed by use of terms such as predominately, about equally, or major
and other.
ASC 275-10-50-2A is added to include the following:
An entity that has not commenced principal operations shall provide:
Disclosures about the risks and uncertainties related to the activities in
which the entity is currently engaged and an understanding of what those
activities are being directed toward.
ASU 2014-10 amends ASC 275 to add an illustration of a nature of operations/activities
disclosure when an entity has not commenced operations.
EXAMPLE 1A: Nature of Operations/Activities—Planned Principal
Operations Have Not Commenced
Facts: New Company, Inc. (Company) is a business that has not commenced planned
principal operations. The Company is designed to develop and manufacture specialized
environmental test equipment for measuring air quality. The Company’s first product is
a rapid-result test kit to identify certain airborne contaminants in high-risk environments. The Company’s activities since inception have consisted principally of acquiring
technology patents, raising capital, and performing research and development activities.
The following illustrates disclosure required of the nature of activities for an entity
that has not commenced principal operations. (The ASU amends ASC 275 to use the
term “Nature of Activities when dealing with a company that has not yet commenced
operations.)
NOTE X: Nature of Activities
New Company, Inc. (Company) is a business whose planned principal operations
are the design, engineering, and manufacturing of air quality test equipment. The
Company is currently conducting research and development activities to operationalize certain patented technology that the Company owns so it can manufacture
rapid-result test kits for certain airborne contaminants in high-risk environments.
During the last year, the Company secured a research facility in Norwalk, Connecticut, which houses all of its employees and research and development activities.
The Company also is in the process of raising additional equity capital to support
the completion of its development activities to begin manufacturing the test kits as
soon as possible.
The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding to operationalize the Company’s current
technology before another company develops similar technology and test kits.
¶ 706
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Paragraph 275-10-55-3B is amended to provide the following comments on the
above disclosure:
• Information necessary for financial statement users not familiar with the activities of the Company to identify and consider the broad risks and uncertainties
associated with businesses that have activities that are similar to those in which
the Company is engaged. From the disclosures provided, financial statement
users that have a general knowledge of business matters should be able to
assess both of the following:
- That the Company’s activities are subject to different and varied risks, including the risk that the entity may be affected by the rapidly changing and intensely
competitive technology market
- That the Company is dependent on additional capital resources for the continuation and expansion of its business activities.
• Information that facilitates the overall understanding of the financial information
provided this kind of disclosure could provide users with a basis for understanding the Company’s financial information and comparing that information with
similar entities or other relevant statistics.
STUDY QUESTION
2. Sally Fields, CPA is working on disclosures for her client, Company X, which is a
start-up company. X has not yet commenced operations. By including the disclosure of
risks and uncertainties in ASC 275, which of the following is correct?
a. X is not required to include a use of estimates disclosure.
b. X is required to include a nature of operations disclosure
c. X is not required to include certain significant estimates disclosure.
d. X is not required to include a current vulnerability due to certain concentrations disclosure.
Change 3: Amendment to ASC 810, Consolidations
ASU 2014-10 removes paragraph 810-10-15-16 which states the following:
A development stage entity does not meet the condition to be a variable
interest entity found in ASC 810-10-15-14(a) if (1) the entity can demonstrate
that the equity invested in the legal entity is sufficient to permit it to finance
the activities that it is currently engaged in and (2) the entity’s governing
documents and contractual arrangements allow additional equity
investments.
After the ASU 2014-10 amendment, all entities within the scope of the Variable Interest
Entities Subsections of Subtopic 810-10 are required to evaluate whether the total equity
investment at risk is sufficient using the guidance found in ASC 810-10-25-45 through
25-47, which requires both qualitative and quantitative evaluations.
The term development stage entity is removed from ASC 810-10-15-16 and GAAP
altogether.
NOTE: Under the ASU, all entities within the scope of the Variable Interest
Entities Subsections of Subtopic 810-10 are required to evaluate whether the total
equity investment at risk is sufficient using the guidance provided in paragraphs
810-10-25-45 through 25-47, which requires both qualitative and quantitative evalua-
¶ 706
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MODULE 2 - CHAPTER 7 - Development Stage Entities Reporting
tions. Because the term development stage entity is used in paragraph
810-10-15-16, the definition of a development stage entity has been removed from
the Master Glossary concurrent with the effective date of the amendment removing paragraph 810-10-15-16.
Language eliminated from ASC 810-10-15-16:
Consolidation—Overall - Scope and Scope Exceptions - Variable Interest Entities
ELIMINATED:
Because reconsideration of whether a legal entity is subject to the Variable
Interest Entities Subsections is required only in certain circumstances, the
initial application to a legal entity that is in the development stage is very
important. Guidelines for identifying a development stage entity appear in
paragraph 915-10-05-2.
A development stage entity is a VIE if it meets any of the conditions in
paragraph 810-10-15-14. A development stage entity does not meet the
condition in paragraph 810-10-15-14(a) if it can be demonstrated that the
equity invested in the legal entity is sufficient to permit it to finance the
activities it is currently engaged in (for example, if the legal entity has
already obtained financing without additional subordinated financial support) and provisions in the legal entity’s governing documents and contractual arrangements allow additional equity investments. However, sufficiency
of the equity investment should be reconsidered as required by paragraph
810-10-35-4, for example, if the legal entity undertakes additional activities or
acquires additional assets.
ASC 810-10-65-5 also is amended to include transition guidance to reflect the effects of
eliminating the impact of development stage entities from the variable interest entity
rules. (That guidance is not included in this chapter.)
Change 4: ASC 915, Development Stage Entities, is Eliminated
ASC 915 is eliminated altogether along with all previous requirements related to
development stage entities. Now, all additional disclosures required by a development
stage entity are no longer required, such as the requirements for development stage
entities to:
• Present inception-to-date information in the statements of income, cash flows,
and shareholder equity
• Label the financial statements as those of a development stage entity
• Disclose a description of the development stage activities in which the entity is
engaged, and disclose in the first year in which the entity is no longer a
development stage entity, that in prior years it had been in the development
stage
¶ 707 TRANSITION AND EFFECTIVE DATE
ASU 2014-10 is effective for public business entities for annual reporting periods
beginning after December 15, 2014, and interim periods therein. For all other entities,
the ASU is effective for annual reporting periods beginning after December 15, 2014,
and for interim reporting periods beginning after December 15, 2015.
NOTE: For all entities, the ASU shall be applied retrospectively except for the
clarification to ASC 275, Risks and Uncertainties, which shall be applied
prospectively.
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A public business entity may early adopt the ASU for any annual reporting period
or interim period for which the entity’s financial statements have not yet been issued.
All other entities may early adopt the ASU for financial statements that have not yet
been made available for issue.
STUDY QUESTION
3. Under GAAP prior to the effective date of ASU 2014-10, which of the following has
been information that a development stage entity has had to include in its financial
statements?
a. Must present certain information in its financial statements from the beginning
of the year to the present
b. Must label its financial statements as “pre-operating activities
c. Must describe the development stage activities
d. Must present any development stage activities as a separate section in the
income statement, net of the tax effect or benefit
CPE NOTE: When you have completed your study and review of chapters 4-7, which
comprise Module 2, you may wish to take the Quizzer for this Module. Go to CCHGroup.com/PrintCPE to take this Quizzer online.
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MODULE 3: OTHER CURRENT
DEVELOPMENTS—CHAPTER 8: The Move to
Fair Value Accounting and Other Reporting
Developments
¶ 801 WELCOME
This chapter examines new FASB proposed statements concerning financial performance reporting and fair value accounting. It also reviews significant GAAP changes on
the horizon.
¶ 802 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Identify key proposed changes under the Financial Performance Reporting
Project
• Recognize the impacts of the Financial Performance Reporting Project
• Discuss the changes that will be made under the proposed Financial Instruments—Overall standard
• Explain the changes that will be made as a result of the Financial Instruments—
Credit Losses exposure draft
¶ 803 SIGNIFICANT GAAP CHANGES IN 2015 AND
BEYOND
2015 should continue to be a very active year at the FASB as there are numerous new
statements about to be issued. A key driver to the FASB’s rapid-fire approach is its goal
to accelerate the international convergence project so that U.S. companies will be in a
position to adopt international accounting standards if the SEC mandates the use of
international standards in the future.
Not all of the projects in the works are jointly issued by the FASB and IASB. Many
of them are not part of the international standards project and are being developed and
may be ultimately issued by the FASB alone. What is clear is that companies will have
significant implementation issues as each of these new FASB statements is issued and
the effective date of adoption nears.
FASB Project Schedule as of April 1, 2015
F = final statement expected to be issued in 2015
ISSUANCE DATE
X = FASB expects to issue exposure draft or final statement
after 2015
2015
Beyond
2015
PROJECTS:
Financial Instruments:
Classification and Measurement
F
Impairment
X
Hedging
X
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Interest Rate Disclosures
Leases
Investment Companies: Disclosures about Investments in
Another Investment Company
Financial Statements of Not-for-Profit Entities
Disclosure Framework
Accounting for Goodwill for Public Business Entities and
Not-for-Profits
Accounting for Identifiable Intangible Assets in a Business
Combination for Public Business Entities and Not-for-Profit
Entities
Accounting for Income Taxes: Intra-Entity Asset Transfers
and Balance Sheet Classification of Deferred Taxes
Clarifying the Definition of a Business
Clarifying Certain Existing Principles on Statement of Cash
Flows
Financial Statements of Not-for-Profit Entities
Financial Performance Reporting
Customer’s Accounting for Fees in a Cloud Computing
Arrangement
Accounting Issues in Employee Benefit Plan Financial
Statements (EITF 15-C)
Application of the Normal Purchases and Normal Sales
Scope Exception to Certain Electricity Contracts within
Nodal Energy Markets (EITF 15-A)
Employee Share-Based Payment Accounting Improvements
Simplifying the Subsequent Measurement of Inventory
Simplifying the Measurement Date for Plan Assets
Recognition of Breakage for No-Cash Prepaid Cards (EITF
15-B)
Disclosures Related to Hybrid Financial Instruments That
Contain Bifurcated Embedded Derivatives
PRIVATE COMPANY COUNCIL:
PCC Issue No. 14-01, Definition of a Public Business Entity
(phase 2)
X
X
F
F
X
X
X
X
X
X
F
X
X
X
X
X
X
F
X
F
X
¶ 804 FASB STARTS UP FINANCIAL PERFORMANCE
REPORTING PROJECT
In 2014, the FASB announced that it is starting up its financial statement presentation
project which stalled in 2011. The project has been renamed Financial Performance
Reporting Project. The objective of the project is to evaluate ways to improve the
relevance of information presented in the performance statement (income statement).
The project will explore and evaluate improvements to the performance statement that
would increase the understandability by presenting certain items that may affect the
amount, timing, and uncertainty of an entity’s cash flows.
In July 2010, the FASB staff issued Staff Draft of an Exposure Draft on Financial
Statement Presentation, which reflected the FASB’s and IASB’s cumulative tentative
decisions on financial statement presentation at that time.
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Key proposed changes identified in the Staff Draft included:
• Financial statements would be functionalized and separated into five main
categories as follows:
- Business section
- Financing section
- Income taxes section
- Discontinued operations section
- Multi-category transaction section
• The indirect method of presenting the operating activities section of the statement of cash flows would be replaced by required use of the direct method.
• The use of the term “cash equivalents would be eliminated in the statement of
cash flows and statement of financial position and replaced with the term “cash.
• The statement of comprehensive income would replace the statement of income.
In 2011, the financial statement presentation project was one of the top priorities at the
FASB. But, given the importance of other projects, including revenue recognition,
financial instruments, and leases, the financial statement project was taken off of the
FASB’s docket.
Recently, the FASB brought the financial statement project back to life under the
named Financial Performance Reporting Project. The plan is to bring the project back as
a re-scoping of a research project.
Although the project is in its infancy, the direction of the changes being considered
is significant and would dramatically change the way in which financial statements are
presented. Moreover, the scope of the project is supposed to include both public and
non-public entities, alike.
The FASB has directed the FASB Staff to focus on the following two areas within
the scope of the project:
• A framework for determining an operating performance metric
• Distinguishing between recurring and nonrecurring or infrequently occurring
items within the performance statement
In addition, the project will address potential related changes that may arise in the
following areas:
• Additional disaggregation in the performance (income) statement
• Transparency of remeasurements
• Related changes to segment reporting
• Linkages across the primary statements
Expect this project to gather momentum once the revenue recognition, financial instruments, and leases projects are issued in final form.
Changes in the financial statement format and presentation would have some
obvious impacts as follows:
• The cost of such a change would be significant. Everything from textbooks to
internal and external financial statement formats would have to be changed. The
change to the direct method alone would be costly.
• There could be significant fluctuations in comprehensive income from year to
year as more items are brought onto that statement that were not on the income
statement before.
• Contract formulas for bonuses, joint ventures, etc. that are based on GAAP net
income would have to be rewritten.
• Tax return M-1 reconciliations would differ.
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STUDY QUESTION
1. Which of the following is the FASB proposing would be the category of cash on the
statement of cash flows?
a. Cash equivalents
b. Cash and cash equivalents
c. Cash only
d. Cash and short-term investments
¶ 805 THE CONTINUED MOVE TO FAIR VALUE
ACCOUNTING
Although the FASB’s move toward fair value was slow at its inception, the pace has
certainly picked up in the past few years due, in part, to the Wall Street and banking
troubles and the challenges in valuing the billions of dollars of non-performing bank
loans and mortgage backed securities.
The FASB has two exposure drafts and two research projects pending with respect
to its financial instruments project:
• Exposure Drafts:
- Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities (issued April 2013)
- Financial Instruments—Credit Losses (Subtopic 825-15) (issued December
2012)
• Research Projects:
- Accounting for Financial Instruments—Hedging (initial deliberations, pending)
- Accounting for Financial Instruments—Interest Rate Disclosures (research project, pending)
Financial Instruments—Overall (Subtopic 825-10) Recognition and
Measurement of Financial Assets and Financial Liabilities (issued
April 2013)
As part of its overall financial instrument classification and measurement project, in
February 2013, the FASB issued an exposure draft entitled, Financial Instruments—
Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The February 2013 exposure draft was accompanied by the issuance of a
companion exposure draft issued in April 2013. Collectively, these proposed statements
focus on creating a comprehensive framework for the classification and measurement of
the financial instruments.
Scope
The proposal would apply to financial instruments. A financial instrument is defined as
cash, evidence of an ownership interest in an entity, or a contract that both:
• Imposes on one entity a contractual obligation either:
- To deliver cash or another financial instrument to a second entity, or
- To exchange other financial instruments on potentially unfavorable terms with
the second entity.
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• Conveys to that second entity a contractual right either:
- To receive cash or another financial instrument from the first entity, or
- To exchange other financial instruments on potentially favorable terms with
the first entity.
Balance Sheet Presentation
Depending on an entity’s present rights or obligations in the instrument upon acquisition or incurrence, the proposal would require an entity to recognize a financial
instrument in its statement of financial position as either of the following:
• A financial asset
• A financial liability
NOTE: The scope would apply to financial instruments that would be an
expansion of existing GAAP under ASC 820, which deals with investments in
securities.
Financial Asset Rules
Upon recognition, an entity would classify each financial asset into the appropriate
subsequent measurement category on the basis of both of the following:
• The contractual cash flow characteristics criterion
• The entity’s business model for managing the asset
Contractual Cash Flow Characteristics Criterion
A financial asset would satisfy the contractual cash flow characteristics criterion if the
contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
Business Model for Managing the Assets
An entity that satisfies the contractual cash flow characteristics criterion (above) would
classify a financial asset into one of the following three categories depending on how the
asset is managed:
Proposed Treatment of Financial Instruments Financial Asset
Manner in which asset is managed
Financial statement measurement
1) The asset is held and managed to holding the
asset to collect contractual cash flows.
2) The asset is held and managed to do both of the
following:
a) Hold the financial asset to collect contractual
cash flows
b) Sell the financial asset
At recognition, the entity has not yet
determined whether it will hold the individual
asset to collect contractual cash flows or sell
the asset.
3) The asset fails to qualify for either (1) or (2)
above.
Amortized cost (similar to current rules for held
to maturity securities)
Fair value with the changes in fair value
recognized in other comprehensive income
(similar to current rules for available-for-sale
securities)
Fair value with all changes in fair value
recognized in net income (similar to current rules
for trading securities)
A financial asset that does not meet the contractual cash flow characteristics criterion
would be measured at fair value with all changes in fair value recognized in net income.
All equity investments would be measured at fair value with the change in fair value
presented in net income unless:
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• The equity investment qualifies for the equity method or consolidation, or
• The equity investment does not have a readily determinable fair value
With few exceptions, an equity investment that does not have a readily determinable fair
value would be recognized at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical investment or a similar investment of the same issuer.
STUDY QUESTION
2. In accordance with the FASB exposure draft on financial instruments, how would
equity investments be measured?
a. At cost
b. At fair value with the change presented in net income
c. At fair value with the change presented as part of other comprehensive income
d. At lower of cost or market
Financial Liability Rules
An entity would measure its financial liabilities at amortized cost.
Exception. An entity would subsequently measure a liability that meets either of
the following conditions at fair value with all changes in fair value recognized in net
income:
• The entity’s business strategy at incurrence of the liability is to subsequently
transact at fair value, for example, to transfer the obligation to a third party
• The financial liability results from a short sale
Selected Treatment of Assets
Following is a summary of how certain financial instruments (assets and liabilities)
would be measured under the proposed standard:
Financial Instrument
Trade receivables and payables
Loans and notes receivable
Derivatives:
Those derivatives designed as the hedging
instrument in a cash flow hedge or a hedge of a
net investment in a foreign operation
All other derivatives
Debt instruments
Equity instruments (other than equity method)
Equity investments without readily determinable
fair value
Long-term debt
Proposed Category
Generally at cost
Generally at cost
FV with change in other comprehensive income
(OCI)
FV with change in net income
Cost or FV
FV with change in net income
FV with change in net income
Special exception: Measured at cost, adjusted for
both impairment and changes that result from
observable prices changes
Generally at cost
The proposal would require that an impairment loss be recognized in net income equal
to the entire difference between the investment’s carrying value and its fair value if an
impairment exists.
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Financial Statement Presentation
Balance sheet presentation. An entity would present financial assets and financial
liabilities separately on the face of the statement of financial position, grouped by
measurement category. For financial assets and liabilities measured at amortized cost, a
public entity would be required to present parenthetically on the face of the balance
sheet the fair value.
NOTE: The parenthetical disclosure would not apply to nonpublic entities.
Moreover, receivables and payables due in less than one year would not be subject
to parenthetical disclosure of fair value.
All entities would be required to separately present cumulative credit losses on the face
of the statement of financial position. All entities would be required to present
parenthetically (on the face of the statement of financial position) the amortized cost of
an entity’s own debt that is measured at fair value.
Statement of comprehensive income. An entity would be required to present in
net income an aggregate amount for realized and unrealized gains or losses for financial
assets measured at fair value with all changes in fair value included in net income.
An entity would be required to separately present the following items in net income
for both financial assets measured at fair value with changes in value recognized in
other comprehensive income and financial assets measured at amortized cost:
• Interest income or expense
• Changes in expected credit losses
• Realized gains or losses from sales or settlements
An entity would be required to present in net income an aggregate amount for realized
and unrealized gains or losses for financial liabilities measured at fair value with all
changes in fair value recognized in net income.
At a minimum, an entity would be required to present separately within net income
all of the following for financial assets (and certain financial liabilities) for which
qualifying changes in fair value are recognized in other comprehensive income:
• Interest income or expense for the current period, including amortization (accretion) of deferred interest
• Premium (discount) recognized upon acquisition or incurrence
• Changes in expected credit losses on financial assets for the current period
• Realized gains and losses from sales or settlements
• Foreign currency gain and loss
There would be changes made to the fair value option found in ASC 825 that would
permit use of the fair value option on a conditional basis only, and, only for a group of
financial assets or liabilities. Disclosures of financial instruments would be expanded
including information on liquidity risk with financial institutions disclosing information
on interest rate risk.
The FASB is expected to issue the Financial Instruments—Overall (Subtopic
825-10) Recognition and Measurement of Financial Assets and Financial Liabilities as a
final statement sometime in 2015.
Financial Instruments—Credit Losses (Subtopic 825-15)
In December 2012, the FASB issued an exposure draft entitled, Financial Instruments—
Credit Losses (Subtopic 825-15). As of early 2015, the exposure draft is pending. The
main objective of the exposure draft is to provide financial statement users with more
information about the expected credit losses on financial assets and other commitments
to extend credit held by a reporting entity at each reporting date. The Exposure Draft
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would apply to all entities that hold financial assets that are not accounted for at fair
value through net income and are exposed to potential credit risk would be affected by
the proposed amendments.
Examples include:
• Loans
• Debt securities
• Trade receivables
• Lease receivables
• Loan commitments
• Reinsurance receivables
• Any other receivables that represent the contractual right to receive cash would
generally be affected by the proposed amendments
The Exposure Draft would:
• Replace the current impairment model, which reflects incurred credit events,
with a model that recognizes expected credit risks and requires consideration of
a broader range of reasonable and supportable information to inform credit loss
estimates
• Reduce complexity by replacing the numerous existing impairment models in
current U.S. GAAP with a consistent measurement approach
Here are some of the proposed amendments found in the Exposure Draft:
• The proposal would require an entity to impair its existing financial assets on the
basis of the current estimate of contractual cash flows not expected to be
collected on financial assets held at the reporting date.
• The impairment would be reflected as an allowance for expected credit losses.
• The proposed amendments would remove the existing “probable threshold in
U.S. GAAP for recognizing credit losses, and broaden the range of information
that must be considered in measuring the allowance for expected credit losses.
• An estimate of expected credit losses would always reflect both the possibility
that a credit loss results and the possibility that no credit loss results. Accordingly, the proposed amendments would prohibit an entity from estimating
expected credit losses solely on the basis of the most likely outcome (i.e., the
statistical mode).
• Financial assets carried at amortized cost less an allowance would reflect the
current estimate of the cash flows expected to be collected at the reporting date,
and the income statement would reflect credit deterioration (or improvement)
that has taken place during the period.
• For financial assets measured at fair value with changes in fair value recognized
through other comprehensive income, the balance sheet would reflect the fair
value, but the income statement would reflect credit deterioration (or improvement) that has taken place during the period.
• An entity would be able to choose to not recognize expected credit losses on
financial assets measured at fair value, with changes in fair value recognized
through other comprehensive income, if both:
- The fair value of the financial asset is greater than (or equal to) the amortized
cost basis.
- Expected credit losses on the financial asset are insignificant.
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STUDY QUESTION
3. Which of the following is not one of the proposed amendments in the Credit Losses
Exposure Draft?
a. An impairment would be reflected as an allowance for expected credit losses.
b. An estimate of expected credit losses would always reflect both the possibility
that a credit loss results and the possibility that no credit loss results.
c. For financial assets measured at fair value with changes in fair value recognized through other comprehensive income, the income statement would
reflect credit deterioration that has taken place during the period.
d. It requires an entity to impair its existing financial assets based on contractual
cash flows not expected to be collected on financial assets held at the reporting
date.
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MODULE 3: OTHER CURRENT
DEVELOPMENTS—CHAPTER 9: Business
Combinations: Pushdown Accounting
¶ 901 WELCOME
This chapter reviews the rules, transition date, and details of ASU 2014-17, Business
Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging
Issues Task Force).
¶ 902 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Identify the acquiree in a business combination that may qualify for pushdown
accounting
• Recognize the types of entities for which pushdown accounting is and is not
available
• State the date as of which pushdown accounting should be applied
¶ 903 INTRODUCTION
The objective of ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting
(a consensus of the FASB Emerging Issues Task Force), issued in November 2014, is to
provide guidance on whether and at what threshold an acquired entity that is a business
or nonprofit activity can apply pushdown accounting in its separate financial statements.
¶ 904 BACKGROUND
There has been limited U.S. GAAP guidance for determining when, if ever, an acquiring
entity’s cost of acquiring another entity should be used to establish a new accounting
and reporting basis (pushdown) in the acquired entity’s standalone financial statements.
Pushdown accounting refers to establishing a new accounting basis for an acquired
entity (acquiree) in its separate standalone financial statements. Use of pushdown
accounting is triggered when an acquirer obtains control of an acquiree in a business
combination.
EXAMPLE: Company A (acquirer) purchases 100 percent of the voting stock
of Company B (acquiree) from an unrelated third party for $30 million. Company
B’s net book value of its equity was $4 million immediately prior to the acquisition,
and Company B will continue to issue its own separate standalone financial
statements after the acquisition.
Conclusion: If pushdown accounting were applied, Company B would establish a
new basis for its net assets equal to $30 million in its own separate standalone
financial statements. That is, B would revalue its balance sheet to reflect the $30
million of net asset value as if the transaction had been an asset purchase, not a
stock purchase.
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Existing GAAP
Existing GAAP does not require nonpublic companies to use pushdown accounting.
Conversely, SEC companies have been required by SEC rules to use pushdown
accounting in certain cases. Thus, existing GAAP has provided no requirement or
guidance as to when, if ever, a nonpublic entity should or may use pushdown
accounting.
