FASB Updates for the Investment Industry– February 10, 2017 by Marcy Kempf

In the fast-paced regulatory environment in which the investment industry lives and breathes, it’s no surprise that the SEC’s actions often attract the greatest share of the spotlight. However, there are significant updates recently announced by the Financial Accounting Standards Board (FASB) that we believe also warrant your attention. Below is a brief summary of each; please note that for those areas still in the proposal phase we will provide updates as they become available.

PROPOSED:  Notes to Financial Statements (Topic 235) – Assessing Whether Disclosures Are Material

Issued in September 2015, this proposed Accounting Standards Update (ASU) was the first release within the scope of the larger Disclosure Framework project and was issued in connection with the Exposure Draft noting amendments to FASB Concepts Statement No. 8 Conceptual Framework for Financial Reporting. Taken in tandem, the two components were intended to both clarify the concept of materiality, as well as promote the use of discretion by organizations when determining their disclosure requirements. The comment period closed in December 2015 with mixed feedback, particularly surrounding the issue of whether materiality is a legal concept and its definition. Next steps from the FASB include a public roundtable meeting in March 2017 to provide an opportunity for commenters to further discuss the effects of the proposed changes. Read additional information on this update.

PROPOSED: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements (Topic 820)

Issued in December 2015, this proposed ASU was the first of four topics considered as part of the overall Disclosure Framework project noted above. The other three topics are: Inventory (330-10-50), Defined Benefit Plans (715-20-50) and Income Taxes (740-10-50) (discussed further below). The comment period closed in February 2016. The ASU removed, modified or added disclosures to the existing Topic 820 requirements. However, in certain cases those changes were applied differently between public and private companies. In addition, the ASU was further designed to promote the use of discretion by entities in an effort to reemphasize the concept of materiality in line with the proposed Concepts Statement (as noted above). Comments regarding the ASU demonstrated general support for the application of the proposed Concepts Statement within the context of fair value measurement disclosures as well as the majority of the specific disclosure changes outlined. This topical ASU also will be discussed further at the FASB’s public meeting in March 2017. Read additional information on this update.

FINAL:  Technical Corrections and Improvements Related to Topic 820 (Fair Value Measurements) and Topic 946 (Investment Companies)

Issued in April 2016, with a comment period through July 2016, this ASU was finalized in December 2016. The ASU was not intended to have significant effect on current accounting practice; rather, the guidance was proposed to correct differences in phrasing, fix references and simplify the Accounting Standards Codification via minor edits, with the overarching goal of enhancing usefulness and understandability. However, certain provisions did include enhanced conceptual and disclosure information. For example, related to Topic 820, Fair Value Measurement, the final ASU clarifies the difference between a valuation “approach” and a valuation “technique,” and requires disclosure in cases of changes to either or both. The edits related to Topic 946 (Investment Companies) are considered clerical in nature and also provide clarification that certain investee fund disclosures are only required for non-registered investment companies. Most of the amendments in the ASU did not require transition guidance and were effective upon issuance of the final ASU. However, the changes associated with Topic 820 noted above are to be applied prospectively. Read the final ASU.

FINAL:  Statement of Cash Flows (Topic 230) - Restricted Cash

This ASU was issued in April 2016, available for public comment through June 2016, and was issued final in November 2016. The ASU applies to all entities that have restricted cash and restricted cash equivalents that are also subject to the requirements of Topic 230 to present a statement of cash flows. The amendments in the ASU require that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Notably, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. Though many investment companies are exempted from the requirements of Topic 230, the increasing popularity of liquid alternative funds, the use of leverage in certain investment strategies and investment companies with significant Level 3 investments (as defined under Topic 820) would indicate that this ASU may have a broader application for investment companies going forward. The effective date of the ASU is staggered; public business entities are required to adopt the ASU for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the effective date extends to those fiscal periods beginning after December 15, 2018, with additional provisions associated with interim periods within those fiscal years and early adoption. Read the final ASU.  

PROPOSED:  Disclosure Framework – Income Taxes (Topic 740)

Issued in July 2016, this proposed ASU was the last of the four topics considered as part of the overall Disclosure Framework project. The comment period closed in September 2016 and public comment letters are available for review. The ASU reexamined certain provisions of the existing income tax disclosure regime and its technical requirements. Additional provisions were proposed for public business entities, in combination with those items that would apply to all entities. Investment companies that operate as C Corporations (such as master limited partnership funds) would be most significantly impacted by the provisions of the proposed ASU. We encourage such funds to become familiar with the provisions of the proposed ASU. This topical ASU also will be discussed further at the FASB’s public meeting in March 2017. Read additional information on this update.

PROPOSED:  Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities

Issued in September 2016, comment letters on this proposed ASU were due in November 2016. The proposed ASU is the result of numerous meetings and revisions to the scope of the FASB’s technical project around changes to the amortization of premiums for callable debt securities. The amendments in the ASU would shorten the amortization period for callable debt securities purchased at a premium; however, they would not require any changes for securities purchased at a discount (amortized to the maturity date). For those securities where the ASU would be applicable, the ASU would require that the premium be amortized to the earliest call date. The architects of the ASU believe that the amendments will more closely align the amortization periods of both premiums and discounts to expectations associated with market pricing on those same securities, and thereby create a stronger connection between the interest income being recorded and the underlying economics of the instrument. We encourage bond funds with significant exposure to callable debt to monitor the status of this ASU. Read more on this update.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.