The authority for SEC companies to use pushdown accounting has been found in
the following guidance that was codified into FASB ASC 805-50-S99-1 through 4,
applicable to SEC companies only, as follows:
• SEC Staff Accounting Bulletin Topic No. 5.J, New Basis of Accounting Required in
Certain Circumstances
• EITF Topic No. D-97, Pushdown Accounting
• Other comments made by the SEC Observer at EITF meetings
SEC Guidance on Pushdown Accounting
Prior to the issuance of ASU 2014-17, SEC guidance has followed certain rules in
applying pushdown accounting to an SEC registrant:
• If a purchase transaction results in an entity becoming substantially wholly
owned, its standalone financial statements should be adjusted to reflect the new
basis of accounting of the acquiring entity.
• Pushdown accounting is:
- Required when 95 percent or more of an entity is acquired
- Permitted when 80 to 95 percent is acquired
- Prohibited when less than 80 percent ownership is acquired
NOTE: Pushdown accounting assumes that due to the purchase transaction,
the acquired entity (acquiree) is within the control of the acquiring entity (acquirer). Other interests, such as outstanding public debt, preferred stock, or a
significant non-controlling interest, however, may impact the acquired entity’s
ability to adjust its standalone financial statements to reflect the acquiring entity’s
basis of accounting.
The SEC staff’s guidance also indicates that holdings of investors, who both mutually
promote the acquisition and collaborate on the subsequent control of the acquired
entity, should be aggregated for the purposes of determining whether the acquired
entity has become substantially wholly owned.
When applying pushdown accounting to an SEC company, there have been a few
nonauthoritative rules that have been followed:
• The assets and liabilities of the target should be grossed up to fair value.
• Acquisition debt is pushed down to the target in certain cases where the target
assumes the debt or the target pledges its assets as collateral for the debt,
among other situations.
• The buyer’s equity accounts should not be pushed down to the target
subsidiary.
• The target’s common stock account should reflect the par value of its issued
shares, and its additional paid-in capital account should represent the difference
between the recorded net assets and the sum of the par value of its issued
shares, and the amount of any preferred stock outstanding.
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• In the financial statements and footnotes, periods prior to the application of
pushdown accounting should be separated from the periods after the application
of pushdown accounting.
• Acquisition costs incurred by the buyer should not be pushed down to the
target’s standalone financial statements.
• Any gain from a bargain purchase recorded by the buyer when applying the
acquisition method is not pushed down to the target’s standalone income
statement.
Because the SEC staff’s guidance has applied only to SEC registrants, no guidance has
existed for the application of pushdown accounting to entities that are not SEC registrants. Thus, for example, a nonpublic entity has had no guidance as to how and when
to apply pushdown accounting.
In the absence of relevant GAAP guidance, non-SEC registrants have had to look to
the SEC staff guidance to determine whether and at what threshold they should apply
pushdown accounting in their separate financial statements.
The History of Pushdown Accounting and Nonpublic Entities
Historically, nonpublic (non-SEC) entities have not been required to follow the SEC
staff’s pushdown accounting guidance. While there has been no authoritative guidance
on pushdown accounting for non-SEC registrants, nothing in GAAP has precluded a
nonpublic entity from following SEC guidance on pushdown accounting. Thus, a nonSEC company could choose to apply pushdown accounting if the related SEC requirements were met.
The issue of whether pushdown accounting should apply to nonpublic entities has
been around for decades, but has not resulted in the issuance of any authoritative
guidance.
Some GAAP documents have addressed pushdown accounting but a consensus has
been reached in limited cases as follows:
• EITF Issue No. 86-9, IRC Section 338 and Pushdown Accounting
• EITF Issue No. 87-21, Change of Accounting Basis in Master Limited Partnership
Transactions
Both of the previously noted EITF Issues are currently codified in ASC Subtopic 805-50,
Business Combinations—Related Issues.
Going as far back as 1979, the AICPA Task Force on Consolidation Problems
discussed pushdown accounting in its October 30, 1979 non-authoritative Issues Paper,
Pushdown Accounting. The Issues Paper developed some advisory conclusions but no
authoritative guidance was issued.
In addition, the FASB considered the issue in its Discussion Memorandum, New
Basis Accounting, published on December 18, 1991. The Discussion Memorandum was
issued as part of the FASB’s broader project on consolidations but no further decisions
were reached by the FASB on pushdown accounting after its issuance.
Since the SEC staff’s guidance has only been mandatory for SEC registrants,
variation in practice has existed on the application of pushdown accounting to nonpublic
entities.
The issue that the FASB EITF decided to address is whether an acquired entity
(acquiree) should establish a new accounting basis in its standalone financial statements due to a change in its ownership as a result of a transaction accounted for as a
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business combination by the acquiring entity. If so, what would be the level of
ownership at which the new accounting basis should be required?
STUDY QUESTION
1. Company X, a public company, acquires 70 percent of the common stock of
Company Y. Which of the following is correct with respect to whether Y can use
pushdown accounting to account for the acquisition of Y’s common stock under SEC
rules in effect prior to the effective date of ASU 2014-17?
a. Y is required to use pushdown accounting.
b. Y is permitted to use pushdown accounting.
c. Y is prohibited from using pushdown accounting.
d. There is no authority to address the issue.
New ASU 2014-17 Adds Pushdown Accounting Guidance to All
Entities
As a result of the limited overall guidance in using pushdown accounting, particularly
for non-SEC entities, in April 2014, the FASB issued an exposure draft entitled, Business
Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging
Issues Task Force).
In November 2014, the exposure draft was issued as a final statement as ASU
2014-17, Business Combinations (Topic 805): Pushdown Accounting.
What ASU 2014-17 Does
• It amends ASC 805, Business Combinations, and provides specific guidance on
using pushdown accounting for all entities, SEC and non-SEC alike.
• It applies to the separate financial statements of an acquired entity and its
subsidiaries that are a business or nonprofit activity (either public or nonpublic).
• It provides an option under which an acquired entity may elect to apply
pushdown accounting in its separate financial statements upon a change-incontrol event in which an acquirer (individual or entity) obtains control of the
acquired entity.
• The change-in-control threshold used in the ASU is consistent with the threshold for change-in-control events found in ASC 805, Business Combinations, and
ASC 810, Consolidation.
¶ 905 DEFINITIONS
The ASU amends ASC 805 to reflect the following definitions:
Acquiree: The business or businesses that the acquirer obtains control of in a
business combination. This term also includes a nonprofit activity or business that a notfor-profit acquirer obtains control of in an acquisition by a not-for-profit entity.
Acquirer: The entity that obtains control of the acquiree. However, in a business
combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.
Acquisition Date: The date on which the acquirer obtains control of the acquiree.
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Business: An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the form of dividends,
lower costs, or other economic benefits directly to investors or other owners, members,
or participants.
Business Combination: A transaction or other event in which an acquirer obtains
control of one or more businesses.
Control: The same as the meaning of controlling financial interest in ASC
810-10-15-8, which is ownership of a majority voting interest, directly or indirectly. The
power to control may also exist with a lesser percentage of ownership, by contract,
lease, agreement with other stockholders, or by court decree.
Nonprofit Activity: An integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing benefits, other than goods
or services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or
mission (e.g., goods or services to beneficiaries, customers, or members). As with a notfor-profit entity, a nonprofit activity possesses characteristics that distinguish it from a
business or a for-profit business entity.
Pushdown Accounting: Use of the acquirer’s basis in the preparation of the
acquiree’s separate financial statements.
Scope of ASU 2014-17
The rules for pushdown accounting found in ASU 2014-17 apply to the separate financial
statements of:
• An acquiree
• Any subsidiaries of an acquiree
An acquiree (or its subsidiaries) must be either a business or a non-profit activity.
An acquiree (and its subsidiaries) can be an SEC, non-SEC, or nonprofit entity.
The guidance of pushdown accounting does not apply to certain transactions identified
in ASC 805-10-15-4 as follows:
• The formation of a joint venture
• The acquisition of an asset or group of assets that does not constitute a business
or non-profit activity
• A combination between entities, businesses, or nonprofit activities under common control
• An acquisition by a not-for-profit entity for which the acquisition date is before
December 31, 2009, or a merger of not-for-profit entities
• A transaction or other event in which a not-for-profit entity obtains control of a
not-for-profit entity but does not consolidate that entity.
SEC SAB 115 Rescission of SEC Topic 5.J
SEC rescinds SEC Topic 5.J so that pushdown accounting is no longer required for SEC
registrants. SEC registrants are permitted, but not required, to elect pushdown accounting using the guidance found in ASU 2014-17, not SEC Topic 5.J. The 80 percent to 95
percent threshold for using pushdown accounting for SEC registrants is gone.
OBSERVATION: On November 18, 2014, the SEC issued Staff Accounting
Bulletin (SAB) 115 which rescinds the SEC guidance previously issued for SEC
registrants in SEC Topic 5.J. That previous guidance permitted SEC registrants to
use pushdown accounting when there is ownership of 80 percent or more of an
acquiree. At 95 percent or more ownership, pushdown accounting was required.
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With the elimination of SEC Topic 5.J and the 80 percent or greater threshold, SEC
registrants now have the option (not requirement) to use pushdown accounting
when there is a change-in-control event. That change in control may occur when an
entity (acquirer) acquires more than 50 percent of the voting shares of an acquiree.
Thus, ASU 2014-17’s threshold for using pushdown accounting (more than 50
percent of the voting interest) is far lower than the 80 percent or greater threshold
previously found in SEC Topic 5.J.
ASU 2014-17 Rules
An acquiree (or its subsidiaries) shall have the option to apply pushdown accounting in
its separate financial statements when an acquirer (an entity or individual acquirer)
obtains control of the acquiree (e.g., there is a change-in-control event).
• The activity of obtaining control is referred to as a “change-in-activity” event.
• Any subsidiary of an acquiree also is eligible to make an election to apply
pushdown accounting to its separate financial statements regardless of whether
the acquiree elects to apply pushdown accounting.
EXAMPLE: Company S owns subsidiaries S1 and S2. Company P acquires
100 percent of the voting interest of Company S. Company S chooses not to elect
pushdown accounting.
Conclusion: Although S does not elect pushdown accounting, either or both of S’s
subsidiaries, S1 and S2, can make an independent election to apply pushdown
accounting.
An acquirer might obtain control (change-in-control event) of an acquiree in several
ways which include any of the following:
• By transferring cash or other assets
• By incurring liabilities
• By issuing equity interests
• By providing more than one type of consideration
• Without transferring consideration, including by contract alone
If there is a transaction in which one party loses control without another party gaining
control, such a transaction is not considered a change-in-control event to which
pushdown accounting would apply.
NOTE: ASC 805-10-25-11 provides the following examples of situations in
which control occurs without transferring consideration:
• The acquiree repurchases a sufficient number of its own shares for an
existing investor (the acquirer) to obtain control.
• Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting interest.
• The acquirer and acquiree agree to combine their businesses by contract
alone and the acquirer transfers no consideration in exchange for control of
an acquiree and holds no equity interests in the acquiree, either on the
acquisition date or previously. Examples including bringing two businesses
together in a stapling arrangement or forming a dual-listed corporation.
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STUDY QUESTION
2. Company P acquires 80 percent of Company S. As a result of the transaction, P
obtains control of S. Company S has two subsidiaries, Company X and Y. Company S
does not elect pushdown accounting. Which of the following is correct as it relates to
use of pushdown accounting?
a. P may use pushdown accounting.
b. Even though S elects not to use pushdown accounting, that election is not
available to S anyway.
c. X may not use pushdown accounting unless S makes the pushdown accounting
election.
d. Y may use pushdown accounting.
Definition of Control for Purposes of Determining Change in Control
Control exists if an acquirer obtains a “controlling financial interest” in an acquiree, as
defined in ASC 810-10-15-8 which includes obtaining either of the following:
• Ownership of a majority (more than 50 percent) voting interest in the acquiree
• Power to control the acquiree through contract, lease, agreement with other
shareholders, or by court decree
NOTE: A primary beneficiary has a controlling financial interest in a VIE.
Determining the Acquirer and Acquiree in Business Combinations
Involving More Than Two Entities
The ASU provides some limited guidance in determining which entity is the acquiree
and which is the acquirer in certain cases.
The ASU states that the guidance in ASC Subtopic 810-10, Consolidation—Overall,
related to determining the existence of a controlling financial interest, shall be used to
identify the acquirer. If a business combination has occurred but it is not clear which of
the combining entities is the acquirer, the ASU 2014-07 references certain factors found
in paragraphs 805-10-55-11 through 805-10-55-15 that shall be considered in identifying
the acquirer.
Those factors include the following:
• The acquirer usually is the entity that transfers the cash or other assets or
incurs the liabilities, in instances where the business combination is effected
primarily by transferring cash or other assets or by incurring liabilities.
• The acquirer usually is the entity that issues its equity interests if the business
combination is effected primarily by exchanging equity interests.
• The acquirer usually is the combining entity whose relative size is significantly
larger than that of the other combining entity or entities, measured in assets,
revenue or earnings.
• In a business combination involving more than two entities, consideration
should be given to factors such as which of the entities initiated the combination, and the relative size of the combining entities.
As to the acquiree, if the acquiree is a VIE, the primary beneficiary of the acquiree
always is the acquirer. The determination of which party, if any, is the primary
beneficiary of a VIE shall be made in accordance with the guidance in ASC Subtopic
810-10, Consolidation—Overall.
The acquiree’s option to apply pushdown accounting may be elected each time
there is a change-in-control event in which an acquirer obtains control of the acquiree.
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An acquiree shall make an election to apply pushdown accounting for the reporting
period in which the change-in-control occurred as follows:
• For an SEC filer and a conduit bond obligor: Before the financial statements are
issued
• For all other entities: Before the financial statements are available to be issued.
If the acquiree elects the option to apply pushdown accounting, it must apply it as of the
acquisition date of the change-in-control event. If the acquiree does not elect to apply
pushdown accounting upon a change-in-control event, it can elect to apply pushdown
accounting to its most recent change-in-control event in a subsequent reporting period
as a change in accounting principle in accordance with ASC 250, Accounting Changes
and Error Corrections.
Any subsidiary of an acquiree is eligible to make an election to apply pushdown
accounting to its separate financial statements irrespective of whether the acquiree
elects to apply pushdown accounting.
The decision to apply pushdown accounting to a specific change-in-control event if
elected by an acquiree is irrevocable.
NOTE: Because the election is irrevocable, a reduction of the equity held by a
controlling party to a non-controlling level would not result in the acquiree stopping use of pushdown accounting.
If an acquiree elects the pushdown accounting option, the acquiree applies the following
rules:
• The acquiree reflects in its separate financial statements the new basis of
accounting established by the acquirer for its individual assets and liabilities by
applying the acquisition method rules found in ASC 805, Business Combinations.
Under the acquisition method, identified assets and acquired liabilities of the
acquirer are recorded at fair value at the acquisition date.
• An acquiree shall recognize goodwill that arises because of the application of
pushdown accounting in its separate financial statements.
• Bargain purchase gains recognized by the acquirer, if any, shall not be recognized (pushed down) in the acquiree’s income statement. The acquiree shall
recognize the bargain purchase gains recognized by the acquirer as an adjustment to additional paid-in capital (or net assets of a not-for-profit acquiree).
• An acquiree shall recognize in its separate financial statements any acquisitionrelated liability incurred by the acquirer only if the liability represents an obligation of the acquiree in accordance with other applicable ASC Topics. Acquisition
costs of the acquirer would generally not be pushed down to the acquiree unless
the acquiree is an obligor of those costs.
NOTE: ASU 2014-08 states that any acquisition-related liability incurred by
the acquirer should be recognized in the acquired entity’s separate financial
statements only if the acquired entity is required to recognize a liability in accordance with other applicable GAAP (e.g., an acquiree might be required to record a
joint and several liability arrangement under ASC 405-40, Liabilities—Obligations
Resulting from Joint and Several Liability Arrangements. The FASB EITF referred to
the definition of a liability in FASB Concepts Statement No. 6, Elements of Financial
Statements, which states that “liabilities are probable future sacrifices of economic
benefits arising from present obligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of past transactions or
events.
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• Deferred income taxes measured and recorded by the acquirer related to the
business combination would also be pushed down to the acquiree’s balance
sheet.
• If the acquirer did not establish a new basis of accounting for the individual
assets and liabilities of the acquiree because it was not required to record the
assets and liabilities at fair value under ASC 805, the acquiree shall still reflect
the new basis of accounting in its separate financial statements as if the acquirer
had valued the acquired assets and liabilities at fair value under ASC 805.
Examples where the acquirer is not required to record the assets and liabilities at fair
value include:
• Acquirer is an individual.
• Acquirer is an investment company following the guidance in ASC 946.
EXAMPLE 1: John Smith acquires 100 percent of the voting shares of
Company X for $5 million. Because John (the acquirer) is an individual, John does
not record the assets and liabilities at fair value.
Conclusion: Although John does not record the assets and liabilities acquired at
fair value, Company X (acquiree) can elect pushdown accounting and revalue its
assets and liabilities at $5 million.
• Once pushdown accounting is elected, the decision is irrevocable and cannot be
reversed.
A new basis of accounting is not appropriate for any of the following transactions that
create a master limited partnership:
• A rollup in which the general partner of the new master limited partnership was
also the general partner in some or all of the predecessor limited partnerships
and no cash is involved in the transaction. Transaction costs in a rollup shall be
charged to expense.
• A dropdown in which the sponsor receives one percent of the units in the master
limited partnership as the general partner and 24 percent of the units as a
limited partner, the remaining 75 percent of the units are sold to the public, and
a two-thirds vote of the limited partners is required to replace the general
partner
• A rollout
• A reorganization
STUDY QUESTIONS
3. Company P acquires some of the voting interest in Company S. Which of the
following is a situation in which Company P (the acquirer) does not obtain control of
Company S (the acquiree) in a business combination?
a. If P obtains a total of 20-50 percent of the voting interest in S
b. If P obtains 80 percent of the voting interest in S
c. If P has the power to control S through a contract
d. If P is the primary beneficiary of S and S is a VIE
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4. Company P (the acquirer) acquires 100 percent of the voting interest in Company S
(the acquiree). Which of the following is correct if S elects to use pushdown
accounting?
a. S is not permitted to recognize goodwill in applying pushdown accounting.
b. S is permitted to recognize any bargain purchase gains recognized by the
acquirer.
c. S should use the book value method in applying pushdown accounting.
d. S should use the acquisition method in applying pushdown accounting.
5. Company X acquires a controlling financial interest in Company Y. Company Y
elects to apply pushdown accounting and does so in Year One, the year in which the
change-in-control event occurs. Which of the following is correct?
a. Y may reverse its use of pushdown accounting in Year Two.
b. Y may not reverse its use of pushdown accounting in Year Two.
c. Y may reverse its use of pushdown accounting only after five years of its use.
d. Y may reverse its use of pushdown accounting in a subsequent year in which X
loses it controlling financial interest in Y.
Subsequent Measurement
An acquiree shall follow the subsequent measurement guidance in other Subtopics of
ASC 805 and other applicable Topics to subsequently measure and account for its
assets, liabilities, and equity instruments, as applicable.
Common Control Transactions
ASU 2014-17 states that the pushdown accounting guidance does not apply to certain
transactions, one of which is a combination between entities, businesses, or nonprofit
activities under common control. Examples of transactions between entities under
common control, found in ASC 805-50-15-6, Business Combinations—Related Issues,
follow:
• An entity charters a newly formed entity and then transfers some or all of its net
assets to that newly chartered entity.
• There is a change in legal organization but not a change in the reporting entity
such as:
- A parent transfers the net assets of a wholly owned subsidiary into the parent
and liquidates the subsidiary.
- A parent transfers its controlling interest in several partially owned subsidiaries
to a new wholly owned subsidiary.
• A parent exchanges its ownership interests or the net assets of a wholly owned
subsidiary for additional shares issued by the parent’s less-than-wholly owned
subsidiary, thereby increasing the parent’s percentage of ownership in the lessthan-wholly owned subsidiary but leaving all of the existing noncontrolling
interest outstanding.
• A parent’s less-than-wholly owned subsidiary issues its shares in exchange for
shares of another subsidiary previously owned by the same parent, and the
noncontrolling shareholders are not party to the exchange.
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• A limited liability company is formed by combining entities under common
control.
• Two or more not-for-profit entities that are effectively controlled by the same
board members transfer their net assets to a new entity, discover the former
entities, and appoint the same board members to the newly combined entity.
Is an acquiree required to record an acquisition debt incurred by the
acquirer to consummate the acquisition of the acquiree?
It depends on whether the acquiree is required to record that liability under other
GAAP.
More specifically, ASU 2014-17 states that under the pushdown accounting rules,
any acquisition-related liability incurred by the acquirer should be recognized in the
acquiree’s separate financial statements only if the acquiree is required to recognize the
liability in accordance with other GAAP.
The ASU also states that the definition of a liability is based on the one found in
FASB Concepts Statement No. 6, Elements of Financial Statements, which defines a
liability as:
“probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other
entities in the future as a result of past transactions or events.
That means that acquisition debt incurred by the acquirer will be “pushed down to the
acquiree if the acquiree is jointly obligated for that debt as a co-borrower and not as a
guarantor.
More specifically, ASC Subtopic 405-40, Liabilities—Obligations Resulting from Joint
and Several Liability Arrangements, addresses the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. One example
of a joint and several liability arrangement is where two entities are co-borrowers such
as when an acquirer and acquiree are borrowers on the same acquisition debt.
Under ASC 405-40:
• An entity (such an acquiree) shall recognize obligations resulting from joint and
several liability arrangements where the total amount under the arrangement is
fixed at the reporting date.
• Obligations resulting from joint and several liability arrangements where the
total amount under the arrangement is fixed at the report date, shall be measured
as the sum of the following:
- The amount the reporting entity (acquiree, in this case) agreed to pay on the
basis of its arrangement among its co-obligors
- Any additional amount the reporting entity expects to pay on behalf of its coobligors, using the guidance similar to the rules found in ASC 450, Contingencies
Using the rules found in ASC 450-40, an acquiree who is a co-borrower of debt
along with the acquirer, would be required to “push down that debt to its new basis
balance sheet under pushdown accounting. The reason is because ASC 450-40 requires
the acquiree to record the debt as a GAAP liability because the acquiree is a co-obligor
of that debt under a joint and several arrangement.
If, instead, the acquiree is merely a guarantor of the acquisition debt and the
acquirer is the sole borrower, the acquiree would not push down that acquisition debt to
its balance sheet.
Why? ASC 450-40 applies to a situation in which an entity is a co-borrower, and not
a guarantor. Therefore, if an entity is a guarantor, the entity must follow the rules found
in ASC 460, Guarantees, which states:
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• At the inception of a guarantee, the guarantor shall recognize in its statement of
financial position a liability for that guarantee at the fair value of the guarantee.
• ASC 460 does not apply to related party guarantees. Therefore, if an entity
guarantees the debt of a related party, the guarantor (acquiree in this case) is
not required to record a liability.
Therefore, if an acquiree guarantees the acquisition debt of the acquirer in a business
combination, the acquiree does not push down that debt to the acquiree’s new basis
balance sheet. The reason is because GAAP does not require the acquiree to record a
liability for a related party guarantee.
EXAMPLE 1: Company P (acquirer) acquires 100 percent of the voting
equity of Company S (acquiree) for $20 million. P had no ownership in S prior to
this acquisition. As part of that acquisition, P borrows $15 million of bank financing. The financing is secured by the assets of S, but S is not a borrower. The
acquisition is a change-in-control event in that P is obtaining control of S through
the transaction. S elects pushdown accounting for the $20 million acquisition of P.
Conclusion: S will revalue its balance sheet by pushing down the $20 million of
P’s acquisition value. In doing so, the net assets and liabilities of S are revalued at
fair value to reflect the $20 million value. S will not push down the $15 million of P’s
acquisition debt. The reason is because S is only a guarantor of that debt and not a
borrower. Thus, under GAAP, S does not record a liability for the guarantee of
related party debt under ASC 460’s rules.
EXAMPLE 2: Same facts as Example 1 except that S is a co-borrower of the
$15 million bank loan.
Conclusion: As part of implementing pushdown accounting, S should record the
$15 million of acquisition debt because S is jointly and severally liable for that debt
as a co-borrower.
Is an acquiree permitted to change from pushdown accounting once
it is elected?
No. Paragraph 805-50-25-9 of the ASU states that “the decision to apply pushdown
accounting to a specific change-in-control event, if elected, by an acquiree is
irrevocable.
This means that if an acquiree elects to use pushdown accounting for a change-incontrol event, once elected, the acquiree is not permitted to stop using pushdown
accounting.
What if the change-in-control event occurs that results in a loss of
control by the acquirer? Is the acquiree required to stop using
pushdown accounting?
The ASU is quite clear that once pushdown accounting is elected, it is irrevocable.
Therefore, a subsequent loss in control (controlling financial interest) by an acquirer of
an acquiree should have no effect on the acquiree’s use of pushdown accounting.
Is each change-in-control event evaluated separately in terms of
whether an acquiree may elect pushdown accounting?
Paragraph BC17 of ASU 2014-17 states that an acquired entity (acquiree) should
evaluate separately the option to apply pushdown accounting at each change-in-control
event and that the guidance should not be treated as a one-time accounting policy
election.
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Every change-in-control event is a distinct event and, therefore, an acquiree should
make its pushdown accounting election on the basis of the facts and circumstances and
the needs of its users for each distinct change-in-control event. Moreover, in the final
ASU, the FASB clarified that the option to elect pushdown accounting can be made
before the financial statements of the reporting period in which the change-in-control
event occurred are issued or are available to be issued.
What happens if control shifts from one party to another? Does that
fact mean there is a change-in-control event?
No. If there is a transaction in which one party loses control of an acquiree without
another party gaining control, such a transaction is not considered a change-in-control
event to which pushdown accounting would apply. However, if one majority owner sells
its equity to a new majority owner, that sale is a change-in-use event for which the
subsidiary may apply pushdown accounting to the transaction.
EXAMPLE: Company P acquires 100 percent of the equity of Company S. S
applies pushdown accounting on the acquisition date. Two years later, Company P
sells its 100 percent interest to Company P1.
Conclusion: The sale of the equity from P to P1 is a change-in-control event for
which S may once again elect to apply pushdown accounting.
If there are multiple acquirees, is only one acquiree permitted to use
pushdown accounting?
No. Although there is only one acquirer in a business combination, there can be several
acquirees. ASU 2014-17 defines an acquiree as:
“the business or businesses that the acquirer obtains control of in a business combination.
Thus, if an acquirer obtains control of several entities in a business combination, each of
those entities is an acquiree. Each acquiree may make its own election to apply
pushdown accounting.
If the acquiree elects not to apply pushdown accounting, are its
subsidiaries permitted to make the election?
Yes. Paragraph BC18 of ASU 2014-17 clarifies that the option to apply pushdown
accounting should be evaluated separately by each acquiree in a change-in-control
transaction. Each acquiree’s evaluation should be made independent of the election
made by other entities in the group of entities controlled by the acquirer.
For example, if one acquiree elects not to apply pushdown accounting, one or more
of its subsidiaries can elect to apply pushdown accounting to its separate financial
statements.
If the acquiree elects not to apply pushdown accounting to a changein-control event, is that acquiree permitted to apply it in the future?
Yes. Paragraph 805-50-25-7 of the ASU states that if the acquiree does not elect to apply
pushdown accounting upon a change-in-control event, it can elect to apply pushdown
accounting to the most recent change-in-control event in a subsequent reporting period.
In doing so, the change is treated as a change in accounting principle in accordance
with ASC 250, Accounting Changes and Error Corrections.
EXAMPLE 1: On January 1, 2015, Company P acquires 100 percent of the
voting common stock of Company S for $30 million. January 1, 2015 is the
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acquisition date. On January 1, 2015, a change-in-control event date, S does not
elect to apply pushdown accounting to its financial statements. On January 1, 2016,
S decides to elect pushdown accounting going back to the most recent change-incontrol event, which is January 1, 2015.
Conclusion: Even though S did not elect pushdown accounting on the acquisition
date of January 1, 2015, S may make the election on January 1, 2016. In doing so, S
makes a change in accounting principle under ASC 250, Accounting Changes and
Error Corrections, and applies the change retrospectively back to the most recent
change-in-control event, which was the January 1, 2015 acquisition date.
The result is that S revalues its balance sheet as of the January 1, 2015
acquisition date, and restates the 2015 financial statements based on the new
valuation. For example, because the 2015 financial statements would be restated to
reflect the pushdown valuation as of January 1, 2015, depreciation and amortization
would be changed for 2015. Both 2015 and 2016 financial statements would be
presented under the new pushdown valuation that was made as of January 1, 2015.
EXAMPLE 2: Assume the same facts as Example 1 except that on September
1, 2015, there is a second change-in-control event under which a new parent
acquires 100 percent of the equity of Company S. On January 1, 2016, S wants to
make the election for pushdown accounting.
Conclusion: S can apply pushdown accounting to the most recent change-incontrol event, which is now September 1, 2015. Thus, S can revalue its balance
sheet as of September 1, 2015 and apply pushdown accounting prospectively from
September 1, 2015 forward into 2016. Depreciation and amortization would be
adjusted for the new bases from September 1, 2015 forward. Because there was a
second and most recent change-in-control event on September 1, 2015, S can no
longer go back and apply pushdown accounting to the first acquisition date of
January 1, 2015.
OBSERVATION: In paragraph BC20 of the ASU’s Background and Conclusions Reached, the FASB EITF addresses its reasoning for permitting an acquiree
to elect to apply pushdown accounting in a period subsequent to a change-incontrol event. The EITF explains that in a subsequent period, there may be
instances in which an entity’s circumstances change that may make the use of
pushdown accounting more relevant. One example given by the EITF is where
there is a significant change in the investor mix such that pushdown accounting
would be more relevant to the current investors. In such a situation, the EITF
notes that the acquired entity should not be prohibited from applying pushdown
accounting to a change-in-control event (change in mix of equity holders) for
which it previously had elected not to apply pushdown accounting as long as that
event is the acquired entity’s most recent change-in-control event.
How does an acquiree that elects pushdown accounting handle
depreciation and amortization?
If the acquiree elects to revalue its balance sheet using pushdown accounting, the
acquiree must recalculate depreciation and amortization using the new values. If the
revaluation is done in the middle of the year, there would be two calculations, one for
depreciation and amortization prior to the pushdown revaluation, and a second calculation based on the new values.
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If pushdown accounting is elected and applied for the current year,
how should the prior year be shown if presented for comparative
purposes?
The ASU does not address the issue of what to do with the prior year’s financial
statements. If pushdown accounting is applied for the current year that means the
current year balance sheet will be revalued while the prior year will remain at the older
values. If comparative financial statements are presented, there would be a mismatch of
balance sheets; one with new values and one with old values. Alternatively, the acquiree
could elect to present single-year current year financial statements only. Another option
would be to present “black lined financial statements under which both years are
presented but there is a line clearly delineating the two years.
What is the impact of ASU 2014-17 on SEC companies?
Previously, SEC companies were required to use pushdown accounting at 95 percent or
greater ownership, under SEC Topic 5.J. With the issuance of ASU 2014-17, the SEC has
rescinded SEC Topic 5.J. That means that an SEC company follows the guidance in ASU
2014-17 only, and is not required to apply pushdown accounting in any instance given
that ASU 2014-17 is optional.
¶ 906 DISCLOSURES
If an acquiree elects the option to apply pushdown accounting in its separate financial
statements, it shall disclose information in the period in which the pushdown accounting was applied (or in the current reporting period if the acquiree recognizes adjustments that relate to pushdown accounting) that enables users of financial statements to
evaluate the effect of pushdown accounting.
Examples of disclosures of such information to evaluate the effect of pushdown
accounting may include the following:
• The name and a description of the acquirer and a description of how the
acquirer obtained control of the acquiree
• The acquisition date
• The acquisition-date fair value of the total consideration transferred by the
acquirer
• The amounts recognized by the acquiree as of the acquisition date for each
major class of assets and liabilities as a result of applying pushdown accounting.
If the initial accounting for pushdown accounting is incomplete for any amounts
recognized by the acquiree, the reasons why the initial accounting is incomplete
• A qualitative description of the factors that make up the goodwill recognized,
such as expected synergies from combining operations of the acquiree and the
acquirer, or intangible assets that do not qualify for separate recognition, or
other factors. In a bargain purchase, the amount of the bargain purchase
recognized in additional paid-in capital (or net assets of a not-for- profit acquiree)
and a description of the reasons why the transaction resulted in a gain
• Information to evaluate the financial effects of adjustments recognized in the
current reporting period that relate to pushdown accounting that occurred in the
current or previous reporting periods (including those adjustments made as a
result of the initial accounting for pushdown accounting being incomplete)
NOTE: The ASU states that the list of disclosures noted above is not an
exhaustive list of disclosure requirements. The acquiree shall disclose whatever
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additional information is necessary to meet the disclosure objective of enabling
users of financial statements to evaluate the effect of pushdown accounting.
¶ 907 TRANSITION AND EFFECTIVE DATE
The ASU is effective as of November 18, 2014. The provisions of the ASU shall be
applied by an acquiree as of the acquisition date of a change-in-control event in which an
acquirer obtained control of the acquiree to both of the following events:
• A change-in-control event with an acquisition date after November 18, 2014
• A change-in-control event with an acquisition date before November 18, 2014,
when the financial statements of the reporting period that contains the acquisition date have not been issued (an SEC filer or a conduit bond obligor as
discussed in ASC 855, Subsequent Events) or made available to be issued (all
other entities as discussed in ASC 855, Subsequent Events)
The changes made by ASU 2014-17 shall be applied by an acquiree as of the acquisition
date of its most recent change-in-control event in which an acquirer obtained control of
the acquiree that meets both of the following conditions as a change in accounting
principle in accordance with ASC 250, Accounting Changes and Error Corrections:
• The acquisition date of the change-in-control event is before November 18, 2014.
• The financial statements of the reporting period that contains the acquisition
date have been issued (an SEC filer or a conduit bond obligor as discussed in
ASC 855) or made available to be issued (all other entities as discussed in ASC
855).
¶ 908 EXAMPLE — APPLICATION OF PUSHDOWN
ACCOUNTING
Company S (acquiree) has the following balance sheet at December 31, 20X1:
Company S Balance Sheet December 31, 20X1
Current assets
Property and equipment
Goodwill
Total assets
Current liabilities
Long-term debt
Retained earnings
Common stock
$400,000
550,000
0
$950,000
$100,000
600,000
200,000
50,000
$950,000
On December 31, 20X1, Company P (acquirer) purchases 100 percent of the common
stock of Company S (acquiree) for $3 million. Company P pays for the purchase by
borrowing $2 million of acquisition debt, secured by the assets of Company S, and
paying cash of $1 million.
S is a co-borrower with P on the $2 million of acquisition debt.
The fair value of the underlying assets of Company S is as follows:
¶ 907
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MODULE 3 - CHAPTER 9 - Business Combinations: Pushdown Accounting
Fair value of underlying assets of S:
Current assets
Property and equipment
Current liabilities
Long-term debt
$400,000
2,800,000
(100,000)
(600,000)
Total
Goodwill (plug)
2,500,000
500,000
Fair value of the net assets acquired
$3,000,000
Breakout:
Fair value: Assets
Liabilities
$3,700,000
(700,000)
$3,000,000
S (acquiree) elects pushdown accounting for the change in control by Company P.
Conclusion:
At the acquisition date of December 31, 20X1, S elects pushdown accounting. In doing
so, it revalues its balance sheet at fair value consisting of $3.7 million fair value of assets,
less $700,000 of liabilities, for a net fair value of $3 million. In addition, $2 million of P’s
acquisition debt is pushed down to S because the $2 million is a liability of S under
GAAP. The reason is because S is jointly and severally obligated for the debt as a coborrower with Company P.
Following is a worksheet that illustrates the new basis of accounting analysis at the
acquisition date:
Pushdown Worksheet Acquisition to the Individual Assets and Liabilities of S December 31, 20X1
Company S
Company S
Pushdown
Revised
(Existing
Adjustment Balance Sheet
Company P Balance Sheet)
on S
(Pushdown)
Current assets
Property and equipment
Goodwill
Investment in S
Total assets
Current liabilities
Long-term debt
Acquisition debt
Retained earnings
Common stock
APIC (plug)
Total L and SE
$400,000
550,000
0
2,250,000
500,000
$400,000
2,800,000
500,000
3,000,000
$3,000,000
$950,000
$3,700,000
$100,000
600,000
1,000,000
200,000
50,000
2,000,000
(200,000)
0
950,000
$100,000
600,000
2,000,000 (1)
0
50,000
950,000
$3,000,000
$950,000
$0
$3,700,000
2,000,000
(1): Acquisition debt of P is pushed down to S because the debt is collateralized by the assets of S. If
the debt was not collateralized by the assets of S, none of the debt would have been pushed down to S
and the offset would be a credit to APIC of $2,950,000 instead of $950,000.
¶ 908
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Entry: Company S’s books: 12-31-X1:
Property and equipment
Goodwill
Acquisition debt
Retained earnings
Additional paid-in capital (APIC)
To pushdown acquisition of S to the underlying assets and liabilities.
Dr
Cr
2,250,000
500,000
2,000,000
200,000
950,000
Company S Balance Sheet December 31, 20X1 (After Pushdown Accounting)
ASSETS
Current assets
Property and equipment
Goodwill
Total assets
$400,000
2,800,000
500,000
$3,700,000
LIABILILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Long-term debt
Acquisition debt
Retained earnings
Common stock
Additional paid-in capital
Total liabilities and stockholder’s equity
$100,000
600,000
2,000,000
0
50,000
950,000
$3,700,000
OBSERVATION: Starting on January 1, 20X2, Company S would start recording depreciation and amortization using the new revalued asset values.
¶ 909 REASONS FOR USING PUSHDOWN
ACCOUNTING
Now that pushdown accounting is permitted for use by all types of acquirees, a larger
issue is whether it behooves an acquiree to use it. An acquiree must weigh the
advantages and disadvantages of using pushdown accounting before making the election. As ASU 2014-17 makes perfectly clear, once pushdown accounting is elected, it is
irrevocable.
Although not all-inclusive, following are some of the advantages and disadvantages
of using pushdown accounting:
Advantages:
• The acquiree will typically have higher net assets due to the assets and liabilities
being stepped up to fair value and goodwill being recognized.
• Assets reflect fair value (minimal effect on liabilities).
• Any negative book value deficiency from showing undervalued net assets may
be eliminated, making borrowing easier.
¶ 909
MODULE 3 - CHAPTER 9 - Business Combinations: Pushdown Accounting
165
Disadvantage:
Pushdown accounting typically results in lower net income. Higher stepped-up assets
and goodwill will result in higher depreciation and amortization, and impairment
charges.
NOTE: EBITDA and operating cash flows should be neutral as both are not
impacted by higher depreciation and amortization expense.
OBSERVATION: Although some companies may choose to use pushdown
accounting, others will not. In particular, those entities that have pressure to drive
earnings, such as private equity companies, may not wish to use pushdown
accounting due to the higher depreciation and amortization that will result from its
use. Similarly, subsidiaries of SEC companies may choose not to use pushdown
accounting. Its use is no longer required now that the SEC rescinded SEC Topic
5.J.
STUDY QUESTION
6. Which of the following is a disadvantage of using pushdown accounting?
a. The acquiree will usually have lower net assets.
b. It usually results in lower net income.
c. Any negative book value deficiency from showing undervalued net assets may
be eliminated.
d. Operating cash flows will be lower.
¶ 909
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MODULE 3: OTHER CURRENT
DEVELOPMENTS—CHAPTER 10: Business
Combinations: Accounting for Identifiable
Intangible Assets
¶ 1001 WELCOME
This chapter reviews the application of ASU 2014-18, Business Combinations (Topic
805): Accounting for Identifiable Intangible Assets in a Business Combination, discusses
the transition requirements, and provides examples.
¶ 1002 LEARNING OBJECTIVES
Upon completion of this chapter, the reader will be able to:
• Recognize some of the types of entities that are permitted to elect the accounting alternative for identifiable intangible assets under ASU 2014-18
• Identify how to apply the accounting alternative for goodwill amortization when
electing the accounting alternative for identifiable intangibles in ASU 2014-18
• Recognize at least one criterion for an identifiable intangible asset
• Recall an example of a customer-related intangible asset
¶ 1003 INTRODUCTION
ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible
Assets in a Business Combination was issued in December 2014. The objective of this
ASU is to provide an accounting alternative for a private company to measure certain
identifiable intangible assets acquired in a business combination.
¶ 1004 BACKGROUND
ASU 2014-18 represents the fourth accounting standards update (ASU) issued by the
FASB’s Private Company Council (PCC). The PCC was established in 2012 to provide
exemptions and modifications to existing GAAP for non-public (private) entities.
To date, the PCC has approved and the FASB has endorsed three ASUs in addition
to ASU 2014-18, as follows:
• ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain
Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting
Approach
• ASU 2014-02, An Amendment of the FASB Accounting Standards Codification®
Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill
• ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities
Guidance to Common Control Leasing Arrangements
In accordance with ASC 805, Business Combinations, in a business combination, an
acquirer recognizes assets acquired and liabilities assumed at their fair values on the
acquisition date. Those assets include all intangible assets that are identifiable.
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ASC 805 states that an asset is considered identifiable if it meets either of the
following two criteria:
• It is separable and capable of being separated or divided from the entity and
sold, transferred, licensed, rented, or exchanged, either individually or together
with a related contract, identifiable asset, or liability, regardless of whether the
entity intends to do so (referred to as the separability criterion).
• It arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights and
obligations (referred to as the contractual-legal criterion).
According to the PCC, private company stakeholders have noted the following:
• The costs exceed the benefits of following the ASC 805 acquisition model with
respect to accounting for identifiable intangible assets separately from goodwill.
• The recognition and measurement of certain identifiable intangible assets separately from goodwill in a business combination does not always provide decision-useful information.
• Many private companies consider intangible assets that currently are recognized separately as not being any different than goodwill.
• The relevance of separately recognized intangible assets diminishes in periods
after a business combination because the carrying amounts of the intangible
assets no longer represent their fair values.
• The cost and complexity of estimating the fair value of certain identifiable
intangible assets is too high.
• Intangible assets that are most relevant to be accounted for separately are those
that are all of the following:
- Legally protected
- Generate separate and reliable cash flows (such as technology)
- Can be sold in liquidation
Based on the feedback from private companies, in February 2013, the PCC added the
identifiable intangibles project to its agenda. In December 2014, the PCC issued ASU
2014-18, which amends ASC 805 with respect to certain private companies that make an
election to apply an exception found in ASU 2014-18.
The ASC applies to all entities except for public business entities and not-for-profit
entities as defined in the Master Glossary of the FASB Accounting Standards
Codification®.
It applies when an entity within the scope of the ASU is required to recognize or
otherwise consider the fair value of intangible assets as a result of any one of the
following transactions (in-scope transactions):
• Applying the acquisition method under ASC 805 on business combinations
• Assessing the nature of the difference between the carrying amount of an
investment and the amount of underlying equity in net assets of an investee
when applying the equity method under ASC 323 on investments—equity
method and joint ventures
• Adopting fresh-start reporting under ASC 852 on reorganizations
An entity within the scope of the ASU that elects to apply the provisions in the ASU is
subject to all of the recognition requirements within the accounting alternative. The
accounting alternative, when elected, should be applied to all in-scope transactions
entered into after the effective date.
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MODULE 3 - CHAPTER 10 - Accounting for Intangible Assets
An entity within the scope of the ASU that elects the accounting alternative to
recognize or otherwise consider the fair value of intangible assets as a result of any inscope transactions should no longer recognize separately from goodwill, two types of
intangible assets:
• Customer-related intangible assets unless they are capable of being sold or
licensed independently from the other assets of the business
• Noncompetition agreements
Intangible assets other than customer-related intangible assets (that are not capable of
being sold or licensed independently from the other assets of a business) and noncompetition agreements will continue to be recognized separately from goodwill.
An entity that elects the accounting alternative in the ASU must also adopt the
private company alternative to amortize goodwill over a maximum of 10 years, under
ASU 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill.
However, an entity that elects the accounting alternative in ASU 2014-02 is not required
to adopt the amendments in this Update.
For entities electing this alternative, the amendments generally will result in those
entities separately recognizing fewer intangible assets in a business combination when
compared to entities that do not elect, or are not eligible, for this alternative. The
decision to adopt the accounting alternative in ASU 2014-18 must be made upon the
occurrence of the first transaction within the scope of this accounting alternative in
fiscal years beginning after December 15, 2015, and the effective date of adoption
depends on the timing of that first in-scope transaction.
STUDY QUESTION
1. Company D elects the accounting alternative in ASU 2014-18. Which of the following
is correct?
a. D must ensure that it does not use the accounting alternative for goodwill.
b. D must elect the accounting alternative for variable interest entities.
c. D must elect the accounting alternative to amortize goodwill.
d. D must ensure that it does not use the accounting alternative for variable
interest entities.
¶ 1005 DEFINITIONS
The ASU adds or modifies certain terms that are now part of ASC 805-20, Business
Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, as
follows:
Contract Asset: An entity’s right to consideration in exchange for goods or
services that the entity has transferred to a customer when that right is conditioned on
something other than the passage of time (e.g., the entity’s future performance).
Available to be Issued: Financial statements are considered available to be issued
when they are complete in a form and format that complies with GAAP and all approvals
necessary for issuance have been obtained, for example, from management, the board
of directors, and/or significant shareholders. The process involved in creating and
distributing the financial statements will vary depending on an entity’s management and
corporate governance structure as well as statutory and regulatory requirements.
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Lease: An agreement conveying the right to use property, plant, or equipment
(land and/or depreciable assets) usually for a stated period of time.
Private Company: An entity other than a public business entity, a not-for-profit
entity, or an employee benefit plan within the scope of ASC 960 through 965 on plan
accounting.
Public Business Entity: A public business entity is a business entity meeting any
one of the following criteria. (Neither a not-for-profit entity nor an employee benefit plan
is a business entity):
• It is required by the U.S. Securities and Exchange Commission (SEC) to file or
furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial
statements or financial information are required to be or are included in a filing).
• It is required by the Securities and Exchange Act of 1934 (the Act), as amended,
or rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
• It is required to file or furnish financial statements with a foreign or domestic
regulatory agency in preparation for the sale of or for the purpose of issuing
securities that are not subject to contractual restrictions on transfer.
• It has issued, or is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market. It has one or more
securities that are not subject to contractual restrictions on transfer, and it is
required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic
basis (e.g., interim or annual periods). An entity must meet both of these
conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial
statements or financial information is included in another entity’s filing with the SEC. In
that case, the entity is only a public business entity for purposes of financial statements
that are filed or furnished with the SEC.
¶ 1006 RULES
A private company may make an accounting policy election to apply an accounting
alternative in ASU 2014-18. The guidance applies when a private company is required to
recognize or otherwise consider the fair value of intangible assets as a result of any one
of the following transactions:
• Applying the acquisition method as described by ASC 805, Business Combinations. The acquisition method requires the acquirer, at the acquisition date, to
recognize separately from goodwill, identified assets acquired and liabilities
assumed, and any noncontrolling interest. Fair value is used to measure assets
and liabilities.
• Assessing the nature of the difference between the carrying amount of an
investment and the amount of underlying equity in net assets of an investee
when applying the equity method of accounting in accordance with ASC 323,
Investments—Equity Method and Joint Ventures
• Adopting fresh-start reporting in accordance with ASC 852, Reorganizations
A private entity that elects the accounting alternative under ASU 2014-18 shall apply it to
all of the related recognition requirements upon election and all future transactions that
are identified above.
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171
An entity that elects this accounting alternative must also adopt the accounting
alternative for amortizing goodwill in ASU 2014-02, An Amendment of the FASB Accounting Standards Codification® Intangibles—Goodwill and Other (Topic 350): Accounting for
Goodwill which is now part of ASC 350-20, Intangibles—Goodwill and Other. ASC 350-20
provides an accounting alternative under which private companies may elect to amortize
goodwill over a maximum of 10 years on a straight-line basis (or less than 10 years if the
entity can demonstrate that another life is more appropriate). The accounting alternative to amortize goodwill is not available for an SEC company so that such an SEC entity
does not amortize goodwill and tests it annually for impairment.
If the accounting alternative for amortizing goodwill under ASC 350-20 was not
adopted previously, it should be adopted on a prospective basis as of the adoption date
of ASU 2014-18. An entity that elects the accounting alternative to amortize goodwill is
not required to adopt the accounting alternative in this ASC 350-20.
EXAMPLE 1: Company X elects the accounting alternative under ASU
2014-18 effective January 1, 2016. X must also elect the accounting alternative
under ASC 350-20 to amortize goodwill over 10 years on a straight-line basis. The
election to amortize goodwill is made prospectively starting January 1, 2016.
EXAMPLE 2: Company X has elected the accounting alternative to amortize
goodwill effective January 1, 2015. The fact that X has elected to amortize goodwill
does not mean that X is required to elect the accounting alternative in this ASU
2014-18 with respect to identifiable intangibles.
NOTE: The primary reason for linking the ASU 2014-18 (identifiable intangibles) and ASU 2014-02 (goodwill amortization) is that the adoption of ASU
2014-18 would result in intangible assets that are wasting in nature being absorbed
into goodwill. The PCC and the FASB concluded that it would not be appropriate to
absorb finite-lived intangible assets into goodwill unless goodwill is amortized.
Further, the adoption of ASU 2014-18 likely will result in a higher goodwill balance
than would result under current GAAP. Therefore, entities will be exposed to a
higher risk of goodwill impairment. By linking the adoption of ASU 2014-18 to the
goodwill amortization accounting alternative in ASU 2014-02, a private company
will reduce its risk for goodwill impairment by amortizing goodwill (which would
include intangible assets that are not recognized separately).
General Rule
As of the acquisition date, the acquirer shall recognize, separately from goodwill, the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree. An identifiable intangible asset is one that meets either the separability
criterion or the contractual-legal criterion.
Separability criterion: An acquired intangible asset is capable of being separated
or divided from the acquiree and sold, transferred, licensed, rented, or exchanged,
either individually or together with a related contract, identifiable asset, or liability.
Contractual-legal criterion: An acquired asset arises from contractual or other
legal rights, regardless of whether those rights are transferable or separable from the
entity or from other rights and obligations.
Accounting Alternative for Private Companies
A private entity (the acquirer) may elect to apply the accounting alternative for the
recognition of identifiable intangible assets acquired in a business combination. Under
the accounting alternative, an acquirer shall not recognize separately from goodwill the
following two types of intangible assets:
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• Customer-related intangible assets, unless they are capable of being sold or
licensed independently from other assets of a business
• Noncompetition agreements
Customer-Related Intangible Assets
Customer-related intangible assets (CRIs) include the following:
• Customer lists
• Order or production backlog
• Customer contracts and related customer relationships
• Noncontractual customer relationships
CRIs that would be recognized separately from goodwill under ASU 2014-18 are those
that are capable of being sold or licensed independently from the other assets of a
business. CRIs that are capable of being sold or licensed independently of other
business assets, and that may meet that criterion for recognition separately from
goodwill include, but are not limited to:
• Mortgage servicing rights
• Commodity supply contracts
• Core deposits
• Customer information (such as names and contact information).
An additional list of CRIs that are capable of being recognized separately from goodwill
consists of the following contract-based intangible assets:
• Licensing, royalty, standstill agreements
• Advertising, construction, management, service or supply contracts
• Lease agreements
• Construction permits
• Franchise agreements
• Operating and broadcast rights
• Servicing contracts such as mortgage servicing contracts
• Employment contracts
• Use rights such as drilling, water, air, timber cutting, and route authorities
OBSERVATION: ASU 2014-18 provides that customer-related intangible assets are not allocated separately from goodwill unless they are capable of being
sold or licensed independently from other assets of a business. In general, most
(but not all) of the intangibles found in the above two lists consist of those
intangibles that most likely are capable of being sold or licensed independent of
the other assets of the entity. Thus, a private company would not be able to use the
accounting alternative in ASU 2014-18 to include their value as part of goodwill.
However, there are instances in which some of the above-noted intangibles are not
capable of being sold or licensed individually such as customer information and
lists. (These types of assets are addressed further on in this chapter.)
The examples of customer-related intangible assets that may meet the criterion for
recognition separately from goodwill (e.g., they are capable of being sold or licensed
independently) consists of mortgage servicing rights, commodity supply contracts, core
deposits, and customer information. These assets typically represent relationships and
information that often can be sold to third parties without input or approval from the
customer or their agreement to the transfer. If the transfer of a customer relationship is
dependent on the decisions of a customer, it would be clear that a reporting entity is not
¶ 1006
MODULE 3 - CHAPTER 10 - Accounting for Intangible Assets
173
capable of selling that customer-related intangible asset separately from the other assets
of the business. Furthermore, the PCC and the FASB noted that private companies
generally are aware of whether their customer-related intangible assets can be sold and
transferred to another entity even if the private company has no intention of selling the
customer-related intangible assets.
Customer-related intangible assets exclude the following:
Contract assets, as used in ASC 606 on revenue from contracts with customers,
are not considered to be customer-related intangible assets for purposes of applying this
accounting alternative. Therefore, contract assets are not eligible to be subsumed into
goodwill and shall be recognized separately.
Leases are not considered to be a customer-related intangible asset for purposes of
applying the accounting alternative in ASU 2014-18. Therefore, favorable and unfavorable leases are not eligible to be subsumed into goodwill and shall be recognized
separately.
OBSERVATION: The PCC and FASB decided that contract assets as used in
ASC 606, Revenue from Contracts with Customers, are not considered intangible
assets eligible to be part of goodwill and therefore are not within the scope of ASU
2014-18. In certain situations, an entity satisfies a performance obligation but does
not have an unconditional right to consideration, for example, because it first needs
to satisfy another performance obligation in the contract. That leads to recognition
of a contract asset. Once an entity has an unconditional right to consideration, it
should present that right as a receivable separately from the contract asset and
account for it in accordance with other guidance (such as ASC 310, Receivables).
Consequently, the PCC and FASB concluded that it is inappropriate to classify a
contract asset as a customer-related intangible asset at the acquisition date when
the contract asset will eventually be reclassified as a receivable.
Noncompetition Agreements
Under the accounting alternative in ASU 2014-18, all noncompetition agreements are
combined as part of goodwill regardless of whether they could be sold or licensed
separately from other assets of the business.
OBSERVATION: The PCC and the FASB note that they chose not to require
an assessment of whether a noncompetition agreement is capable of being sold or
licensed separately from the other assets of a business because, in their view,
noncompetition agreements will seldom, if ever, meet the criteria for recognition.
How do you determine which intangible assets are not recognized separately
from goodwill under the private company accounting alternative?
ASU 2014-18 provides that in a business combination, a private company may elect not
to allocate fair value to certain identifiable intangible assets, separately from goodwill.
Identifiable intangible assets are those intangibles that meet either the separability
criterion or the contractual-legal criterion as follows:
• Separability criterion: An acquired intangible asset is capable of being separated or divided from the acquiree and sold, transferred, licensed, rented, or
exchanged, either individually or together with a related contract, identifiable
asset, or liability.
• Contractual-legal criterion: An acquired asset arises from contractual or other
legal rights, regardless of whether those rights are transferable or separable
from the entity or from other rights and obligations.
The ASU states that a private company may elect not to allocate any fair value from
an acquisition to two specific types of identifiable intangible assets, as follows:
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• Customer-related intangible assets: unless they are capable of being sold or
licensed independently from other assets of a business, and
• Noncompetition agreements
As to the first category of intangibles, customer-related intangible assets (CRIs) include
the following:
• Customer lists
• Order or production backlog
• Customer contracts and related customer relationships
• Noncontractual customer relationships
As to CRIs, a private company that elects the accounting alternative assigns no value to
the CRIs unless they are capable of being sold or licensed independently from other
assets of the business. That means that a private company must evaluate CRIs to
determine those assets that can and cannot be sold or licensed separately from other
assets of the business. Those CRIs that cannot be sold or licensed independently from
other business assets are not assigned a separate value at acquisition date. Instead, the
asset value is part of goodwill. Those CRIs that are capable of being sold or licensed
independently from other business assets are assigned at acquisition date, a value
separate from goodwill.
Thus, customer-related intangible assets (CRIs) are separated into two types:
Type of Customer-Related Intangible Asset (CRI)
Treatment under Private Company Accounting
Alternative (ASU 2014-18)
CRIs that are capable of being sold or licensed
Must be assigned a value separate from goodwill
independently from other assets
CRIs that are not capable of being sold or licensed Are not assigned a value separate from goodwill
independently from other assets
So, the next question is which CRIs are “capable of being sold or licensed independently
from other assets of the business?
CRIs that may be capable of being sold or licensed independently of other business
assets, and that are likely to be recognized separately from goodwill include but are not
limited to:
• Mortgage servicing rights
• Commodity supply contracts
• Core deposits
• Customer information (such as names and contact information).
Although the first three items on the list (mortgage servicing rights, commodity supply
contracts, and core deposits) most likely are capable of being sold or licensed independently of other business assets, the last one (customer information) may have restrictions that preclude it from being sold without customer approval. In such situations, the
customer list is not capable of being sold independently of other assets and, therefore, is
not measured separately from goodwill under the private company accounting alternative election per ASU 2014-18.
The key issue in determining whether a CRI is measured separately from goodwill
under the private company alternative is this: Can that asset be sold or licensed
independently from other business assets?
The entity must be able to sell or license the intangible asset on its own without
selling or licensing any other assets of the business. Under this narrow requirement,
many intangible assets that are saleable as part of the sale of an asset group may not be
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saleable individually. For example, an entity might be able to sell a customer list as part
of an overall business sale, but may not be able to sell it independent of other business
assets. After all, the entity acquiring the list might be reluctant to purchase it without a
noncompetition agreement or purchase of the entity name.
Factors that may restrict the sale of a CRI are:
• A buyer is reluctant to acquire an asset without other assets of the business
being acquired.
EXAMPLE: A buyer might not be willing to acquire a customer list or other
customer information unless the buyer can ensure that the seller will not compete
for those customers after the sale of the list.
• A customer list or other information requires customer approval prior to sale,
under law or contract.
• A customer contract has a restriction on assignability or a confidentiality
provision.
• A Web site list or other information was obtained with a representation that the
list would not be distributed or sold without offering customers the ability to opt
out if their information is sold or transferred to another party.
• A company acquires an order backlog that cannot be fulfilled without having
special know-how or equipment.
What are the requirements for a private company not to allocate
value to a noncompetition agreement?
As previously discussed, ASU 2014-18 states that a private company may elect not to
allocate any fair value at the acquisition date to two specific types of identifiable
intangible assets:
• CRIs, unless they are capable of being sold or licensed independently from
other assets of a business
• Noncompetition agreements
In the previous section, the author discussed that a private company may elect not to
allocate value at the acquisition date to CRIs that are not capable of being sold or
licensed independently from other assets of the business. CRIs that are capable of being
sold or licensed independently from other assets of the business must have a value
assigned to them that is separate from goodwill.
When it comes to noncompetition agreements, there is no differentiation required
between those agreements that qualify and those that do not qualify under the private
company election. ASU 2014-18 simply states that all noncompetition agreements
qualify for exclusion under ASU 2014-18. That is, if a private company acquires a
noncompetition agreement as part of a business combination, and that private company
makes the accounting alternative election under ASU 2014-18, the private company is
not required to allocate any of the acquisition-date purchase price to the noncompetition
agreement. Instead, the value would have been assigned to the noncompetition agreement is allocated to goodwill.
If a private company elects the accounting alternative in ASU
2014-18, must the company include disclosures about the intangible
assets to which no allocation was made?
ASU 2014-18 does not require additional disclosures beyond those required by existing
GAAP. An entity is required to include disclosures that are required by other GAAP. For
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example, assume a private company makes the accounting alternative election in ASU
2014-18 and, as a result, does not allocate any of the acquisition price to noncompetition
agreements. In disclosing the allocation of the fair value at acquisition, the entity would
not have any portion of the value allocated to the noncompetition agreements. However,
the entity would have to disclose the terms and conditions of the noncompetition
agreements that were executed as part of the business combination.
STUDY QUESTIONS
2. Which of the following is an example of a customer-related intangible asset to which
ASU 2014-18 applies?
a. Contract assets under ASC 606
b. Lease
c. Backlog that cannot be sold separately from other company assets
d. Trade name
3. Company K, a private company, elects the accounting alternative under ASU
2014-18. Which of the following assets is K not permitted to recognize separately from
goodwill?
a. A customer-related intangible that K is able to sell
b. Property and equipment
c. Inventory
d. Noncompetition agreement
¶ 1007 TRANSITION
The decision to adopt the accounting alternative found in ASU 2014-18 must be made
upon the occurrence of the first transaction that occurs in fiscal years beginning after
December 15, 2015, and the timing of that first transaction determines the effective date
of the ASU. If the first transaction occurs in the first fiscal year beginning after
December 15, 2015, the ASU will be effective for that fiscal year’s annual financial
reporting and all interim and annual periods thereafter. If the first transaction occurs in
fiscal years beginning after December 15, 2016, the ASU will be effective in the interim
period that includes the date of the transaction and subsequent interim and annual
periods thereafter.
Customer-related intangible assets and noncompetition agreements that exist as of
the beginning of the period of adoption shall continue to be subsequently measured in
accordance with ASC 350, Intangibles—Goodwill and Other. That is, existing customerrelated intangible assets and noncompetition agreements should not be subsumed
(absorbed) into goodwill upon adoption of ASU 2014-18.
Early application of ASU 2014-18 is permitted for any interim and annual period
before which an entity’s financial statements are available to be issued.
OBSERVATION: Under ASU 2014-18, an entity should continue to recognize
and measure customer-related intangible assets and noncompetition agreements
that exist as of the beginning of the period of adoption in accordance with ASC 350,
Intangibles—Goodwill and Other. The PCC and FASB stated that they considered
requiring any intangible asset that exists as of the beginning of the period of
adoption to no longer be separately recognized and, therefore, to be absorbed into
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MODULE 3 - CHAPTER 10 - Accounting for Intangible Assets
goodwill. However, the PCC and the FASB concluded that because the cost of
initially measuring the fair value of those customer-related intangible assets and
noncompetition agreements has already been incurred, continuing to recognize
and measure them separately will not result in significant additional costs.
¶ 1008 DISCLOSURES
If a private company elects the accounting alternative in ASU 2014-18, additional
disclosures are not required.
NOTE: The PCC and FASB decided that the current disclosure requirements
in ASC 805, Business Combinations, offer sufficient disclosures about intangible
assets that do not require separate recognition. This includes a qualitative description of intangible assets that do not qualify for separate recognition.
¶ 1009 EXAMPLE — APPLICATION OF ASU 2014-18
Facts: On January 1, 20X1, Company X, a non-public (private) entity, acquired 100
percent of the assets of Company Y for $10 million. X has no goodwill from other
transactions. X elects the accounting alternative in ASU 2014-18 to not allocate the fair
value to the identifiable intangible assets.
Assets acquired consist of the following at the fair value at the January 1, 20X1
acquisition date:
Inventory
Property and equipment
Agreement not to compete
Supply contract
Customer list
Goodwill
$2,000,000
3,000,000
1,000,000
500,000
TBD
TBD
The $1 million agreement not to compete consists of a three-year agreement with key
officers of the Company Y, payable over a three-year period. The supply contract
consists of a favorable contract to purchase commodities, valued at approximately
$500,000 fair value. X believes the supply contract could be sold independently from
other X assets because it pertains to an oil commodity which is easily separable and
saleable from the rest of X’s business.
The customer list consists of customer names and other customer information for
Y’s 4,000 customers. X believes it is not capable of selling or licensing the customer list
and information independently from the other assets of X because a prospective buyer
would require X to guarantee not to compete for those same customers after a sale.
Conclusion: By making the accounting alternative election, X must evaluate the
identifiable intangible assets to determine whether a portion of the $10 million purchase
price should be allocated to them or not.
Intangibles that qualify for the private company accounting alternative election are:
• Customer-related intangible assets (CRIs): unless they are capable of being
sold or licensed independently from other assets of a business
• Noncompetition agreements
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X has the following identifiable intangible assets:
Identifiable Intangible Asset
Is it Capable of Being Sold or
Licensed Independently of X’s
Other Assets?
Customer-related intangible
assets:
Supply contract
Customer list
Yes. Capable of being sold
independently of other X assets
Noncompetition agreement:
Agreement not to compete
NA- automatically qualifies for
exclusion per ASU 2014-18
No. Not capable of being sold
independently of other X assets
Treatment per ASU 2014-18
Value assigned separately from
goodwill per ASU 2014-18
election
Value not assigned separately
from goodwill per ASU 2014-18
election
Value not assigned separately
from goodwill
per ASU 2014-18 election
Based on X’s analysis, X should allocate a value to the supply contract because that
contract represents a customer-related intangible asset that is capable of being sold or
licensed independently from X’s other assets. The customer list should not have a
separate value assigned. Instead, any value is included as part of goodwill in accordance
with ASU 2014-18. The reason is because the customer list represents a customerrelated intangible asset that is not capable of being sold or licensed independently from
X’s other assets.
No value should be assigned to the agreement not to compete. Instead, the $1
million value is part of goodwill. Under ASU 2014-18, an agreement not to compete has
no value assigned to it if a private company makes the accounting alternative election.
Based on the above analysis, the $10 million purchase price is allocated to assets
acquired at the date of acquisition as follows:
As of January 1, 20X1
($000s)
Inventory
Property and equipment
Agreement not to compete (a)
Supply contract
Customer list (a)
Goodwill (plug)
Total assets acquired
Fair value
$2,000,000
3,000,000
0
500,000
0
4,500,000
$10,000,000
(a) The values of the agreement not to compete and the customer list are allocated to
goodwill under the ASU 2014-18 election.
¶ 1009
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¶ 10,100 Answers to Study Questions
¶ 10,101 MODULE 1—CHAPTER 1
1. a. Incorrect. The FASB and IASB are working on an international standards
convergence project that will ultimately result in one set of international GAAP standards. Changes will be required to existing U.S. GAAP standards and many of those
changes will not be important to non-public entities.
b. Correct. The FASB has issued several extremely controversial FASB statements and interpretations that are costly and difficult for non-public entities to
implement and are not meaningful to the third parties they serve. One example
is the issuance of ASC 810.
c. Incorrect. Sarbanes-Oxley mandates that FASB’s funding come primarily from SEC
registrants, thereby suggesting that the FASB’s focus continues to be on issues important to public entities, not non-public entities.
d. Incorrect. Actually, accountants from smaller firms are not serving as FASB staff or
board members, which results in no small business representation or perspective on the
FASB.
2. a. Correct. Accounting for Uncertainty in Income Tax (An Interpretation of
FAS 109) clarifies the accounting for uncertainty in tax positions related to
income taxes recognized in an entity’s financial statements and is difficult to
implement for smaller, closely held companies.
b. Incorrect. Disclosure about Fair Value of Financial Instruments is one instance
where the FASB has limited GAAP to public companies and large non-public entities,
thereby exempting smaller non-public entities from its application.
c. Incorrect. Earnings per Share is one instance where the FASB has limited GAAP to
public companies, thereby exempting non-public entities.
d. Incorrect. Segment Reporting is one instance where the FASB has limited GAAP to
public companies, thereby exempting non-public entities.
3. a. Incorrect. Historical cost is the model. Fair value is eliminated except for
available-for-sale securities.
b. Incorrect. Since it is optional, there is no effective date. It may be used at any point
after it was officially released in June 2013.
c. Incorrect. The goal is for the framework to be a very stable financial reporting
platform that will only be amended every three or four years.
d. Correct. FRF for SMEs is not GAAP. It is one more in a collection of OCBOA
frameworks that might be an acceptable alternative to GAAP in some
circumstances.
¶ 10,102 MODULE 1—CHAPTER 2
1. a. Correct. The FASB cites that accounting policy disclosures are too general
to be informative. The revenue project helps alleviate some of the generality
related to revenue disclosures.
b. Incorrect. The FASB cites that despite the large number of revenue recognition
pronouncements, there is little guidance for service activities, which is the fastest
growing part of the U.S. economy.
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
c. Incorrect. The FASB cites that U.S. GAAP contains no comprehensive standard for
revenue recognition that is generally applicable.
d. Incorrect. FASB cites that U.S. GAAP for revenue recognition consists of more than
200 pronouncements by various standard-setting bodies that is hard to retrieve and
sometimes inconsistent.
2. a. Incorrect. Transaction price is the amount of consideration for transferring goods
or services and is not necessarily the price to sell a good separately.
b. Correct. ASU 2014-09 defines the standalone price as that price at which an
entity would sell a good or service separately to a customer. The key to this
definition is that it is the price, if sold separately, and not combined with other
performance obligations.
c. Incorrect. A selling price does not necessarily identify the price if sold separately.
d. Incorrect. A performance obligation is a promise in a contract to transfer a good or
service and does not necessarily relate to the price if sold separately.
3. a. Incorrect. Variable consideration is identified as one of the four elements, and is
included based on either the expected value or the most likely amount.
b. Incorrect. The standard includes the time value of money as one of the four
elements used to determine the transaction price, and adjusts the promised amount to
reflect the time value of money.
c. Correct. One of the elements is noncash consideration (not cash consideration) promised in the form other than cash.
d. Incorrect. The standard would include in the transaction price the consideration
payable to the customer in the form of cash, credit, or other items that the customer can
apply against amounts owed.
4. a. Incorrect. The ASU does state that the adjusted market assessment approach is a
suitable method. Under the expected cost plus a margin method, an entity estimates the
price that a customer in that market would be willing to pay for those goods or services.
b. Incorrect. The ASU states that the expected cost plus a margin approach is a
suitable method. Using this method, an entity forecasts its expected costs of satisfying a
performance obligation and then adds an appropriate margin for that good or service.
c. Incorrect. The ASU approves the residual approach as a suitable method if certain
conditions are met. Using this method, an entity estimates the standalone selling price
by computing the total transaction price less the sum of the observable standalone
selling prices of other goods or services promised in the contract.
d. Correct. Historical cost is not a suitable method identified by the ASU. The
reason is because historical cost could be old and most likely does not represent
the current value of the performance obligation.
5. a. Incorrect. Having legal title of the asset is an indicator. Another indicator is that
an entity has a present right of payment for the asset.
b. Correct. A factor that demonstrates control is when the customer (M) has
accepted the asset. To determine the point in time at which a customer obtains
control of a promised asset and an entity satisfies a performance obligation, the
entity should consider indicators of the transfer of control, some, but not all of
which are listed in the ASU.
¶ 10,102
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ANSWERS TO STUDY QUESTIONS - Module 1 - Chapter 2
c. Incorrect. In order to have control, one factor is that the significant risks and
rewards of ownership of the asset have passed to M. In this case, they have not passed
so the seller still contains control.
d. Incorrect. One factor confirming control is if the customer (M) has obtained
possession of the asset. In this case, M has not yet picked up the asset so that M
probably does not have control over the asset.
6. a. Incorrect. If X does not have title to the goods, X is likely not the principal and,
instead, is an agent.
b. Correct. The key to being a principal is that X must control promised goods or
services before they are transferred to a customer.
c. Incorrect. If X obtains a commission on the transaction, X is likely to be an agent
and not a principal.
d. Incorrect. If X does not set the price of the goods, X is likely an agent, and not a
principal. By not being able to set the price, X is demonstrating that it does not control
the product.
7. a. Incorrect. In order to capitalize as an asset costs to fulfill a contract, those costs
must generate or enhance resources that will be used in satisfying performing obligations in the future.
b. Incorrect. ASU 2014-09 requires that Q expect the costs to be recoverable.
c. Incorrect. The ASU does not state that the costs cannot provide any future value.
d. Correct. ASU 2014-09 states that one key criterion for capitalizing the costs as an
asset is that the costs must relate directly to a contract or to an anticipated contract that
the entity can specifically identify. The theory behind this criterion is that the costs can
be linked to a contract, so the costs to fulfill that contract should be matched with the
revenue generated.
8. a. Incorrect. Direct labor, but not indirect labor, is considered a cost directly related
to the contract.
b. Incorrect. Only direct materials, not indirect materials, are considered a cost
directly related to the contract.
c. Incorrect. General overhead that is not directly allocated to the contract is not a
direct cost per ASU 2014-09.
d. Correct. ASU 2014-09 states that salaries and wages of employees who
provide promised services directly to the customer are considered direct costs.
9. a. Incorrect. The new revenue standard has more, not fewer, disclosures about its
contracts with customers, including disaggregated information.
b. Incorrect. L will have to use estimates to allocate the transaction price to each
performance obligation.
c. Correct. Because L has several performance obligations in one contract, L will
be required to divide that contract into the separate performance obligations.
d. Incorrect. L’s construction contracts may be able to recognize revenue on a
continuous basis (over time) if certain criteria are met.
¶ 10,102
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
¶ 10,103 MODULE 1—CHAPTER 3
1. a. Incorrect. An entity must amortize finite-lived intangible assets. An entity must
not amortize indefinite-lived intangible assets and, typically, goodwill. The exception for
goodwill is a private company may elect a shortcut to amortize goodwill over 10 years
(or possibly less).
b. Incorrect. Goodwill is an intangible asset that arises only as a result of a business
combination. Other existing intangible assets, such as intellectual property rights, can
be purchased outright outside a business combination. An internally developed intangible asset cannot be recognized by the entity that develops it internally, but may be
recognized by an entity that acquires it in a business combination.
c. Correct. ASC 350 contains subtopics on goodwill (ASC 350-20) and intangible assets other than goodwill (ASC 350-30). These subtopics address impairment. If an intangible asset (including goodwill) is part of an asset group or
disposal group, the guidance in ASC 360-10 may also be relevant.
d. Incorrect. Goodwill and other assets that lack physical substance—other than
financial assets—are intangible assets. Goodwill is an intangible asset that arises in a
business combination.
2. a. Incorrect. All of these assets should be tested, but these are not the correct steps.
b. Incorrect. GAAP does not allow goodwill and all other tangible and intangible assets
to be combined and tested for impairment simultaneously.
c. Correct. GAAP requires that all tangible and intangible assets other than
goodwill be tested and adjusted first. Then, the adjusted numbers flow into the
test for goodwill impairment.
d. Incorrect. GAAP does not provide for goodwill and all intangible assets being tested
together separately from the test of tangible assets.
3. a. Incorrect. The carrying amount measured upon initial recognition is not relevant
in this circumstance.
b. Incorrect. The carrying amount of goodwill never exceeds the amount measured
upon initial recognition.
c. Correct. Once recognized, an impairment loss is never reversed.
d. Incorrect. The guidance does not set out conditions under which impairments of
goodwill may be restored.
4. a. Correct. Even if there is an excess in Step 1, the implied fair value of
goodwill may be higher than the carrying amount in Step 2, resulting in no
impairment loss to be recognized.
b. Incorrect. An excess identified in Step 1 does not mean there is an impairment loss
in Step 2. Instead, it is possible that, in Step 2, the implied fair value of goodwill will
exceed its carrying amount and, thus, no impairment loss to be recognized.
c. Incorrect. If Step 1 is passed, an entity never proceeds to Step 2, so Step 2 is neither
passed nor failed.
d. Incorrect. If Step 1 is passed, an entity never proceeds to Step 2, so Step 2 is neither
passed nor failed because it is never taken.
5. a. Correct. The aggregate amount of goodwill impairment losses must be
presented as a separate line item in the income statement before the subtotal of
¶ 10,103
ANSWERS TO STUDY QUESTIONS - Module 1 - Chapter 3
183
income from continuing operations. If the impaired goodwill was associated with
a discontinued operation, India Entity would have to present a separate incomestatement line item, net of taxes, within the results of discontinued operations.
b. Incorrect. Impairment losses are not part of other comprehensive income, which is
the difference between net income and comprehensive income.
c. Incorrect. This is the presentation of goodwill impairment losses associated with
discontinued operations, which must be presented within the results of discontinued
operations in a separate line item net of taxes.
d. Incorrect. This describes the income statement presentation for an impairment loss
on an indefinite-lived intangible asset, not an impairment loss on goodwill. This is
covered latter in the chapter.
6. a. Correct. Stable foreign exchange rates would typically mitigate, rather than
increase, the likelihood of impairment. In contrast, significant volatility in foreign exchange rates would typically increase the likelihood of impairment.
b. Incorrect. A significant decline in revenue could increase the likelihood of impairment. Other declines in financial performance, such as a decrease in cash flows, would
similarly be of concern.
c. Incorrect. Significant changes in personnel may contribute to the likelihood of
impairment. This would also be true for certain changes in the entity’s management,
customers, or strategy.
d. Incorrect. A negative political development may point to an increased likelihood of
impairment. This might involve, for example, legislative or regulatory actions.
7. a. Incorrect. This statement is true. If a qualitative assessment (for either goodwill
or an indefinite-lived intangible asset) is passed, the entity has completed impairment
testing. In this situation, the entity simply must test again in a year (or in the interim if
facts warrant).
b. Correct. This statement is false. A qualitative assessment – whether for
goodwill or an indefinite-live intangible asset—is always optional. What is
mandatory is that an entity must test goodwill and indefinite-lived intangible
assets at least annually. Each time the entity tests for impairment, the entity may
choose whether or not to perform a qualitative assessment.
c. Incorrect. This statement is true. Although the authoritative guidance sets out
examples of qualitative factors, the listed events and circumstances are not exhaustive.
An entity has to consider other events and circumstances that are relevant.
d. Incorrect. This statement is true. The qualitative assessment may save an entity
time and expense if the entity’s goodwill or indefinite-lived intangible assets are immune
to most events or circumstances. However, if the entity suspects impairment exists,
performing and documenting a qualitative assessment before actually testing for impairment is additional work that could be avoided.
8. a. Correct. This statement is false. Although indefinite-lived intangible assets
must be tested at least annually for impairment, items operated as a single asset
must be aggregated as a single unit of account.
b. Incorrect. This is a true statement. In this situation, the qualitative assessment is
failed and the entity must proceed to qualitatively test the indefinite-lived intangible
asset impairment.
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c. Incorrect. This is a true statement. The excess of an indefinite-lived intangible
asset’s carrying amount over its fair value is an impairment loss that must be recognized
with an offsetting adjustment to the item’s carrying amount.
d. Incorrect. This is a true statement. The entity must also disclose which financial
statement line item includes the impairment loss and, if the entity reports operating
segment, which operating segment includes the impaired intangible asset.
9. a. Incorrect. This statement is true. Unless an event or circumstance suggests that
it is more likely than not that the item has become impaired in the interim, Bravo Entity
does not need to test the item again for impairment until June 30, 20X8.
b. Incorrect. This statement is true. Bravo Entity must recognize the impairment and
the related adjustment of the carrying amount. Bravo Entity must also disclose certain
information about the impairment loss.
c. Incorrect. This statement is true. GAAP requires that an impairment loss for an
indefinite-lived intangible asset be presented within continuing operations, but leaves
the choice of line item to the discretion of the reporting entity.
d. Correct. This statement is false. Bravo Entity must test the item at least
annually, but each year Bravo Entity may choose whether or not to perform a
qualitative assessment. Bravo Entity’s use of a qualitative assessment on June
30, 20X7, does not set a precedent, even though the qualitative assessment was
failed.
¶ 10,104 MODULE 2—CHAPTER 4
1. a. Incorrect. Reasonably possible is a threshold used in contingencies, and not part
of the liquidation basis of accounting.
b. Incorrect. The probable threshold is not used in liquidation basis of accounting.
Instead, it is used in the contingency rules.
c. Incorrect. The ASC does not use the more likely than not threshold.
d. Correct. The ASU requires use of the liquidation basis of accounting when
liquidation is imminent. However, even if an entity’s liquidation is not imminent,
there may be conditions and events, considered in the aggregate, that raise
substantial doubt about the entity’s ability to continue as a going concern.
2. a. Incorrect. Although auditors used the balance sheet date as the beginning of
their going concern assessment, this date is not used in management’s going concern
assessment.
b. Incorrect. The date the financial statements are issued is the date for SEC issuers,
but not non-SEC entities.
c. Correct. ASU 2014-15 requires that a non-SEC entity’s assessment begin on
the date the financial statements are available to be issued.
d. Incorrect. The assessment is being performed by management so that the date the
audit engagement begins is irrelevant to that assessment.
3. a. Correct. The interpretation states that the auditor should use the definition
of the framework if such a definition exists. Thus, in this case, the auditor should
follow GAAP’s definition of substantial doubt.
¶ 10,104
ANSWERS TO STUDY QUESTIONS - Module 2 - Chapter 5
185
b. Incorrect. The auditor should follow another assessment period that begins on the
date the financial statements are available to be issued and differs from the existing
auditor’s assessment period which begins at the balance sheet date.
c. Incorrect. The auditor should follow the disclosure requirements of the applicable
financial reporting framework. That requirement is not an abbreviated version of GAAP
disclosures.
d. Incorrect. The interpretation makes no changes to the report modifications required
by AU-C 570.
¶ 10,105 MODULE 2—CHAPTER 5
1. a. Incorrect. One of the conditions is that the operations of the component have
been or will be eliminated, not retained, from the ongoing operations.
b. Incorrect. One of the conditions is that the entity will not have significant continuing
involvement in the operations of the component.
c. Correct. One of the conditions is that the operations and cash flows of the
component will be eliminated from the ongoing operations of the entity as a
result of the disposal.
d. Incorrect. There is no condition that requires that the entity replace the component
with a similar component or element.
2. a. Incorrect. One of the advantages is that, unlike accrual manipulation, there is no
settling up in the future,
b. Correct. One of the key advantages is that net income does not change but
operating income, income from continued operations and core earnings may
change because of the shifting of the item to below the line.
c. Incorrect. It is actually one of the easiest forms of managed earnings because all it
involves is shifting the location of the item from continuing operations to discontinued
operations.
d. Incorrect. There is no indication that it is illegal in most cases because it typically
involves interpreting the location in which to present the particular item on the income
statement.
3. a. Correct. One requirement is that the disposal must represent a strategic
shift in the entity’s operations. It must also have a major effect on the entity’s
operations and financial results.
b. Incorrect. The pre-ASU 2014-08 rules require that the operations of the component
must have been eliminated from operations. The new definition in ASU 2014-08 no
longer has that requirement.
c. Incorrect. Under the pre-2014-08 rules, in order to qualify for discontinued operations treatment, the entity must not have any continued involvement in the operations of
the component after the disposal. That requirement was eliminated by ASU 2014-08.
d. Incorrect. There must be a disposal which is not limited to a sale. The disposal can
include a held-for-sale transaction whereby the sale has yet to occur.
4. a. Incorrect. In order for a component to qualify for discontinued operations
classification, the component must have a major effect on the entity. The term major
effect can mean 15-20 percent of total assets which is higher than the 10 percent
threshold of the component. Thus, the disposed of component does not have a “major
¶ 10,105
186
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
effect on Company Y and therefore, does not qualify for discontinued operations based
on its total assets.
b. Correct. A disposal must have a major effect on the entity’s operations which
can be measured several ways. One way is that the component disposed of must
have revenue of at least 15-20 percent of the entity’s total revenue. At 19 percent
of revenue, the component appears to satisfy the major effect threshold.
c. Incorrect. Unless net income of the component is at least 15 percent of total entity
income, the disposal is not deemed to have a major effect on the entity and therefore,
does not qualify for discontinued operations treatment.
d. Incorrect. The disposal must have a major effect on the entity’s operations. The
component’s liabilities representing 25 percent of the entity’s total liabilities is generally
not a benchmark for measuring “major effect. Instead, major effect is measured using
total assets, revenue, or net income.
5. a. Incorrect. Although the transaction has a major effect on Z’s operations (24
percent of total assets are disposed of), the transaction is not a strategic shift in Z’s
business.
b. Incorrect. Because the building represents 24 percent of total assets, the transaction
does have a major effect on Z’s operations. In general, the disposal of at least 15 percent
of total assets, revenue, or net income is considered to have a major effect.
c. Correct. Under the new ASU 2014-08 rules, a discontinued operation must
represent a strategic shift in the entity’s operations. In this example, Z’s core
business is wholesale, not real estate. Thus, the sale of a single piece of real
estate is not likely to represent a strategic shift in Z’s business.
d. Incorrect. The transaction does satisfy the “major effect criterion, although it does
not satisfy the “strategic shift criterion. The fact that it meets one of the two criteria
makes the answer incorrect.
6. a. Incorrect. One of the criteria is that an active program to sell the asset has been
initiated by K, and not that K is about to decide to sell the asset.
b. Incorrect. One criterion is that the components to be sold by K are being actively
marketed for sale at a price that is reasonable, and not that it will be actively marketed
within the next six months.
c. Incorrect. One of the criteria is that it is unlikely (not likely) that significant changes
to K’s plan to sell will be made or the plan will be withdrawn.
d. Correct. ASC 360 states that a criterion to consider as to whether the transaction
qualifies as held for sale is that K’s management commits to a plan to sell the
components to be sold. They cannot merely be testing the market for interested
potential buyers, for example, with no real commitment to sell.
7. a. Incorrect. The held-for-sale rules do not provide for B depreciating the assets
over the remaining useful lives up to the estimated date of sale. In fact, the assets are
not depreciated.
b. Incorrect. Because the assets are held for sale, those assets have already been
written down to lower of carrying amount or fair value (less costs to sell). Thus, writing
off those assets to zero is inappropriate and not authorized under GAAP.
c. Correct. Under GAAP, B should not depreciate the assets while classified as
held for sale. The reason is because the assets are being sold and are not
providing utility to the company.
¶ 10,105
187
ANSWERS TO STUDY QUESTIONS - Module 2 - Chapter 6
d. Incorrect. GAAP does not provide for depreciating the assets over standard GAAP
lives because those assets will not offer utility to the company over such longer useful
lives.
8. a. Incorrect. A financial guarantee is an example because, through giving the
guarantee, the entity stays involved after the discontinued operation.
b. Correct. Although an actual distribution agreement would result in continuing
involvement, an interest in possibly securing a future distribution agreement
would not because the entity is not bound by a mere interest.
c. Incorrect. Having a supply agreement in place means the entity is bound by and
involved in the operation after the disposal date.
d. Incorrect. Having an option to repurchase a discontinued operation means the entity
is still involved in the discontinued operation.
9. a. Incorrect. There is no disclosure requirement related to financing cash flows in
the notes.
b. Correct. Previous GAAP does not require a separate disclosure of cash flows
related to discontinued operations. ASU 2014-08 provides a choice of disclosures related to cash flows. One is to disclose total operating and investing cash
flows of the discontinued operations.
c. Incorrect. Although disclosure of total operating and investing cash flows of the
discontinued operations is one of two options for disclosures, there is no requirement
that it be presented on the face of the income statement.
d. Incorrect. Although not previously required, ASU 2014-08 adds new disclosures
about cash flows related to discontinued operations.
¶ 10,106 MODULE 2—CHAPTER 6
1. a. Correct. One of the two criteria is that the transaction must have an unusual
nature in terms of a high degree of abnormality.
b. Incorrect. One of the criteria is infrequency (not frequency) of occurrence.
c. Incorrect. Limited application is not one of the criteria and the extent of application
has nothing to do with whether an event is extraordinary.
d. Incorrect. Repetition of use is not one of the two criteria required for categorization
as extraordinary.
2. a. Incorrect. In general, a loss from a terrorist attack is not an extraordinary item
because the infrequency of occurrence and unusual in nature criteria are not met. The
reason is because it is reasonable that such an attack could occur again in the
foreseeable future.
b. Incorrect. There is no authority for presenting such a transaction as part of income
from discontinued operations because it has nothing to do with the elimination of a
particular operation.
c. Correct. Because the criteria for extraordinary treatment are not satisfied, the
loss should be presented as part of income from continuing operations. The
FASB has argued that a terrorist attack does not satisfy the two criteria, so
presently the effect of a terrorist attack is shown as part of income from continuing operations.
¶ 10,106
188
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
d. Incorrect. The loss should be presented on the income statement and not part of
retained earnings because there is no authority to present it in retained earnings.
3. a. Correct. The ASU is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. The effective date is the
same for all entities.
b. Incorrect. The ASU allows early adoption provided that the guidance is applied from
the beginning of the fiscal year of adoption.
c. Incorrect. If an entity prospectively applies the guidance, it must disclose, if
applicable, a description of both the nature and the amount of an item included in
income from continuing operations after adoption that adjusts an extraordinary item
previously classified and presented before the date of adoption.
d. Incorrect. The ASU may be applied retrospectively to all prior periods presented in
the financial statements.
¶ 10,107 MODULE 2—CHAPTER 7
1. a. Incorrect. The FASB observes that many development stage entities remain in
that stage for many years prior to any need to prepare financial statements. Thus, the
answer stating that many entities have short development stages is incorrect.
b. Incorrect. The FASB notes that development stage entities may incur significant
audit costs to gather certain information for its first financial statement disclosures
being issued.
c. Incorrect. Many development stage entities do, in fact, go public. In turn, that may
result in those entities changing auditors. The new auditors may want to perform
additional procedures related to inception-to-date information, leading to additional
costs to the entity.
d. Correct. The FASB states that is common for development stage entities to
issue complex equity instruments, including warrants and preferred stock. Because of the issuance of such instruments, the entity may be required to disclose
equity transactions going back to inception, which is costly.
2. a. Incorrect. ASC 275 does, in fact, list a “use of estimates disclosure as a required
disclosure under GAAP.
b. Correct. Even though X has not commenced operations, ASU 2014-10
amends ASC 275 to require a nature of operations/activities disclosure even if
operations have not commenced.
c. Incorrect. ASC 275, as written, requires an entity to disclose certain significant
estimates to the extent they exist.
d. Incorrect. One of the four required disclosures of risks and uncertainties in ASC 275
is that an entity should disclose its current vulnerability due to certain concentrations.
Nothing exempts X from this disclosure.
3. a. Incorrect. The development stage entity must present “inception-to-date information and not information from the beginning of the year to the present.
b. Incorrect. The financial statements must be labeled “development stage entity and
not “pre-operating activities.
c. Correct. GAAP under ASC 915 requires that the entity describe the development stage activities in which it is engaged.
¶ 10,107
189
ANSWERS TO STUDY QUESTIONS - Module 3 - Chapter 9
d. Incorrect. There is no requirement that the entity present any development stage
activities as a separate section in the income statement, net of the tax effect or benefit.
¶ 10,108 MODULE 3—CHAPTER 8
1. a. Incorrect. The term “cash equivalents would be eliminated.
b. Incorrect. Although “cash and cash equivalents is a term used under the current
statement of cash flows, the FASB does not recommend that it be continued.
c. Correct. The FASB wants to eliminate the term “cash equivalents” so that the
statement of cash flows reconciles down to cash only.
d. Incorrect. Cash and short-term investments is not a category recommended by the
FASB.
2. a. Incorrect. All equity investments would be presented at a different value, not cost.
b. Correct. All equity investments would be measured at fair value with the
change in fair value presented in net income unless the equity investment
qualifies for the equity method or consolidation, or the equity investment does
not have a readily determinable fair value.
c. Incorrect. Although equity investments would be presented at fair value, the change
would be presented elsewhere, not presented as part of other comprehensive income.
d. Incorrect. Fair value, not lower of cost or market, would be the measurement.
3. a. Incorrect. An impairment of existing financial assets would be shown as an
allowance for expected credit losses.
b. Incorrect. An estimate of expected credit losses would always reflect both the
possibility that a credit loss results and the possibility that no credit loss results.
Therefore, the proposed amendments would not allow an entity to estimate expected
credit losses only on the basis of the most likely outcome.
c. Correct. For financial assets measured at fair value with changes in fair value
recognized through other comprehensive income, the balance sheet would show
the fair value, but the income statement would show credit deterioration (or
improvement) that has occurred during the period.
d. Incorrect. It would require an entity to impair its existing financial assets on the
basis of the current estimate of contractual cash flows that probably will not be collected
on financial assets owned at the reporting date.
¶ 10,109 MODULE 3—CHAPTER 9
1. a. Incorrect. Under the SEC rules in effect prior to ASU 2014-17, the SEC requires
use of pushdown accounting when 95 percent or more of the entity is acquired, not 70
percent.
b. Incorrect. Under the pre-ASU 2014-17 SEC rules, X is permitted to use pushdown
accounting when there is 80 to 95 percent ownership acquired, not 70 percent.
c. Correct. At less than 80 percent, the SEC rules have prohibited Y from using
pushdown accounting.
d. Incorrect. The SEC has provided authority on pushdown accounting for SEC
companies, although there has been an absence of relevant GAAP guidance.
¶ 10,109
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TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
2. a. Incorrect. Pushdown accounting applies to an acquiree, and not an acquirer. P, as
the party who obtains control to the business combination, is the acquirer so that
pushdown accounting does not apply to P.
b. Incorrect. Company S is an acquiree in a business combination through which an
acquirer (Company P) obtains control. ASU 2014-17 permits such an acquiree to use
pushdown accounting. Thus, even though S elected not to use pushdown accounting, S
could have made that election.
c. Incorrect. ASU 2014-17 permits the subsidiary of an acquiree (Company X in this
case) to use pushdown accounting even if the acquiree (Company S) elects not to use
pushdown accounting.
d. Correct. The election to use pushdown accounting is available to an acquiree
and any of the acquiree’s subsidiaries, provided a business combination results
in an acquirer obtaining control over the acquiree. In this case, as a subsidiary of
S, Company Y is permitted to make its own election to use pushdown
accounting.
3. a. Correct. Under the definition of control found in ASC 810, control exists if
P obtains a controlling financial interest in S. A controlling financial interest is
deemed to occur if there is ownership of more than 50 percent of the voting
interest in S. At 20 percent to 50 percent, P’s interest falls short of the more
than 50 percent mark.
b. Incorrect. At 80 percent of the voting interest in S, P has more than 50 percent
which is considered a controlling financial interest. Control exists if the acquirer obtains
a controlling financial interest.
c. Incorrect. ASC 810 states that P may have control if it has the power to control
Company S through a contract. Ownership is not necessarily required. Thus, control
does exist.
d. Incorrect. ASC 810 states that if P is the primary beneficiary of S and S is a VIE, the
primary beneficiary is deemed to have a controlling financial interest.
4. a. Incorrect. ASU 2014-17 states that the acquiree shall recognize goodwill that
arises due to using pushdown accounting.
b. Incorrect. ASU 2014-17 provides that any bargain purchase gains recognized by the
acquirer shall not be recognized in the acquiree’s income statement.
c. Incorrect. ASU 2014-17 does not state that the book value method should be used in
applying pushdown accounting.
d. Correct. If the pushdown accounting is used, the acquiree (Company S)
presents in its separate financial statements, its assets and liabilities using the
acquisition method. That method records assets and liabilities at fair value.
5. a. Incorrect. ASU 2014-17 states that the election to use pushdown accounting is
irrevocable.
b. Correct. Once Y elects to use pushdown accounting for a specific change-incontrol event, Y may not reverse its use subsequently based on the rules found
in ASU 2014-17.
c. Incorrect. There is no five-year provision found in ASU 2014-17.
d. Incorrect. ASU 2014-17 states that the election is irrevocable and may not be
reversed for any reason. Thus, the fact that X loses its controlling financial interest in a
¶ 10,109
ANSWERS TO STUDY QUESTIONS - Module 3 - Chapter 10
191
subsequent year does not mean that Y is permitted to reverse its use of pushdown
accounting.
6. a. Incorrect. The acquiree will typically have higher net assets because the assets
and liabilities are stepped up to fair value and goodwill is recognized.
b. Correct. Higher stepped-up assets and goodwill will cause higher depreciation, amortization, and impairment charges.
c. Incorrect. This is an advantage as it makes borrowing easier.
d. Incorrect. Operating cash flows and EBITDA should be neutral as neither are
affected by higher depreciation and amortization.
¶ 10,110 MODULE 3—CHAPTER 10
1. a. Incorrect. The ASU does not state that D must not use the accounting alternative
for goodwill, which requires that goodwill be amortized over a maximum of 10 years.
b. Incorrect. Use of the accounting alternative for variable interest entities has no
correlation or importance to use of ASU 2014-18’s alternative for identifiable intangible
assets.
c. Correct. ASU 2014-18 states that if the accounting alternative is elected with
respect to identifiable intangible assets in a business combination, an entity
must also elect the accounting alternative to amortize goodwill per ASU
2014-02.
d. Incorrect. The accounting alternative for variable interest entities has nothing to do
with ASU 2014-18.
2. a. Incorrect. The ASU specifically states that contracts with customers are not
considered to be customer-related intangible assets in applying the ASU’s alternative.
b. Incorrect. ASU 2014-18 states that a lease is not considered to be a customer-related
intangible asset in applying the ASU’s accounting alternative. That applies to both
favorable and unfavorable leases.
c. Correct. An order backlog is a customer-related intangible asset to which the
ASU applies, provided the asset cannot be sold or licensed separately from other
company assets.
d. Incorrect. Although a trade name is an intangible, it is not a customer-related
intangible asset to which the ASU applies.
3. a. Incorrect. K is permitted not to recognize separately from goodwill a customerrelated intangible, but only if that intangible is not capable of being sold or licensed
independently from other assets of the business.
b. Incorrect. The ASU pertains to identifiable intangible assets, not property and
equipment.
c. Incorrect. ASU 2014-18 does not cover inventory. Instead, the election relates to
intangible assets that are recognized separately from goodwill.
d. Correct. One of the assets to which the accounting alternative found in ASU
2014-18 applies is a noncompetition agreement which is not recognized separately from goodwill.
¶ 10,110
193
Index
References are to paragraph (¶ ) numbers.
ASC 460, Guarantees . . . . . . . . . . . . . . . . . . . 205, 905
A
ASC 605, Revenue Recognition . . . . . . . . . . . . . . . 204
Accounting change, cumulative effect of . . . . 505, 605, 608
Accounting Standards Codification (ASC),
amendment of . . . . . . . . . . . . . . . . . . . . . . . 706
Acquiree
. definition of . . . . . . . . . . . . . . .
. determining . . . . . . . . . . . . . .
. means of acquirer obtaining control of
. net assets of . . . . . . . . . . . . . .
. pushdown accounting for . . . . . . .
. subsidiaries of . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . . . . . . . 905
. . . . . . . . 905
. . . . . . . . 905
. . . . . . . . 909
904, 905, 906, 909
. . . . . . . . 905
Acquirer
. acquisition debt acquired by . . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . . . .
. determining . . . . . . . . . . . . . . . . . . .
. recognition of identifiable intangible assets by
. recording of assets and liabilities by . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Acquisition date of entity . . . . . . . . . . . . .
. change in accounting principle as of . . . . . .
. definition of . . . . . . . . . . . . . . . . . . . .
. disclosures including . . . . . . . . . . . . . .
. identifiable intangible assets recognized as of
.
.
.
.
.
.
.
.
.
.
. . . . 304
. . . . 907
. . . . 905
. . . . 906
1006, 1009
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
905
905
905
1006
905
Acquisition method . . . . . . . . . . . . 304, 904, 1004, 1006
Acquisition-related liability . . . . . . . . . . . . . . . . . 905
Acts of God not considered extraordinary items . . . . . 607
ASC 606, Revenue from Contracts with Customers . . . 204
ASC 740, Accounting for Uncertainty in Income Tax
(An Interpretation of FAS 109) . . . . . . . . . . . . . . 104
. extraordinary items under . . . . . . . . . . . . . . . . . . 607
. private company issues with . . . . . . . . . . . . . . . . 107
ASC 805, Business Combinations . 304, 904, 905, 1004, 1006
ASC 810, Consolidation of Variable Interest Entities . . . 104
. change-in-control events under . . . . . . . . . . . . . . 904
. controlling financial interest under . . . . . . . . . . . . . 905
. development stage entities under . . . . . . . . . . . 704, 706
. private company issues with . . . . . . . . . . . . . . . . 107
ASC 820 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805
ASC 825 . . . . . . . . . . . . . . . . . . . . . . . . . . . 104, 805
ASC 840, Leases . . . . . . . . . . . . . . . . . . . . . . . . 205
ASC 845, Nonmonetary Transactions . . . . . . . . . . . 205
ASC 852, Reorganizations . . . . . . . . . . . . . . 1004, 1006
ASC 855, Subsequent Events . . . . . . . . . . . . . . . . 907
ASC 915, Development Stage Entities . . . . . . . . . . . 704
. elimination of . . . . . . . . . . . . . . . . . . . . . . . . . 706
ASC 944, Financial Services—Insurance . . . . . . . . . 205
ASC 985, Software Revenue Recognition . . . . . . . . . 204
Agent, entity as . . . . . . . . . . . . . . . . . . . . . . . . 209
ASC Subtopic 250-10, Accounting Changes and Error
Corrections . . . . . . . . . . . . . . . . . . . . . . . . . 210
American Institute of Certified Public Accountants (AICPA)
. extraordinary item treatment by . . . . . . . . . . . . . . 607
. support for little GAAP by . . . . . . . . . . . . . . . . 106, 108
Assets, definition of . . . . . . . . . . . . . . . . . . . . . . 304
Amortization
. impact of pushdown accounting on . . . . . . . . . . . . 909
. recalculated upon pushdown accounting election . . . . . 905
APB 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
ASC 205, Presentation of Financial Statements . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 505, 507, 509
ASC 225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605
ASC 250, Accounting Changes and Error Corrections . 213
. change in accounting principle under . . . . . . . . . 905, 907
. discontinued items under . . . . . . . . . . . . . . . . . . 505
. extraordinary items under . . . . . . . . . . . . . . . . 605, 608
ASC 260 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
ASC 275, Risks and Uncertainties . . . . . . . . 704, 706, 707
ASC 280, Segment Reporting . . . . . 104, 212, 306, 507, 508
ASC 310, Receivables
. . . . . . . . . . . . . . . . . . 211, 212
ASC 323, Investments—Equity Method and Joint
Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . 1006
ASC 350, Intangibles—Goodwill and Other
. accounting alternative under . . . . . . . .
. amortizing goodwill under . . . . . . . . . .
. goodwill defined in . . . . . . . . . . . . . .
. recognition of gain or loss under . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . . . 107
1006, 1007
. . . . 1006
. . 303, 304
. . . . 204
ASC 360, Property, Plant, and Equipment . 204, 303, 506, 507
ASC 405 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905
ASC 450, Contingencies . . . . . . . . . . . . . . . . . 407, 905
Asset types, distinguishing . . . 303. See also individual types
ASU 2014-02, An Amendment of the FAB Accounting
Standards Codification® Intangibles—Goodwill and Other
(Topic 350): Accounting for Goodwill . . . . . . . . . . 110
. approval by PCC and endorsement by FASB of . . . . . 1004
. goodwill amortized up to 10 years under . . . . . . 1004, 1006
ASU 2014-03, Derivatives and Hedging (Topic 815):
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swap—Simplified Hedge Accounting
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 110
. approval by PCC and endorsement by FASB of . . . . . 1004
ASU 2014-07, Consolidation (Topic 810): Applying
Variable Interest Entities Guidance to Common Control
Leasing Arrangements . . . . . . . . . . . . . . . . . . 110
. approval by PCC and endorsement by FASB of . . . . . 1004
ASU 2014-08, Presentation of Financial Statements
(Topic 205) and Property, Plant and Equipment (Topic 360:
Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity . . . . . . . 501-511
. amendments in . . . . . . . . . . . . . . . . . . . . . . . 507
. background of . . . . . . . . . . . . . . . . . . . . . . 504, 604
. illustrations of . . . . . . . . . . . . . . . . . . . . . . . . 510
. issuance of . . . . . . . . . . . . . . . . . . . . . 504, 507, 604
. key provisions of, compared to previous GAAP . . . . . . 509
. objective of . . . . . . . . . . . . . . . . . . . . . . . . . . 507
. rules in . . . . . . . . . . . . . . . . . . . . . . . . . . 507, 905
. scope of . . . . . . . . . . . . . . . . . . . . . . . . . 507, 509
. transition to and effective date of . . . . . . . . . . . . . . 511
ASU 2014-09, Revenue from Contracts with
Customers (Topic 606) . . . . . . . . . . . . . . . . 201-214
ASU
194
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE - INDEX
ASU 2014-09, Revenue from Contracts with Customers
(Topic 606)—continued
. background of . . . . . . . . . . . . . . . . . . . . . . . . 204
. core principle of . . . . . . . . . . . . . . . . . . . . . . . 207
. definitions of terms for . . . . . . . . . . . . . . . . . . . . 206
. disclosure requirements of . . . . . . . . . . . . . . . . . 212
. exemptions from application of . . . . . . . . . . . . . . . 205
. impact of implementing . . . . . . . . . . . . . . . . . . . 214
. issuance of . . . . . . . . . . . . . . . . . . . . . . . . 201, 204
. purpose of . . . . . . . . . . . . . . . . . . . . . . . . . . 203
. right of return under . . . . . . . . . . . . . . . . . . . . . 209
. scope of . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
. transition to and effective date of . . . . . . . . . . . . . . 213
ASU 2014-10, Development Stage Entities (Topic
915): Elimination of Certain Financial Reporting
Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701-707
. background of . . . . . . . . . . . . . . . . . . . . . . . . 704
. definitions of terms for . . . . . . . . . . . . . . . . . . . . 705
. disclosure requirements of . . . . . . . . . . . . . . . . . 706
. issuance of . . . . . . . . . . . . . . . . . . . . . . . . 701, 704
. objective of . . . . . . . . . . . . . . . . . . . . . . . . . . 703
. rules in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706
. transition to and effective date of . . . . . . . . . . . . . . 707
ASU 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern . . . . . . . . . . . . 401-413
. assessment period under . . . . . . . . . . . . . . . . . . 410
. background of . . . . . . . . . . . . . . . . . . . . . . . . 404
. definitions of terms for . . . . . . . . . . . . . . . . . . . . 405
. disclosure requirements of . . . . . . . . . . . . . . . . . 409
. evaluating conditions and events under . . . . . . . . . . 407
. GAAP rules versus auditing standards under . . . . . . . 412
. implementation guidance for . . . . . . . . . . . . . . . . 410
. issuance of . . . . . . . . . . . . . . . . . . . . . . . . . . 404
. objective of . . . . . . . . . . . . . . . . . . . . . . . . . . 403
. rules for implementation of . . . . . . . . . . . . . . . . . 406
. transition to and effective date of . . . . . . . . . . . . . . 411
ASU 2014-17, Business Combinations (Topic 805):
Pushdown Accounting (a consensus of the FASB
Emerging Issues Task Force) . . . . . . . . . . . . 901-909
. background of . . . . . . . . . . . . . . . . . . . . . . . . 904
. definition of terms for . . . . . . . . . . . . . . . . . . . . 905
. disclosure requirements of . . . . . . . . . . . . . . . . . 906
. example of applying . . . . . . . . . . . . . . . . . . . . . 908
. impact on SEC companies of . . . . . . . . . . . . . . . . 905
. issuance of . . . . . . . . . . . . . . . . . . . . . . . . 903, 904
. objective of . . . . . . . . . . . . . . . . . . . . . . . . . . 903
. rules in . . . . . . . . . . . . . . . . . . . . . . . . . . 905, 909
. scope of . . . . . . . . . . . . . . . . . . . . . . . . . . . 905
. SEC Topic 5.J rescinded by . . . . . . . . . . . . . . 905, 908
. transition to and effective date of . . . . . . . . . . . . . . 907
ASU 2014-18, Business Combinations (Topic 805):
Accounting for Identifiable Intangible Assets in a
Business Combination . . . . . . . . . . . . . . 1001-1009
. allocation of costs in business combinations under . . . . 110
. background of . . . . . . . . . . . . . . . . . . . . . . . . 1004
. definitions of terms for . . . . . . . . . . . . . . . . . . . . 1005
. disclosure not required for . . . . . . . . . . . . . . . . . 1008
. example of applying . . . . . . . . . . . . . . . . . . . . . 1008
. issuance of . . . . . . . . . . . . . . . . . . . . . . 1003, 1004
. objective of . . . . . . . . . . . . . . . . . . . . . . . . . . 1003
. rules in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1006
. transition to . . . . . . . . . . . . . . . . . . . . . . . . . . 1007
ASU
ASU 2015-01, Income Statement—Extraordinary and
Unusual Items (Subtopic 225-20): Simplifying Income
Statement Presentation by Eliminating the Concept of
Extraordinary Items . . . . . . . . . . . . . . . . . . 601-608
. issuance of . . . . . . . . . . . . . . . . . . . . . 601, 604, 607
. transition to and effective date of . . . . . . . . . . . . 605, 608
ASU 2015-10, Technical Corrections and
Improvements . . . . . . . . . . . . . . . . . . . . . . . 303
Audit procedures for entities becoming public . . . . . . 704
Auditing Standards Board (ASB)
. diminishing role of . . . . . . . . . . . . . . . . . . . . . . 104
. going concern guidance by . . . . . . . . . . . . . . . . . 410
Auditors, going concern issues for
. litigation risk for . . . . . . . . . . . . . . . . . . . . . . . 413
. requirements for . . . . . . . . . . . . . . . . . . . . . . . 410
Available to be issued financial statements
. definition of . . . . . . . . . . . . . . . . . . . . . . . 405, 1005
. use by non-SEC entities of . . . . . . . . . . . . . . . . . 407
B
Big GAAP-little GAAP . . . . . . . . . . . . . . . . . . . 101-110
. prior attempts at developing, . . . . . . . . . . . . . . . . 105
. reasons for impetus to develop . . . . . . . . . . . . . . . 104
Business
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 507, 905
. held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 507
Business combinations
. accounting for identifiable intangible assets in
. buyback of right in . . . . . . . . . . . . . . . .
. by contract alone . . . . . . . . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . . . .
. determining acquirer and acquiree in . . . . .
. disclosures for . . . . . . . . . . . . . . . . . .
. of entities or activities under common control .
. extraordinary gains in . . . . . . . . . . . . . .
. GAAP for . . . . . . . . . . . . . . . . . . . . .
. goodwill arising from . . . . . . . . . . . . . .
. identifiable intangible assets in . . . . . . . . .
. pushdown accounting for . . . . . . . . . . . .
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.
1001-1009
. . . 306
. . . 905
. . . 905
. . . 905
. . . 212
. . . 905
. . . 607
. . . 304
. 304, 607
1001-1009
. . 901-908
.
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.
.
Business Combinations (Topic 805): Pushdown
Accounting (a consensus of the FASB Emerging Issues
Task Force) . . . . . . . . . . . . . . . . . . . . . . . . . 904
Business segment, definition of . . . . . . . . . . . . . . 506
C
Carrying amount
. of investment . . . . . . . . . . . . . . . . . . . . . . . . . 1006
. of major classes of assets and liabilities . . . . . . . . . . 508
. of reporting unit . . . . . . . . . . . . . . . . . . . . . . . 304
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 804
Change in accounting estimate . . . . . . . . . . . . . . . 210
Change-in-activity event . . . . . . . . . . . . . . . . . . . 905
Change-in-control event . . . . . . . . . . . . . . . . . 904, 905
Channel stuffing . . . . . . . . . . . . . . . . . . . . . . . . 204
Chief executive officer (CEO), lowering exposure of . 506, 606
Chief financial officer (CFO), lowering exposure of . 506, 606
Classification shifting for transactions . . . . . . . . 506, 606
Commodity supply contracts . . . . . . . . . . . . . . . . 1006
Completed contract method for revenue recognition . . 204,
214
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE - INDEX
Component of entity
. definition of . . . . .
. disposals of . . . .
. held for sale . . . .
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. . . . . . . . 505
. . . 506, 507, 509
507, 508, 509, 511
. . . 507, 510, 511
Construction industry, contracts in . . . . . . . . . . . . 214
Continuing operations, shifting losses and expenses
from . . . . . . . . . . . . . . . . . . . . . . . . 506, 507, 606
Contract asset
. capitalized costs giving rise to .
. definition of . . . . . . . . . . . .
. disclosures for . . . . . . . . . .
. impairment of . . . . . . . . . .
. legal right giving rise to . . . . .
. reclassification as receivable of
. separate recognition of . . . . .
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. . . . . . 214
206, 211, 1005
. . . . . . 212
. . . . . . 212
. . . . . . 304
. . . . . . 212
. . . . . . 1006
Contract balances, disclosures for . . . . . . . . . . . . . 212
Contract liability
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 206, 211
. disclosures for . . . . . . . . . . . . . . . . . . . . . . . . 212
. recognition of revenue arising from . . . . . . . . . . . . 212
Contracts
. assets recognized from costs to obtain or fulfill . 210, 212, 214
. completed . . . . . . . . . . . . . . . . . . . . . . . . . . 213
. costs to fulfill . . . . . . . . . . . . . . . . . . . . . . . . . 210
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 206
. disclosures of revenue and cash flows for . . . . . . . . . 212
. distinct goods or services within context of . . . . . . . . 208
. expenses recognized from . . . . . . . . . . . . . . . . . 214
. impact of implementing revenue recognition standard
on . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
. incremental costs of obtaining . . . . . . . . . . . . . . . 210
. performance obligations of . . . . . . . . . . . . 204, 207, 208
. presentation of, in statement of financial position . . . . . 211
. responsibility for fulfilling . . . . . . . . . . . . . . . . . . 209
. revenue from, disaggregation of . . . . . . . . . . . . . . 212
. termination of . . . . . . . . . . . . . . . . . . . . . . . . 208
. variable consideration in . . . . . . . . . . . . . . . . . . 208
195
Disclosures
. accounting policy . . . . . . . . . . . . . . . . . . . . . . 204
. ASU 2014-18 accounting alternative as not requiring . . . 1008
. for contracts . . . . . . . . . . . . . . . . . . . . . . . . . 212
. for development stage entities . . . . . . . . . . . . . 704, 706
. for discontinued operations . . . . . . . . . . . . 505, 507, 508
. for extraordinary items . . . . . . . . . . . . . . . . . . . 608
. going concern . . . . . . . . . . . . . . . . . . . . . . 401-413
. for goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . 304
. improving requirements for . . . . . . . . . . . . . . . . . 203
. for intangible assets . . . . . . . . . . . . . . . . . . 306, 1006
. for long-lived assets held for sale or disposed of . . . . . 508
. for management’s plans for mitigating concerns about
continuing as going concern . . . . . . . . . . . . . . 409
. for risks and uncertainties . . . . . . . . . . . . . . . . 704, 706
. SEC guidance for . . . . . . . . . . . . . . . . . . . . . . 404
Discontinued operations . . . . . . . . . . . . . . . . . 501-511
. activities excluded from . . . . . . . . . . . . . . . . . . . 507
. adjustment to amounts of prior . . . . . . . . . . . . . 507, 508
. allocation of interest and overhead to . . . . . . . . . . . 509
. ASU 2014-08 as tightening rules for . . . . . . . . . . 504, 604
. balance sheet reporting of . . . . . . . . . . . . . . . . . 507
. cash flows of . . . . . . . . . . . . . . . . . . . . . . . 508, 509
. change in plan for selling . . . . . . . . . . . . . . . . . . 508
. classification shifting of losses and expenses to . . . 506, 507
. continuing involvement with . . . . . . . . . . . . . . . . 508
. definition of . . . . . . . . . . . . . . . . . . . . . 505, 507, 509
. disclosures for . . . . . . . . . . . . . . . . . . . 505, 507, 508
. examples of reporting for . . . . . . . . . . . . . . . . . . 510
. GAAP for . . . . . . . . . . . . . . . . . . . 501, 505, 507, 509
. income statement presentation of . . . . . . . . . . . 509, 604
. presentation of assets and liabilities of . . . . . . . . . . . 509
. reduced threshold for . . . . . . . . . . . . . . . . . . . . 506
. statement of income reporting of . . . . . . . . . . . . . . 507
Disposal group, definition of . . . . . . . . . . . . . . . . 507
Dodd-Frank, clawback provisions of . . . . . . . . . . 506, 606
E
Control, definition of . . . . . . . . . . . . . . . . . . . . . 905
Earnings management . . . . . . . . . . . . . . . . . . . . 506
Controlling financial interest in acquiree . . . . . . . . . 905
EITF Issue 86-9, IRS Section 338 and Pushdown
Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 904
Copyright as legal right . . . . . . . . . . . . . . . . . . . . 304
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . 1006
Credit losses, expected
. . . . . . . . . . . . . . . . . . . 805
Customer
. consideration payable to . . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . .
. disclosure of contract with . . . . . . . . .
. identifying contract with . . . . . . . . . . .
. information about, separate recognition of .
. satisfaction of performance obligation by .
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.
. . . 208
. . . 206
. . . 212
. 207, 208
. . . 1006
. . . 208
Customer list . . . . . . . . . . . . . . . . . . . 304, 1006, 1009
Customer relationships . . . . . . . . . . . . . . . . . . . 1006
D
Depreciation
. impact of pushdown accounting on . . . . . . . . . . . . 909
. recalculated upon pushdown accounting election . . . . . 905
Development stage entities
companies
. definition of . . . . . . . . .
. disclosures by . . . . . . .
. GAAP for . . . . . . . . . .
. reporting requirements for
. . . . 701-707. See also Start-up
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704, 705, 706
. . . 704, 706
. . . . . 704
. . . 704, 706
EITF Issue 87-21, Change of Accounting Basis in
Master Limited Partnership Transactions . . . . . . . 904
EITF Topic D-97, Pushdown Accounting . . . . . . . . . . 904
Emerging Issues Task Force.See FASB Emerging Issues Task
Force (EITF)
Enforceable right to payment of an entity . . . . . . . . . 208
Equity investments, fair value measurement of . . . . . . 805
Equity method investment, disclosures for . . . . . . . . 508
Extraordinary items . . . . . . . . . . . . . . . . . 506, 601-608
. ASU 2015-01 as eliminating . . . . . . . . . . . . . . . . 604
. classification shifting of losses and expenses to . . . . . 606
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 605
. FASB actions to reduce transactions qualifying as . 603, 604,
607
. GAAP for . . . . . . . . . . . . . . . . . . . . . . . . . 605, 607
. infrequency of occurrence of . . . . . . . . . . . . . . 605, 607
. presentation issues for . . . . . . . . . . . . . . . . . . . 603
. unusual nature of . . . . . . . . . . . . . . . . . . . . 605, 607
F
Fair value accounting . . . . . . . . . . . . . . . . . . . . . 805
Fair value of reporting unit . . . . . . . . . . . . . . . . . . 304
FAI
196
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE - INDEX
FAS 7, Accounting and Reporting by Development
Stage Enterprises . . . . . . . . . . . . . . . . . . . 703, 704
FAS 109, Accounting for Income Taxes . . . . . . . . . . 607
FAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets . . . . . . . . . . . . . . . . . . . 506
FAS 145, Rescission of FAS 4, 44, and 64 . . . . . . . . . 607
FASB Concepts Statement No. 6, Elements of
Financial Statements . . . . . . . . . . . . . . . . . . . 905
FASB Emerging Issues Task Force (EITF)
. extraordinary item treatment by . . . . . . . . . . . . . . 607
. pushdown accounting guidance by . . . . . . . . . . . 901-908
. revenue recognition guidance by . . . . . . . . . . . . . . 204
Financial Accounting Foundation (FAF) . . . . . . . . . . 107
. Blue Ribbon Panel of . . . . . . . . . . . . . . . . . . . . 105
Financial Accounting Standards Advisory Council
(FASAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Financial Accounting Standards Board (FASB).See also
International standards convergence between FASB and IASB
. controversial statements and interpretations issued
by . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
. discontinued operations and extraordinary items
actions of . . . . . . . . . . . . . 506, 507, 603, 604, 607
. endorsement of PCC changes to GAAP by . . . . . . . . 106
. financial performance reporting project of . . . . . . . . . 804
. liaison member to PCC from . . . . . . . . . . . . . . . . 106
. project schedule of, for 2015 and after . . . . . . . . . 803, 804
. research projects on fair value accounting of . . . . . . . 805
. revenue project of . . . . . . . . . . . . . . . . . . . . . . 204
Generally accepted accounting principles (GAAP)—continued
. for pushdown accounting . . . . . . . . . . . . . . . . . . 904
. revenue recognition under . . . . . . . . . . . . . . . 203, 204
Going concern.See also Substantial doubt about continuing as
going concern
. assessment period for . . . . . . . . . . . . . . . . . . . . 412
. financial statements and disclosures for . . . . . . . . 401-413
. guidance for auditors addressing . . . . . . . . . . . . . . 410
. management’s evaluation of . . . . . . . . . . . . . . . . 407
. management’s plans about entity continuing as . . . . 408, 409
. rules in review engagement for . . . . . . . . . . . . . . . 412
Going concern basis of accounting under GAAP
406
. 403, 404,
Going concern report modifications . . . . . . . . . . . . 413
Goodwill.See also Intangible assets
. amortization of . . . . . . . . . . . . . . . .
. annual testing of . . . . . . . . . . . . . . .
. arising from applying pushdown accounting
. assigned to reporting units . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . .
. disclosures for . . . . . . . . . . . . . . . .
. excluded from discontinued operations . .
. GAAP for . . . . . . . . . . . . . . . . . . .
. impairment of . . . . . . . . . . . . . . . .
. implied fair value of . . . . . . . . . . . . .
. noncompetition agreements combined in .
. presentation of aggregate amount of . . . .
. qualitative factors for . . . . . . . . . . . .
. as type of intangible asset . . . . . . . . .
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.
. 1004, 1006
. . . . . 304
. . . 905, 906
. . . . . 304
. . . 303, 304
. . . . . 304
. . . . . 509
303, 304, 305
. . . 301-305
. . . . . 304
. . . . . 1006
. . . . . 304
. . . . . 305
. . . . . 303
Financial instrument, definition of . . . . . . . . . . . . . 805
Guarantee
. for contracts . . . . . . . . . . . . . . . . . . . . . . . . . 205
. liability for, at fair value . . . . . . . . . . . . . . . . . . . 905
Financial Instruments—Credit Losses (Subtopic
825-15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805
H
Financial Instruments—Overall (Subtopic 825-10)
Recognition and Measurement of Financial Assets and
Financial Liabilities . . . . . . . . . . . . . . . . . . . . 805
Held for sale classification . . . . . . . . . . . . . 507, 508, 510
. presentation of assets and liabilities in . . . . . . . . . 509, 510
Financial assets, measurement categories of . . . . . . . 805
Hurricane Katrina . . . . . . . . . . . . . . . . . . . . . . . 607
Financial liabilities, amortized cost of . . . . . . . . . . . 805
Financial Reporting Framework for Small and
Medium Sized Entities (FRF for SMEs) . . . . 106, 108, 109
Financial statements
. FASB and IASB tentative decisions on presentation of . . 804
. format and presentation of . . . . . . . . . . . . . . . . . 804
. simplifying preparation of . . . . . . . . . . . . . . . . . . 203
Firm purchase commitment, definition of . . . . . . . . . 507
Fraud and accounting violations, revenue
recognition and . . . . . . . . . . . . . . . . . . . . . . 204
G
Generally accepted accounting principles (GAAP)
. for business combinations . . . . . . . . . . . . . . . . . 304
. changes planned in 2015 and after for . . . . . . 803, 804, 805
. for contracts . . . . . . . . . . . . . . . . . . . . . . . 203, 204
. for development stage entities . . . . . . . . . . . . . . . 704
. for discontinued operations . . . . . . . . . 501, 505, 507, 509
. evaluation of going concern issues under . . . . . . . . . 412
. for extraordinary items . . . . . . . . . . . . . . . . . 605, 607
. going concern basis of accounting under . . . . 403, 404, 406
. ignoring new standards of . . . . . . . . . . . . . . . . . . 104
. for impairment of goodwill and other intangible assets . . 303,
304, 305
. PCC recommendations for changes to . . . . . . . . . . 106
. for private, nonpublic companies . . . . . . . . . 101-110, 507
. for public, SEC companies . . . . . . . . . . . . 104, 206, 507
FAS
I
IAS 1, Presentation of Financial Statements . . . . . . . 607
Identifiable assets . . . . . . . . . . . . . . . . . . . . 304, 1004
Identifiable intangible assets acquired in business
combination . . . . . . . . . . . . . . . . . . . . 1001-1009
. accounting for goodwill separately from . . . . . . 1004, 1006
. contractual-legal criterion for . . . . . . . . . . . . . . . . 1006
. PCC project for . . . . . . . . . . . . . . . . . . . . . . . 1004
. separability criterion for . . . . . . . . . . . . . . . . . . . 1006
. transition to accounting alternative for . . . . . . . . . . . 1007
IFRS 5, Noncurrent Assets Held for Sale and
Discontinued Operations . . . . . . . . . . . . . . . . . 507
IFRS 15, Revenue from Contracts with Customers . . . . 204
Impairment loss calculation . . . . . . . . . . . . . . . 304, 306
Impairment loss recognition . . . . . . . . . . . . . . . . . 210
Inception-to-date information for development stage
entities . . . . . . . . . . . . . . . . . . . . . . . . . . 704, 706
Income-tax-basis financial statements . . . . . . . . . 104, 109
Indefinite-lived intangible assets . . . . . . . . . 301, 305, 306
Indirect method of presenting operating activities . . . . 804
Installment sales method for revenue recognition . . . . 204
Intangible assets.See also Goodwill; Identifiable intangible
assets acquired in business combination
197
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE - INDEX
Intangible assets.—continued
. contract-based . . . . . . . . . .
. customer-related . . . . . . . .
. definition of . . . . . . . . . . . .
. disclosures for . . . . . . . . . .
. distinguishing types of . . . . . .
. fair value of . . . . . . . . . . . .
. identifiable, accounting for . . .
. identifiable, acquisition of . . . .
. impairment guidelines for . . . .
. indefinite-lived . . . . . . . . . .
. presentation and disclosures for
. subsequent accounting for . . .
. useful life of . . . . . . . . . . .
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Nonpublic entities.—continued
. identifiable intangible assets of . . . . . . . . . . . 1001-1009
. pushdown accounting for . . . . . . . . . . . . . . . . . . 904
. value of, classification shifting affecting . . . . . . . . 506, 606
. . . . . . . . . . 1006
304, 1004, 1006, 1007
. . . . . . . . 303, 304
. . . . . . . 306, 1006
. . . . . . . . . . 303
. . . . . . . . . . 1004
. . . . . . 1001-1009
. . . . . . . . . . 304
. . . . . . . . 305, 306
. . . . . 301, 305, 306
. . . . . . . . . . 306
. . . . . . . . . . 303
. . . . . . . . 303, 306
Oil and gas properties . . . . . . . . . . . . . . . . . . 507, 509
Intellectual property, license of . . . . . . . . . . . . . . . 214
Operating expenses, classification of . . . . . . . . . . . 506
Interest allocated to discontinued operations
Not-for-profit entity
. acquisition of intangible asset by
. change in net assets of . . . . .
. definition of . . . . . . . . . . . .
. securities issued by . . . . . . .
. transfer of net assets of . . . . .
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. . . 304
. . . 508
. 206, 507
. 213, 511
. . . 905
O
. . . . . . 509
Operating segment, definition of . . . . . . . . . . . . . . 304
International Accounting Standards Board (IASB).See also
International standards convergence between FASB and IASB
. exposure draft Revenue Recognition (Topic 605):
Revenue from Contracts with Customers of . . . . . . 204
. extraordinary item treatment by . . . . . . . . . . . . . . 607
. IFRS for SMEs of . . . . . . . . . . . . . . . . . . . . . . 109
. tentative decisions on financial statement
presentation by FASB and . . . . . . . . . . . . . . . 804
Other comprehensive basis of accounting (OCBOA)
. compliance with . . . . . . . . . . . . . . . . . . . . . . . 104
. FRF for SMEs as one framework of . . . . . . . . . . . . 108
Overhead allocated to discontinued operations . . . . . 509
International Financial Reporting Standards (IFRSs) . . 204
Parent, exchanges in subsidiary ownership interests
by . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905
International standards convergence between FASB and
IASB
. ASU applications in . . . . . . . . . . . . . . . . . . . . . 204
. changes to U.S. GAAP required for . . . . . . . . . . 104, 803
. discontinued operations addressed for . . . . . . . . . . 507
Percentage of costs incurred method . . . . . . . . . . . 214
Issued financial statements, definition of . . . . . . . . . 405
L
Lease
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 1005
. separate recognition of . . . . . . . . . . . . . . . . . . . 1006
P
Percentage-of-completion method . . . . . . . . . . . 204, 214
Performance obligations.See also Contracts
. allocation of transaction price to . . . . . . . . . 207, 208, 212
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 206, 208
. disclosures for . . . . . . . . . . . . . . . . . . . . . . . . 212
. distinction of providing goods and services or arrange
for provision by another party in . . . . . . . . . . . . 209
. division of contracts into separate . . . . . . . . . . . . . 214
. identification of . . . . . . . . . . . . . . . . . . . . . . . . 208
. timing of satisfaction of . . . . . . . . . . . . . . . . . . . 212
Legal rights, intangible assets arising from . . . . . . 304, 306
Pretax profit or loss of discontinued operation . . . . 508, 509
Limited partnership, master . . . . . . . . . . . . . . . . . 905
Principal, agency as
Liquidation
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 405
. imminent . . . . . . . . . . . . . . . . . . . . . . . . . . . 406
Principle operations, planned . . . . . . . . . . . . . . . . 704
. disclosures for . . . . . . . . . . . . . . . . . . . . . . . . 706
Losses shifted from continuing operations . . . . . . . . 507
M
Manipulation of earnings and stock value . . . . . . . . . 506
. . . . . . . . . . . . . . . . . . . . . 209
Private Company Council (PCC)
. actions of . . . . . . . . . . . . . . .
. ASUs approved by . . . . . . . . .
. as framework for nonpublic entities
. membership of . . . . . . . . . . . .
. responsibilities of . . . . . . . . . .
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107, 1004
. . . 1004
. 109, 110
. . . 106
. . . 106
N
Private Company Decision-Making Framework: A
Guide for Evaluating Financial Accounting and Reporting
for Private Companies . . . . . . . . . . . . . . . . . . 110
Natural disasters, losses due to . . . . . . . . . . . . . . . 607
Private company, definition of . . . . . 1005. See also Private,
nonpublic companies
Mortgage servicing rights . . . . . . . . . . . . . . . . . . 1006
Net income, presentation of . . . . . . . . . . . . . . . . . 805
Noncompetition agreements . . . . . . . . . 1004, 1006, 1009
Nonprofit activity
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 507, 905
. held for sale . . . . . . . . . . . . . . . . . . . . 507, 510, 511
Nonpublic entities.See also Private, nonpublic companies
. application of ASU 2014-08 by . . . . . . . . . . . . . . . 511
. application of ASU 2014-09 by . . . . . . . . . . . . . . . 213
. disclosures for contract balances by . . . . . . . . . . . . 212
. disclosures for remaining performance obligations by . . 212
. GAAP for . . . . . . . . . . . . . . . . . . . . . . . . . 101-110
. going concern assessment period for . . . . . . . . . . . 412
Private, nonpublic companies
. GAAP rules for . . . . . . . . . . . . . . .
. identifiable intangible assets of . . . . . .
. shortcut election for intangible assets by
. types of frameworks available for . . . .
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101-110, 507
. 1001-1009
. . . . . 304
. . . 108-110
Probable events . . . . . . . . . . . . . . . . . . . . . . . . 206
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 405, 507
Public business entity
. criteria for . . . . . . . . .
. definition of . . . . . . . . .
. disclosures required for . .
. discontinued operations of
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. . . 507
705, 1005
. . . 508
. 508, 511
PUB
198
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE - INDEX
Public business entity—continued
. definition of . . . . . . . . . . . . .
. GAAP for . . . . . . . . . . . . . .
. SEC requirements for . . . . . . .
. stock price value for . . . . . . . .
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. . . 206, 507
104, 206, 507
. . . 507, 705
. . . 506, 606
Public Company Accounting Oversight Board
(PCAOB) as standards-setter for SEC company auditors .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Pushdown accounting . . . . . . . . . . . .
. advantages of . . . . . . . . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . .
. disadvantages of . . . . . . . . . . . . . .
. disclosures for . . . . . . . . . . . . . . . .
. election to apply, by subsidiary, irrevocable
. example of applying . . . . . . . . . . . . .
. future election of . . . . . . . . . . . . . . .
. GAAP for . . . . . . . . . . . . . . . . . . .
. goodwill arising from applying . . . . . . .
. history of . . . . . . . . . . . . . . . . . . .
. net income affected by . . . . . . . . . . .
. for nonpublic entities . . . . . . . . . . . .
. SEC rules for . . . . . . . . . . . . . . . . .
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. 901-909
. . . 909
. . . 904
. . . 909
. . . 906
. 905, 909
. . . 908
. . . 905
. . . 904
. . . 905
. . . 904
. . . 909
. . . 904
. 904, 905
Q
Qualitative assessment of goodwill . . . . . . . . . . 304, 305
R
Receivable
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 211
. disclosure of opening and closing balances of . . . . . . 212
. reclassification of contract asset as . . . . . . . . . . . . 212
SEC Staff Accounting Bulletin Topic No 5.J, New
Basis of Accounting Required in Certain Circumstances .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 904
SEC Topic 5.J, rescission of . . . . . . . . . . . . 905, 908, 909
Securities and Exchange Commission (SEC)
. consideration of international standards by .
. guidance on going concern disclosures by .
. public business entity requirements of . . . .
. pushdown accounting requirements of . . . .
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. . . 703
. . . 404
. 507, 705
. 904, 905
Securities Exchange Act of 1934 . . . . . . . . . . . . 507, 705
Service activities, revenue recognition for . . . . . . . . 204
SSARS 21 . . . going concern issues under . . . . . . . . 412
Staff Draft of an Exposure Drat on Financial
Statement Presentation . . . . . . . . . . . . . . . . . . 804
Standalone selling price
. definition of . . . . . . . . . . . . . . . . . . . . . . . . 206, 208
. methods of estimating . . . . . . . . . . . . . . . . . . . . 208
Start-up companies.See also Development stage entities
. financial statements of . . . . . . . . . . . . . . . . . 703, 704
. principal operations of . . . . . . . . . . . . . . . . . . . . 704
Statement of financial position
. extraordinary items in . . . . . . . . . . . . .
. guarantees in . . . . . . . . . . . . . . . . .
. presentation of contract in . . . . . . . . . .
. presentation of revenue-related accounts in .
. of start-ups . . . . . . . . . . . . . . . . . . .
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. . . 608
. . . 905
. . . 211
. . . 204
. 804, 805
Stock price and value, classification shifting to drive . . 506,
606
Strategic shift, disposal representing . . . . . . 507, 509, 510
Reporting unit for goodwill impairment test . . . . . . . . 304
Subsidiary, change in legal organization of . . . . . . . . 905
Restatements, sources of . . . . . . . . . . . . . . . . . . 204
Substantial doubt about continuing as going
concern . . . . . . . . . . . . . . . . . . . .
. auditor’s consideration of . . . . . . . . . . .
. conditions and events raising . . . . . . . . .
. definition of . . . . . . . . . . . . . . . . . . .
. disclosures for . . . . . . . . . . . . . . . . .
. evaluating, ASU 2014-15 flowchart for . . . .
. management’s plans upon raising . . . . . .
Revenue
. catch-up adjustments to . . . . . . . . . . . . . . . . . . . 212
. definition of . . . . . . . . . . . . . . . . . . . . . . . . . . 206
. disaggregation of . . . . . . . . . . . . . . . . . . . . . . 212
Revenue realization . . . . . . . . . . . . . . . . . . . . . . 204
Revenue recognition . . . . . . . . . . . . . . . . .
. of asset from costs to fulfill contract . . . . . . . .
. on bill and hold transactions . . . . . . . . . . . .
. changes to GAAP for . . . . . . . . . . . . . . . .
. in construction industry . . . . . . . . . . . . . . .
. of contract liability . . . . . . . . . . . . . . . . . .
. disclosure requirements for . . . . . . . . . . . . .
. as entity satisfies performance obligation . . . . .
. as fee or commission amount . . . . . . . . . . .
. in fraud and accounting violations . . . . . . . . .
. impact of implementing ASU 2014-09 standard for
. of incremental costs of obtaining contract . . . . .
. of other costs as expenses . . . . . . . . . . . . .
. over time, input and output methods for . . . . . .
. premature . . . . . . . . . . . . . . . . . . . . . .
. steps in . . . . . . . . . . . . . . . . . . . . . . . .
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. 201-214
. . . 210
. . . 204
. . . 204
. . . 214
. . . 212
. . . 212
. 207, 208
. . . 209
. . . 204
. . . 214
. . . 210
. . . 210
. 208, 214
. . . 204
. 207, 208
Revenue violations, types of . . . . . . . . . . . . . . . . . 204
Review engagement, going concern rules for . . . . . . . 412
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. . . . . 404
. . . . . 410
. . . . . 407
405, 410, 412
. . . 409, 412
. . . . . 410
. . . . . 408
T
Terrorist attacks not considered extraordinary items . . 607
Traditional sales method for revenue recognition . . . . 204
Transaction price
. allocating, to performance obligations
. definition of . . . . . . . . . . . . . . .
. determination of . . . . . . . . . . . .
. estimating . . . . . . . . . . . . . . .
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207, 208, 212
. . . 206, 208
204, 207, 208
. . . . . 208
U
Unit of account for impairment testing . . . . . . . . . . . 306
Useful life of intangible asset . . . . . . . . . . . . . . 303, 306
V
Right of return, transfer of products with . . . . . . . . . 209
S
SAB 101, Revenue Recognition in Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . 204
SAB 115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905
Sale with a right of return . . . . . . . . . . . . . . . . . . 209
Sales to fictitious customers . . . . . . . . . . . . . . . . 204
Sarbanes-Oxley Act of 2002
. classification shifting under . . . . . . . . . . . . . . . 506, 606
. FASB funding under . . . . . . . . . . . . . . . . . . . . . 104
PUB
Variable consideration in contract . . . . . . . . . . . . . 208
. constrained estimate of . . . . . . . . . . . . . . . . . . . 212
. estimates of, use of . . . . . . . . . . . . . . . . . . . . . 214
Variable interest entities
. controlling interest in . . . . . . . . . .
. definition of . . . . . . . . . . . . . . . .
. impact of development stage entities for
. total equity investment evaluation for .
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905
704
706
706
Y
Year-end cutoff procedures . . . . . . . . . . . . . . . . . 204
199
¶ 10,200 CPE Quizzer Instructions
This CPE Quizzer is divided into three Modules. To obtain CPE Credit, go to CCHGroup.com/PrintCPE to complete your Quizzers online for immediate results and no
Express Grading Fee. There is a grading fee for each Quizzer submission.
Processing Fee:
Recommended CPE:
$98.00 for Module 1
7 hours for Module 1
$84.00 for Module 2
6 hours for Module 2
$56.00 for Module 3
4 hours for Module 3
$238.00 for all Modules
17 hours for all Modules
Instructions for purchasing your CPE Tests and accessing them after purchase are
provided on the CCHGroup.com/PrintCPE website.
To mail or fax your Quizzer, send your completed Answer Sheet for each Quizzer
Module to CCH Continuing Education Department, 4025 W. Peterson Ave.,
Chicago, IL 60646, or fax it to (773) 866-3084. Each Quizzer Answer Sheet will be
graded and a CPE Certificate of Completion awarded for achieving a grade of 70 percent
or greater. The Quizzer Answer Sheets are located at the back of this book.
Express Grading: Processing time for your mailed or faxed Answer Sheet is generally
8-12 business days. To use our Express Grading Service, at an additional $19 per
Module, please check the “Express Grading box on your Answer Sheet and provide
your CCH account or credit card number and your fax number. CCH will fax your
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p.m. the business day following our receipt of your Answer Sheet. If you mail your
Answer Sheet for Express Grading, please write “ATTN: CPE OVERNIGHT” on
the envelope. NOTE: CCH will not Federal Express Quizzer results under any
circumstances.
Recommended CPE credit is based on a 50-minute hour. Participants earning credits for
states that require self-study to be based on a 100-minute hour will receive 1/2 the CPE
credits for successful completion of this course. Because CPE requirements vary from
state to state and among different licensing agencies, please contact your CPE governing body for information on your CPE requirements and the applicability of a
particular course for your requirements
Date of Completion: If you mail or fax your Quizzer to CCH, the date of completion on
your Certificate will be the date that you put on your Answer Sheet. However, you must
submit your Answer Sheet to CCH for grading within two weeks of completing it.
Expiration Date: December 31, 2016
Evaluation: To help us provide you with the best possible products, please take a
moment to fill out the course Evaluation located after your Quizzer. A copy is also
provided at the back of this course if you choose to mail or fax your Quizzer Answer
Sheets.
¶ 10,200
200
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
One complimentary copy of this course is provided with certain copies of CCH
publications. Additional copies of this course may be downloaded from CCHGroup.com/PrintCPE or ordered by calling 1-800-248-3248 (ask for product
10024493-0003).
¶ 10,200
201
¶ 10,301 QUIZZER QUESTIONS: MODULE 1
1. With respect to the Big-GAAP, Little-GAAP issue, accountants and their clients have
defaulted to several techniques to avoid the burdensome task of having to comply with
recently issued difficult and irrelevant accounting standards. Such techniques include
all of the following except:
a. Ignore the new GAAP standards
b. Include a GAAP exception in the accountant’s/auditor’s report
c. Issue OCBOA (income tax basis) financial statements
d. Issue standard GAAP statements
2. One of the challenges of the AICPA’s FRF for SMEs is that the framework is
.
a. Too complex to follow
b. Non-authoritative
c. Lacking core disclosures required by third parties
d. Costly to implement
3. As of April 2015, the PCC has one project on its agenda, which is:
a. Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps- Simplified Hedge Accounting Approach (phase 2)
b. Accounting for Identifiable Intangible Assets in a Business Combination
(phase 2)
c. Definition of a Public Business Entity (phase 2)
d. Accounting for Goodwill (phase 2)
4. Which of the following frameworks can be used but limits the practitioner as to the
extent to which GAAP exceptions can be used?
a. FASB’s Private Company Council Framework
b. AICPA’s Financial Reporting Framework for Small-to Medium-Sized Entities
c. U.S. GAAP
d. U.S. GAAP with GAAP exceptions
5. Which of the following ASUs allows a non-public company lessee to elect an
accounting alternative not to consolidate a VIE if certain criteria are met?
a. ASU 2014-02
b. ASU 2014-03
c. ASU 2014-07
d. ASU 2014-18
6. Examples of recognition of revenue prematurely include all of the following except:
a. Channel stuffing
b. Improper use of the percentage-of-completion method
c. Reporting revenue when significant services have not been performed
d. Reporting revenue when the goods are shipped and title passes
¶ 10,301
202
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
7. SAB No. 101 concludes that revenue should not be recognized until it is realized.
Realization occurs when four criteria have been met that include all of the following
except:
a. Delivery has occurred.
b. Persuasive evidence of an arrangement exists.
c. The sale has been collected in cash.
d. The seller’s price to the buyer is fixed and determinable.
8. The revenue recognition standard has a core principle based on which one of the
following triggering events occurring?
a. A contract must be signed.
b. There must be a completion of the critical stage.
c. There must be a transfer of promised goods or services.
d. There must be a certain percentage of transaction completed.
9. Which of the following is a step in applying the revenue standard?
a. Deliver the goods or services
b. Collect the consideration
c. Determine the transaction price
d. Recognize revenue once the contract is signed
10. Under the revenue standard, in identifying a contract with a customer, a contract
modification would be accounted for as a separate contract if the modification results on
certain conditions being satisfied. One is that the promised goods or services are
.
a. Similar
b. Distinct
c. Separable
d. Interchangeable
11. Company D has variable revenue from a contract. Because D has consideration in
a contract that is variable, to estimate the transaction price, which of the following is an
acceptable method D can use?
a. Discounted cash flow method
b. The expected value
c. Weight-average index
d. The replacement value
12. Company Z has several performance obligations and wants to allocate the transaction price to each obligation under the new revenue standard. In order to make the
allocation, which piece of information should Z obtain for each performance obligation?
a. Standalone price
b. Fair value
c. Replacement cost
d. Discounted price
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13. In accordance with the revenue standard, revenue would be recognized under two
approaches, one of which is
.
a. Over time
b. As cash is collected similar to the installment sales method
c. When the transaction is complete and collectability is reasonably assured
d. Using the completed contract method or cost recovery method
14. Under the revenue recognition standard, a contract exists only if the contract has
certain attributes that include which of the following?
a. The contract lacks commercial substance.
b. The parties to the contract have not approved the contract.
c. The entity cannot identify each party’s rights regarding the goods or services
to be transferred.
d. The entity can identify the payment terms for those goods or services.
15. A company sells a product and allows its customers the right to return the product.
To account for the transfer of the product with the right to return, which of the
following should the company recognize?
a. A refund receivable
b. A deferred credit
c. A refund liability
d. A credit to equity
16. Company X sells a product and receives a fee. X wants to determine whether it
should record the transaction gross (as a principal) or net (as an agent). Which of the
following is a factor that would suggest that X is an agent?
a. Another party is primarily responsible for fulfilling the contract.
b. X has inventory risk.
c. X has discretion in establishing the price.
d. X is exposed to credit risk.
17. Company X has certain incremental costs associated with obtaining a contract. One
such cost consists of sales commissions that will be recognized over two years. Under
the revenue standard, how should X account for the commissions?
a. Expense the commissions as period costs
b. Recognize the commissions as an asset
c. Net the cost against the revenue and present it on a net basis on the income
statement
d. Record it as a receivable and present it net of an allowance account
18. Company Z has general and administrative costs that are not explicitly chargeable
to a customer contract. Under ASU 2014-09, how should these costs be accounted for?
a. Expensed when incurred
b. Capitalized and amortized against revenue
c. Pro-rated with a portion capitalized and a portion expensed
d. Netted against contract revenue
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19. With respect to a contract under ASU 2014-09, an entity shall present any unconditional rights to consideration separately as a
.
a. Liability
b. Deferred credit
c. Receivable
d. Contra- equity account
20. Company Z is a nonpublic entity. Under the new revenue standard, which of the
following disclosures must Z make with respect to methods, inputs and assumptions
used?
a. Those used to determine the transaction price
b. Those used to assess whether an estimate of variable consideration is
constrained
c. Those used to allocate the transaction price
d. Those used to measure obligations for returns and refunds
21. How should intangible assets with indefinite lives be accounted for?
a. Should be amortized and tested for impairment at least annually
b. Should not be amortized and should be tested for impairment at least annually
c. Should be amortized but not tested for impairment
d. Should not be amortized and should not be tested for impairment
22. Which of the following is correct as it relates to goodwill?
a. Goodwill should be amortized over 15 years with no test for impairment
required.
b. Goodwill should not be amortized and should be tested for impairment only if
there is a reason to do so.
c. Goodwill should be amortized over its useful life and tested for impairment at
least annually.
d. Goodwill should not be amortized and should be tested for impairment at least
annually.
23. An entity typically must test for impairment of goodwill at the
a. Entity
b. Reporting unit
c. Consolidated entity
d. Individual asset and liability
level.
24. Which of the following would be an event or circumstance that may warrant an
entity performing an interim test of goodwill for impairment?
a. A deterioration in general economic conditions
b. A positive change in cash flows
c. Cost factors such as decreases in the cost of raw materials or labor
d. An increase in actual revenue or earnings
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25. Which of the following best represents the measurement of any impairment loss
for goodwill?
a. Fair value of the reporting unit
Less: Fair value of the reporting unit’s assets and liabilities (excluding
goodwill)
Equals: Implied fair value of reporting unit’s goodwill
Less: Carrying amount of reporting unit’s goodwill
Equals: Impairment loss for reporting unit’s goodwill (if negative)
b. Fair value of the entire reporting entity
Less: Carrying amount of entire reporting entity’s assets and liabilities
Equals: Computed goodwill
Less: Carrying amount of goodwill
Equals: Impairment loss (if negative)
c. Fair value of the reporting unit
Less: Carrying amount of entire reporting entity
Equals: Implied value of goodwill
Less: Fair value of goodwill
Equals: Impairment loss (if positive)
d. Fair value of individual assets and liabilities of entire reporting entity
Less: Carrying amount of individual assets and liabilities of reporting unit
Equals: Computed value of goodwill
Less: Fair value of goodwill
Equals: Impairment loss (if positive)
26. If, based on the qualitative assessment of goodwill, it is more likely than not (more
than 50 percent likelihood) that the carrying amount of a reporting unit exceeds the
reporting unit’s fair value, which of the following actions is required?
a. The entity must perform both steps to the two-step impairment test.
b. The entity must perform the first step of the two-step impairment test and then,
if necessary, perform the second step.
c. The entity may bypass performing both steps of the impairment test as there is
no impairment.
d. The entity may bypass the first step and go directly to the second test of the
two-step impairment test.
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27. Charlie Entity is testing its goodwill for impairment. The fair value is greater than
the carrying amount of Charlie Entity’s stockholders’ equity. The carrying amount is
greater than zero. How should Charlie Entity proceed?
a. There is a potential impairment; Charlie Entity should go to the second step
and measure the impairment.
b. There is no potential impairment, but Charlie Entity should go to the second
step and measure the impairment.
c. There is a potential impairment; Charlie Entity should not go to the second
step and measure the impairment.
d. There is no potential impairment, and Charlie Entity should not go to the
second step and measure the impairment.
28. How do the rules for the qualitative assessment of goodwill impairment apply when
the reporting unit has a carrying amount that is zero or negative?
a. The qualitative assessment does not apply.
b. The qualitative assessment can be used if the carrying amount is zero, but not
negative.
c. The qualitative assessment can be used if the carrying amount is negative, but
not zero.
d. The qualitative assessment is mandatory.
29. An entity has performed a qualitative assessment of an indefinite-lived intangible
asset. The entity has concluded that the likelihood of impairment is 50 percent or less.
Which of the following is correct?
a. The two-step impairment test is required.
b. Performing an impairment test is unnecessary.
c. A single impairment test must be performed.
d. A further qualitative assessment is required.
30. An entity has recognized an impairment loss for an indefinite-lived intangible asset
and adjusted the item’s carrying amount accordingly. In subsequent reporting periods,
reversal of the previously recognized impairment loss is
.
a. Permitted up to the cumulative amount previously recognized
b. Prohibited
c. Permitted up to impairment losses in the preceding reported period
d. Optional
31. How should deferred tax assets and liabilities be handled in the testing of goodwill
of a reporting unit?
a. Deferred tax assets, but not deferred tax liabilities, are excluded from the
carrying amount of the recognized assets of the unit.
b. Deferred tax assets and deferred tax liabilities are included in the carrying
amount used to test goodwill.
c. Deferred tax assets, but not deferred tax liabilities, are included in the carrying
amount used to test goodwill.
d. Deferred tax assets are excluded, but deferred tax liabilities are included in the
carrying amount calculation.
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32. A private company elects the private company shortcut. How does the private
company account subsequently for the goodwill?
a. Not amortized but tested for impairment
b. Amortized over no more than 10 years
c. Amortized over the GAAP life but not tested for impairment
d. Not amortized and not tested for impairment
33. Goodwill must be initially recognized as an asset based on
.
a. Excess of carrying amount over fair value of assets
b. Excess of the cost of the acquired entity over the net amounts assigned to
assets and liabilities assumed
c. A formula to value goodwill using a capitalization rate
d. Excess of book value of individual assets over carrying amount of net assets
34. Hotel Entity has goodwill and is performing an annual test for impairment. In its
qualitative assessment Hotel Entity concluded there is more than a 50 percent likelihood that the carrying amount of a reporting unit exceeds the reporting unit’s fair value.
Hotel Entity calculates the carrying amount of the given reporting unit is less than
zero—that is, negative. Which of the following is true?
a. The reporting unit has no potential impairment.
b. Hotel Entity must perform the second step in the impairment test.
c. Hotel Entity does not need to proceed to the second step of measuring
impairment.
d. More data is needed to reach a conclusion as to whether there is a potential
impairment.
35. Which of the following is not a footnote disclosure required for goodwill impairment losses?
a. How the entity estimated the fair value of the reporting unit
b. A description of the facts and circumstances leading to the impairment
c. The amount of the impairment loss
d. The acquisition price of the goodwill and the date it was recorded
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¶ 10,302 QUIZZER QUESTIONS: MODULE 2
36. Which of the following would be an example of financial statements available to be
issued under ASU 2014-15?
a. Financial statements are complete in a GAAP format but have not been
approved for issuance.
b. Financial statements are in an abbreviated non-GAAP format and have been
approved for issuance.
c. Financial statements are complete in a GAAP format and have been approved
for issuance.
d. Financial statements are in an abbreviated non-GAAP format and have not
been approved for issuance
37. In accordance with the FASB’s ASU 2014-15 related to going concern, management’s evaluation of going concern runs for what period of time?
a. One year
b. Six months
c. A reasonable period of time that is not quantified
d. 18 months
38. Which of the following is the term that is used to measure “substantial doubt in
managements’ assessment of going concern?
a. More likely than not
b. Probable
c. Reasonably possible
d. Remote
39. Company X is in financial trouble and may have a going concern problem.
Management has substantial doubt of X’s ability to continue as a going concern.
Management is seeking plans to mitigate the substantial doubt. Which of the following
is an example of a plan management may implement to mitigate substantial doubt about
going concern?
a. The ability to purchase an asset
b. Ability to repay all debt outstanding
c. Availability and terms of new debt financing
d. Plan to pay dividends to shareholders
40. Eli Walton is an auditor who is considering issuing a going concern report on an
audit client. Based on a study, which of the following is likely to be true with respect to
Eli issuing a going concern report?
a. By issuing a going concern report, there is a higher likelihood that Eli will be
named in a class action lawsuit.
b. By issuing a going concern report, Eli is not likely to deter investors from filing
class action lawsuits against Eli.
c. If Eli issues a going concern audit report, it increases the likelihood that
management will switch auditors in the next year.
d. A going concern report is likely to save the company from going out of
business.
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41. Company X is trying to shift a loss to discontinued operations. By making the shift
in loss, which of the following is a key measurement that X can increase that could drive
X’s stock price or value?
a. Operating income
b. Revenue
c. Net income
d. Cost of goods sold
42. One reason why a company might be motivated to shift a loss from continuing
operations to discontinued operation is that
.
a. There is no settling up in the future for past earnings management.
b. The effect of the shift reverses in a future period.
c. Net income increases.
d. Disclosures are reduced.
43. Which of the following is a reason noted by the author as to why there has been an
expansion in classification shifting to discontinued operations?
a. The SEC and FASB have not been paying attention.
b. FAS 144 (now ASC 360) broadened the definition of discontinued operations.
c. The SEC issued a directive authorizing a large percentage of operating expenses to be allocated to discontinued operations.
d. There have been numerous calamities in recent years that qualify for discontinued operations treatment.
44. One of the criticisms of the current definition of discontinued operations noted by
investors is that it has resulted in which of the following?
a. There has been a lack of disposals of small groups of assets classified as
discontinued operations.
b. Not enough disposals of property transactions have been classified as continued operations.
c. Too many disposals of single transactions have been classified as discontinued
operations.
d. Too many traditional revenue transactions have been classified as part of
discontinued operations.
45. Company X has numerous disposals and is trying to sort out which of them
qualifies for discontinued operations classification under ASU 2014-08. Which of the
following activities represents an activity that is excluded from discontinued operations
under ASU 2014-08?
a. Goodwill
b. Servicing assets
c. Deferred tax assets
d. Oil and gas properties accounted for using the full-cost method
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46. In order for a disposal to qualify as a discontinued operation under ASU 2014-08,
the disposal must
.
a. Be material to the operations of the entity
b. Have a major effect on an entity’s operations
c. Be an integral part of the business
d. Be easily severable from the operations
47. Company Z has numerous operations all over the world. A disposal of which of the
following would not likely be considered a strategic shift in Z’s operations for purposes
of meeting the discontinued operations definition?
a. Sale of a single building
b. Sale of a major group of retail stores in New England
c. Sale of a major retail product line
d. Sale of 85 percent of an equity method investment
48. How should the results of operations and any gain or loss related to discontinued
operations be presented on the income statement?
a. Net of applicable income taxes, but not benefit
b. Net of applicable income taxes or benefit
c. Gross without allocation of income taxes or benefit
d. With income taxes allocated to the results of operations but not any allocation
of income taxes to the gain or loss
49. If an entity has a discontinued operation that is classified as held for sale, how
should the assets and liabilities of that transaction be classified on the balance sheet?
a. Shall be combined with other assets and liabilities
b. Shall be presented separately in the asset and liability sections
c. Shall be commingled on the balance sheet with separate breakouts in the notes
d. Shall be netted into one single line item called “net held for sale assets
50. Company X classifies certain assets and liabilities as held for sale. How should
those assets and liabilities be measured once the classification to held for sale is made?
a. Amortized cost
b. Fair value
c. Lower of carrying amount or fair value less costs to sell
d. Net realizable value
51. Which of the following is true concerning the application of ASU 2014-08?
a. No early adoption is permitted.
b. It is effective for all businesses or nonprofit activities that, on acquisition, are
classified as held for sale that occur within annual periods beginning on or
after December 15, 2015, and interim periods within those years.
c. For nonpublic entities, it is effective for all disposals (or classifications as held
for sale) of components of an entity that occur within annual periods beginning
on or after December 15, 2015, and interim periods within annual periods
beginning on or after December 15, 2016.
d. An entity shall not apply the ASU to a component of an entity that is classified
as held for sale before the effective date even if the component of an entity is
disposed of after the effective date.
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52. Under the amendments in ASU 2014-08, the definition of discontinued operations
differs from current U.S. GAAP as indicated below except for:
a. Under the new rules, any component of an entity that is a reportable segment,
an operating segment, a reporting unit, a subsidiary, or an asset group is
eligible for discontinued operations presentation.
b. A business or nonprofit activity that, on acquisition, meets the criteria to be
classified as held for sale may now be reported in discontinued operations.
c. A disposal of an equity method investment that meets the definition of discontinued operations may now be reported in discontinued operations.
d. The new definition of discontinued operations in ASU 2014-08 is now similar to
the definition of discontinued operation in IFRS 5, Noncurrent Assets Held for
Sale and Discontinued Operations.
53. For any period in which a long-lived asset (disposal group) either has been
disposed of, or is classified as held for sale, an entity shall disclose all of the following in
the notes to financial statements except:
a. A description of the facts and circumstances leading to the disposal or the
expected disposal
b. The expected manner and timing of that disposal
c. The gain or loss recognized
d. If separately presented on the face of the statement where net income is
reported, the caption in the statement where net income is reported that
includes that gain or loss
54. A for-profit entity shall disclose, to the extent not presented on the face of the
financial statements as part of discontinued operations, all of the following in the notes
to financial statements except:
a. The pretax profit or loss of the discontinued operation for the periods in which
the results of operations of the discontinued operation are presented in the
statement where net income is reported
b. The major classes of line items constituting the pretax profit or loss of the
discontinued operation for the periods in which the results of operations of the
discontinued operation are presented in the statement where net income is
reported
c. The fair value of the discontinued operation
d. Cash flows information
55. ASC 205-20-45 provides rules for allocating interest and overhead to discontinued
operations. Those rules include which of the following?
a. Interest on debt to be assumed by the buyer and on debt required to be repaid
due to the disposal is not allocated to discontinued operations.
b. Consolidated interest that is directly attributable to other operations of the
entity is permitted to be allocated to discontinued operations.
c. Other consolidated interest that cannot be attributed to other operations is
allocated based on the ratio of net assets to be sold less debt to be repaid, to
the sum of total net assets of the consolidated entity plus consolidated debt
other than certain identified debt.
d. General corporate overall is allocated to discontinued operations.
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56.
is defined as an underlying event or transaction that would not reasonably
be expected to recur in the foreseeable future, taking into account the environment in
which the entity operates.
a. Infrequency of occurrence
b. Unusual nature
c. Not likely to occur
d. Not probable
57. Which of the following is an example of a transaction type that the FASB has
eliminated from extraordinary treatment over the past decade?
a. Sale of fixed assets
b. Gain on sale of certain utility equipment
c. Tax benefit of a net operating loss carryforward
d. Recoveries from previous trade receivable writeoffs
58. Which of the following is a change made to the extraordinary item rules by ASU
2015-01?
a. Transactions are no longer classified as extraordinary on the income
statement.
b. The rules to qualify a transaction for extraordinary treatment are more
stringent.
c. The FASB has liberalized the extraordinary item rules so that more transactions qualify for extraordinary item treatment.
d. ASU 2015-01 establishes a new sub-classification for extraordinary items.
59. Company P has a material transaction that P considers to meet the infrequency of
occurrence criterion. How should P present the transaction on the income statement
under ASU 2015-01?
a. As part of extraordinary items, net of the applicable income tax or benefit
b. As part of cost of goods sold
c. As a separate item through retained earnings
d. As a separate component of income from continued operations
60. In implementing ASU 2015-01, which of the following are the choices an entity may
use?
a. Apply the ASU prospectively only.
b. Apply the ASU retrospectively only.
c. Apply the ASU either prospectively or retrospectively.
d. Neither prospective nor retrospective treatment would be appropriate.
61. Under GAAP prior to the effective date of ASU 2014-10, which of following is an
element of a development stage entity?
a. Its planned principal operations have not commenced.
b. Operations representing at least 25 percent of total operations have
commenced.
c. Significant revenue is being generated.
d. The business has at least two years of activity as an operating entity.
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62. One of the changes made by ASU 2014-10 is that the definition of development
stage entity is:
a. Eliminated from GAAP
b. Replaced by another term
c. Modified to be more comprehensive
d. Expanded
63. Company X was a development stage entity in 20X1 and is no longer such an entity
in 20X2. Under existing GAAP prior to the effective date of ASU 2014-10, which of the
following is a disclosure X should include in its 20X2 financial statements?
a. None. Once X is no longer a development stage entity no disclosures about it
are required.
b. Must disclose in 20X2 that in prior years X had been in the development stage
c. Must disclose a forecast of future sales and operations once X is out of
development stage
d. Must disclose the cumulative losses incurred since inception of operations
64. All of the following are eliminated under ASU 2014-10 except:
a. Paragraph 810-10-15-16
b. ASC 915
c. ASC 275
d. Definition of development stage entity in GAAP’s Master Glossary
65. Which of the following is not true concerning the implementation of ASU 2014-10?
a. It is effective for public business entities for annual reporting periods beginning after December 15, 2014, and interim periods therein.
b. It is effective for other than public business entities for annual reporting
periods beginning after December 15, 2014, and for interim reporting periods
beginning after December 15, 2015.
c. For all entities, it shall be applied retrospectively except for the clarification to
ASC 275, Risks and Uncertainties, which shall be applied prospectively.
d. Early adoption is not allowed.
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¶ 10,303 QUIZZER QUESTIONS: MODULE 3
66. Which of the following is not a category or subcategory of financial statements
proposed under the financial performance reporting project?
a. Business section
b. Financial section
c. Income tax section
d. Debt section
67. In accordance with the FASB’s proposed financial instruments project, an entity
would classify each financial asset into a category on the basis of two criteria, one of
which is:
a. Entity’s business model for managing the asset
b. Duration of holding the underlying asset
c. Extent to which the asset is a “critical component
d. Entity’s intent and historical actions taken in connection with similar assets
68. Which of the following will not be an impact of the changes made by the FASB’s
Financial Performance Reporting Project?
a. It will be costly.
b. Contract formulas that are based on GAAP net income will have to be
rewritten.
c. There may be significant fluctuations in comprehensive income from year to
year.
d. All of the above are impacts of the project.
69. Which of the following would not be measured at cost under the proposed
financial instruments (assets and liabilities) standard?
a. Business section
b. Derivatives
c. Long-term debt
d. Trade receivables and payables
70. Which of the following is not true regarding the exposure draft entitled, Financial
Instruments—Credit Losses?
a. The main objective is to provide more information about the expected credit
losses on financial assets and other commitments to extend credit held by a
reporting entity.
b. It would apply to all entities that hold financial assets that are accounted for at
fair value through net income and are exposed to potential credit risk.
c. It would replace the current impairment model with a model that recognizes
expected credit risks and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
d. It would reduce complexity by replacing the many existing impairment models
with a consistent measurement approach.
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71. Company P acquires 100 percent of the voting shares of Company S in a business
combination. As a result of the transaction, P obtains control of S. In this transaction, S
is a (an)
.
a.
b.
c.
d.
Acquirer
Acquiree
Seller
Buyer
72. Pushdown accounting applies to which of the following?
a. A merger of not-for-profit entities
b. The formation of a joint venture
c. A combination between entities, businesses, or nonprofit activities under common control
d. Subsidiaries of an acquiree if elected
73. ASU 2014-17:
a. Allows pushdown accounting to be used only when 80 to 95 percent of another
entity is acquired
b. Prohibits pushdown accounting when less than 80 percent ownership is
acquired
c. Allows pushdown accounting when control of another entity is obtained
d. Requires pushdown accounting when 95 percent or more of an entity is
acquired
74. Company C owns subsidiaries S1 and S2. Company A acquires 100 percent of the
voting interest of Company C. Which of the following is true?
a. Company A must use pushdown accounting.
b. Either or both S1 and S2 can elect to use pushdown accounting even if
Company A does not.
c. Neither Company A nor the subsidiaries can use pushdown accounting.
d. Both S1 and S2 must use pushdown accounting if Company A does.
75. When may a company stop using pushdown accounting?
a. Never. Once elected it is irrevocable.
b. When there is a subsequent loss of control
c. At the beginning of a new fiscal year
d. When testing for impairment
76. If an acquiree does not elect to apply pushdown accounting when there is a
change-in-control event:
a. It cannot apply pushdown accounting unless there is another change-in-control
event.
b. It can apply pushdown accounting in a subsequent reporting period but must
reissue the financial statements back to the period the change-in-control event
occurred.
c. It will not be allowed to apply pushdown accounting even if there are future
change-in-control events.
d. It can elect to apply pushdown accounting in a subsequent reporting period as
a change in accounting principle.
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77. Company X is an acquiree in a business combination in which the acquirer obtains
control of the acquiree. In which of the following situations are the pushdown accounting rules not available to X?
a. If X is an SEC entity
b. If X is a non-SEC entity
c. If X is not a business
d. If X is a nonprofit entity
78. Company S is an acquiree in a business combination and wishes to elect to apply
pushdown accounting. As of which of the following dates must S apply the pushdown
accounting?
a. The acquisition date of the change-in-control event
b. The date on which the financial statements are issued
c. The date on which the financial statements are available to be issued
d. The first date on which the acquiree and acquirer engaged in any financial
transaction
79. Which of the following should an acquiree recognize in its separate financial
statements if the acquiree elects to use pushdown accounting?
a. Acquisition costs of the acquirer
b. Acquisition-related liability which represents an obligation of the acquiree
c. Liability of the acquirer for which the acquiree has no obligation
d. The assets and liabilities of all related-party entities
80. Company S, an acquiree, is contemplating electing use of pushdown accounting for
its separate financial statements. In making the decision, which of the following is an
advantage that use of pushdown accounting might have to S?
a. Net income is likely to be higher.
b. EBITDA is likely to be higher.
c. Net assets are likely to be higher.
d. Operating cash flow is likely to be higher.
81. Which of the following entities is permitted to elect the accounting alternative
under ASU 2014-18 with respect to identifiable intangible assets?
a. A private company
b. An SEC registrant
c. A non-profit entity
d. A pension plan
82. Company X elects the accounting alternative under ASU 2014-18. Which of the
following is true?
a. X is permitted to apply it to selected provisions of ASU 2014-18.
b. X is required to delay implementation for at least two years after making the
election.
c. X must apply it to all of the related recognition requirements upon election.
d. X must apply it to three special provisions within ASU 2014-18 with the
remainder being optional.
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83. Company Z is a private entity that wishes to elect the accounting alternative with
respect to goodwill under ASU 2014-02. Under that alternative, how should Z account
for goodwill?
a. Amortize goodwill over a maximum of 10 years
b. Not amortize it but test it annually for impairment
c. Amortize goodwill over a maximum of five years and perform an annual
impairment test
d. Write off goodwill in the first year
84. Which of the following is a criterion of an identifiable intangible asset?
a. Amortization criterion
b. Separability criterion
c. Impairment criterion
d. Non-transferability criterion
85. Which of the following is an example of a customer-related intangible asset?
a. Noncompetition agreement
b. Customer list
c. Patent
d. Trademark
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219
¶ 10,400 Answer Sheets
¶ 10,401 Top Accounting Issues for 2016 CPE Course:
MODULE 1
(10014576-0004)
Go to CCHGroup.com/PrintCPE to complete your Quizzer online for instant results
and no Express Grading Fee.
A $98.00 processing fee will be charged for each user submitting Module 1 for grading.
If you prefer to mail or fax your Quizzer, remove both pages of the Answer Sheet from
this book and return them with your completed Evaluation Form to: CCH Continuing
Education Department, 4025 W. Peterson Ave., Chicago, IL 60646-6085 or fax your
Answer Sheet to CCH at 773-866-3084. You must also select a method of payment below.
NAME
COMPANY NAME
STREET
CITY, STATE, & ZIP CODE
BUSINESS PHONE NUMBER
E-MAIL ADDRESS
DATE OF COMPLETION
METHOD OF PAYMENT:
Check Enclosed
Discover
Card No.
Signature
Visa
CCH Account*
Master Card
AmEx
Exp. Date
EXPRESS GRADING: Please fax my Course results to me by 5:00 p.m. the business day following
your receipt of this Answer Sheet. By checking this box I authorize CCH to charge $19.00 for this
service.
Fax No.
Express Grading $19.00
* Must provide CCH account number for this payment option
220
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Module 1: Answer Sheet
(10014576-0004)
Please answer the questions by indicating the appropriate letter next to the corresponding number.
1.
10.
19.
28.
2.
11.
20.
29.
3.
12.
21.
30.
4.
13.
22.
31.
5.
14.
23.
32.
6.
15.
24.
33.
7.
16.
25.
34.
8.
17.
26.
35.
9.
18.
27.
Please complete the Evaluation Form (located after the Module 3 Answer Sheet)
and return it with this Quizzer Answer Sheet to CCH at the address on the
previous page. Thank you.
221
MODULE 2 - ANSWER SHEET
¶ 10,402 Top Accounting Issues for 2016 CPE Course:
MODULE 2
(10014577-0004)
Go to CCHGroup.com/PrintCPE to complete your Quizzer online for instant results
and no Express Grading Fee.
A $84.00 processing fee will be charged for each user submitting Module 2 for grading.
If you prefer to mail or fax your Quizzer, remove both pages of the Answer Sheet from
this book and return them with your completed Evaluation Form to: CCH Continuing
Education Department, 4025 W. Peterson Ave., Chicago, IL 60646-6085 or fax your
Answer Sheet to CCH at 773-866-3084. You must also select a method of payment below.
NAME
COMPANY NAME
STREET
CITY, STATE, & ZIP CODE
BUSINESS PHONE NUMBER
E-MAIL ADDRESS
DATE OF COMPLETION
METHOD OF PAYMENT:
Check Enclosed
Discover
Card No.
Signature
Visa
CCH Account*
Master Card
AmEx
Exp. Date
EXPRESS GRADING: Please fax my Course results to me by 5:00 p.m. the business day following
your receipt of this Answer Sheet. By checking this box I authorize CCH to charge $19.00 for this
service.
Fax No.
Express Grading $19.00
* Must provide CCH account number for this payment option
222
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Module 2: Answer Sheet
(10014577-0004)
Please answer the questions by indicating the appropriate letter next to the corresponding number.
36.
44.
52.
60.
37.
45.
53.
61.
38.
46.
54.
62.
39.
47.
55.
63.
40.
48.
56.
64.
41.
49.
57.
65.
42.
50.
58.
43.
51.
59.
Please complete the Evaluation Form (located after the Module 3 Answer Sheet)
and return it with this Quizzer Answer Sheet to CCH at the address on the
previous page. Thank you.
223
MODULE 3 - ANSWER SHEET
¶ 10,403 Top Accounting Issues for 2016 CPE Course:
MODULE 3
(10014578-0004)
Go to CCHGroup.com/PrintCPE to complete your Quizzer online for instant results
and no Express Grading Fee.
A $56.00 processing fee will be charged for each user submitting Module 3 for grading.
If you prefer to mail or fax your Quizzer, remove both pages of the Answer Sheet from
this book and return them with your completed Evaluation Form to: CCH Continuing
Education Department, 4025 W. Peterson Ave., Chicago, IL 60646-6085 or fax your
Answer Sheet to CCH at 773-866-3084. You must also select a method of payment below.
NAME
COMPANY NAME
STREET
CITY, STATE, & ZIP CODE
BUSINESS PHONE NUMBER
E-MAIL ADDRESS
DATE OF COMPLETION
METHOD OF PAYMENT:
Check Enclosed
Discover
Card No.
Signature
Visa
CCH Account*
Master Card
AmEx
Exp. Date
EXPRESS GRADING: Please fax my Course results to me by 5:00 p.m. the business day following
your receipt of this Answer Sheet. By checking this box I authorize CCH to charge $19.00 for this
service.
Fax No.
Express Grading $19.00
* Must provide CCH account number for this payment option
224
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
Module 3: Answer Sheet
(10014578-0004)
Please answer the questions by indicating the appropriate letter next to the corresponding number.
66.
71.
76.
81.
67.
72.
77.
82.
68.
73.
78.
83.
69.
74.
79.
84.
70.
75.
80.
85.
Please complete the Evaluation Form (located after the Module 3 Answer Sheet)
and return it with this Quizzer Answer Sheet to CCH at the address on the
previous page. Thank you.
225
¶ 10,500 Top Accounting Issues for 2016
CPE Course: Evaluation Form
(10024493-0003)
Please take a few moments to fill out and mail or fax this evaluation to CCH so that we
can better provide you with the type of self-study programs you want and need. Thank
you.
About This Program
1. Please circle the number that best reflects the extent of your agreement with the
following statements:
Strongly
Agree
Strongly
Disagree
a.
The Course objectives were met.
5
4
3
2
1
b.
This Course was comprehensive and
organized.
5
4
3
2
1
c.
The content was current and technically
accurate.
5
4
3
2
1
d.
This Course was timely and relevant.
5
4
3
2
1
e.
The prerequisite requirements were
appropriate.
5
4
3
2
1
f.
This Course was a valuable learning
experience.
5
4
3
2
1
g.
The Course completion time was
appropriate.
5
4
3
2
1
2. This Course was most valuable to me because of:
Continuing Education credit
Convenience of format
Relevance to my practice/employment
Timeliness of subject matter
Price
Reputation of author
Other (please specify)
3. How long did it take to complete this Course? (Please include the total time spent
reading or studying reference materials and completing CPE Quizzer).
Module 1
Module 2
Module 3
4. What do you consider to be the strong points of this Course?
5. What improvements can we make to this Course?
226
TOP ACCOUNTING ISSUES FOR 2016 CPE COURSE
General Interests
(10024493-0003)
1. Preferred method of self-study instruction:
Text
Audio
Computer-based/Multimedia
Video
2. What specific topics would you like CCH to develop as self-study CPE programs?
3. Please list other topics of interest to you
About You
1. Your profession:
Accountant
Controller
Enrolled Agent
Other (please specify)
Auditor
CPA
Risk Manager
2. Your employment:
Self-employed
Service Industry
Banking/Finance
Education
Public Accounting Firm
Non-Service Industry
Government
Other
3. Size of firm/corporation:
1
2-5
6-10
11-20
21-50
4. Your Name
Firm/Company Name
Address
City, State, Zip Code
E-mail Address
THANK YOU FOR TAKING THE TIME TO COMPLETE THIS SURVEY!
51+
CCH LEARNING CENTER
At Wolters Kluwer, we recognize the value of Continuing Professional Education—to educate and train
your workforce, bring added value to your clients or organization, and gain a competitive edge in the
marketplace. But keeping up with legislative and regulatory changes and industry developments can be a
full-time job. Let Wolters Kluwer and the CCH Learning Center serve as your gateway to compelling selfstudy CPE courses and research resources. With the CCH Learning Center you get:
n
More Than 300 Up-To-Date Courses:
The CCH Learning Center offers more
than 300 informative courses covering
tax, financial and estate planning, and
accounting/auditing issues, with new courses
being added all the time. Go to the Course
Catalog at CCHGroup.com/CPE to see
descriptions of all the courses you can take.
n Expert Authors And Superior Content:
Our team of professional analysts, editors,
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ensures you get current, reliable, real-world
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n Approved CPE: CCH is an approved QAS
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requirements.
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are available online 24 hours a day, seven
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results and certification, so you can make
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n
Opportunities To Apply Knowledge: CCH
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n Links to CCH® INTELLICONNECT™
and Accounting Research ManagerTM: For
additional research, guidance, and access to
late breaking developments, CCH Learning
Center’s tax courses include links to sources
of additional explanation and authority
within Intelliconnect™ and the accounting
and auditing courses include links to
authoritative and proposed literature within
Accounting Research Manager™.
To purchase a subscription or learn more about
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800 248 3248
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