ACCTFAX Bulletin Board

UTILITY COOPERATIVE FORUMGENERAL EDITOR Philip W. Miller, CPA NSAC Assistant Education Director 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net

ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com

FASB ISSUES STANDARD TO IMPROVE A LESSOR’S ACCOUNTING FOR CERTAIN LEASES WITH VARIABLE LEASE PAYMENTS

On July 19, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve an area of the leases guidance related to a lessor’s accounting for certain leases with variable lease payments.

During the FASB’s post-implementation review (PIR) of leases (Topic 842), the Board received an agenda request highlighting an issue encountered by lessors. Specifically, a lessor may be required under Topic 842 to recognize a selling loss at lease commencement (day-one loss) for a salestype lease with variable payments even if the lessor expects the arrangement will be profitable overall. Stakeholders highlighted that this accounting outcome results in financial reporting that does not faithfully represent the underlying economics either at lease commencement or over the lease term. Therefore, users of financial statements are not being provided with information for those transactions that is decision useful.

To address this, the Board is issuing this ASU to amend lessor lease classification requirements. Specifically, a lessor is now required to classify and account for a lease with variable payments as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease and (b) the lessor would have otherwise recognized a day-one loss. A day-one loss or profit is not recognized under operating lease accounting. The resulting financial reporting is expected to more faithfully represent the economics underlying the lease and improve the decision usefulness of information provided to the users of financial statements.

The ASU is available at www.fasb.org.

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL

The Private Company Council (PCC) met on Monday, June 21 and Tuesday, June 22, 2021. Below is a brief summary of topics addressed by the PCC at the meeting:

PCC Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards”: The PCC reached a final consensus on a practical expedient for a private company to determine the current price input of equityclassified share-based awards issued to both employees and nonemployees that describes the characteristics of a reasonable application of a reasonable valuation method. The PCC discussed significant external review feedback and addressed sweep issues related to scope, application, disclosure, effective date, and measurement.

Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff provided the PCC with an update on the

research and outreach conducted by the staff and Working Group on this PCC research project. PCC members shared their experiences with profits interests in practice, noting that generally profits interests awards are granted to senior management and that the terms of the awards are diverse and can be complex. PCC members noted that there are challenges associated with measuring profits interests and some noted that determining whether to apply the guidance in Topic 718, Compensation—Stock Compensation, or Topic 710, Compensation—General, can be challenging.

Current Issues in Financial Reporting: PCC members discussed practice issues arising from the current business environment under the COVID-19 pandemic. PCC members discussed the accounting and reporting for employee retention credits included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent COVID-19related legislation.

Disclosures by Business Entities about Government Assistance: FASB staff reported that, at its May 26, 2021 meeting, the Board completed re-deliberations on the proposed Accounting Standards Update, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, including narrowing the scope to transactions a business entity is accounting for, by analogy, under a grant or contribution model. The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

Improving the Accounting for Asset Acquisitions and Business Combinations (Phase 3 of the Definition of a Business project): FASB staff provided the PCC with a project update and noted this project’s objective and background. FASB staff then gave a summary of the accounting for contingent consideration in business combinations and solicited feedback from PCC members. PCC members had mixed views on how to account for contingent consideration in a business combination and what the expected costs and expected benefits would be under different models.

Revenue—Post-Implementation Review: PCC members briefly discussed implementation issues related to Topic 606, Revenue from Contracts with Customers, and FASB staff provided an update on the next steps of the post-implementation review.

Leases (Topic 842)—Discount Rate for Lessees That Are Not Public Business Entities: FASB staff updated the PCC on the proposed Accounting Standards Update, Leases (Topic 842), Discount Rate for Lessees That Are Not Public Business Entities, which was issued on June 16, 2021, and has a comment period ending on July 16, 2021. The proposed amendments are intended to improve discount rate guidance for lessees that are not public business entities, including private companies.

Identifiable Intangible Assets and Subsequent Accounting for Goodwill: FASB staff provided a project update and solicited feedback from PCC members on certain factors that may be used to estimate the useful life of goodwill. Several PCC members did not agree with the use of an estimated payback period as a method to estimate the useful life of goodwill and cautioned against it being the only alternative method to a default amortization period. PCC members indicated that the transition was smooth for those private companies that have elected the accounting alternative to amortize goodwill and that most private companies have elected to test goodwill for impairment at the entity level, rather than at the reporting unit level.

Disclosure Framework: Disclosures—Interim Reporting: FASB staff solicited feedback from PCC members to better understand common reporting practices of nonpublic entities, including the types of financial information produced by private companies and requested by private company financial statement users at interim periods. PCC members provided feedback that private company interim financial information tends to exclude notes to the financial statements and that the content of the financial information is generally driven by covenant compliance and other debt considerations.

FASB PROPOSES IMPROVEMENTS TO DISCOUNT RATE GUIDANCE FOR LESSEES THAT ARE NOT PUBLIC BUSINESS ENTITIES

On June 16, 2021, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would improve discount rate guidance for lessees that are not public business entities— including private companies, not-for-profit organizations, and employee benefit plans. It is intended to reduce the expected cost of implementing the lease standard (Topic 842) for those entities while retaining the expected benefits for users of financial statements. Stakeholders were encouraged to review and provide comment on the proposed ASU by July 16, 2021.

Topic 842 currently provides lessees that are not public business entities with a practical expedient that allows them to make an accounting policy election to use a riskfree rate as the discount rate for all leases. The FASB originally provided this practical expedient to relieve those lessees from having to calculate an incremental borrowing rate, which could create unnecessary cost and complexity.

Some private company stakeholders expressed reluctance to use the risk-free rate election for all leases. Those stakeholders noted that in the current economic environment, a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.

To address these concerns, the amendments in the proposed ASU would allow lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. It also would require that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

The proposed ASU is available at www.fasb. org.

FAF ISSUES 2020 ANNUAL REPORT, “STANDARDS THAT WORK FROM MAIN STREET TO WALL STREET”

On May 26, 2021, the Financial Accounting Foundation (FAF) posted its 2020 Annual Report to the FAF website. The report is available as a printable PDF file and as an interactive digital version.

The annual report theme is “Standards That Work from Main Street to Wall Street.” The report provides a look at how the FASB and GASB supported stakeholders through an unprecedented year. By monitoring and responding to the situation as it evolved, the Boards sought to reduce the impact of the COVID-19 pandemic by providing technical assistance, delaying standard implementations, and always ensuring stakeholder needs were the top priority.

The 2020 Annual Report includes: • Letters from FASB, GASB, and FAF leadership • Snapshots of 2020 stakeholder outreach and engagement along with the many actions taken to ease the unforeseen challenges of the year • Complete 2020 management’s discussion and analysis and audited financial statements (previously posted to the FAF website).

The annual report is available online as a downloadable PDF file, along with a mobilefriendly version at accountingfoundation. org/street. The online version also includes complete lists of all FASB and GASB advisory group members, including the Emerging Issues Task Force and the Private Company Council.

FASB ISSUES AN INVITATION TO COMMENT ON FASB’S FUTURE AGENDA

In December 2020, Financial Accounting Standards Board (FASB) Chair Richard R. Jones announced at the American Institute of Certified Public Accountants (AICPA) Conference on U.S. Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) Developments (2020 AICPA Conference)

that the FASB would undertake an agenda consultation process in 2021 (the 2021 Agenda Consultation) to assist the Board in deciding where to focus its standard-setting efforts going forward.

On June 24, 2021, the FASB staff published an Invitation to Comment (ITC) to solicit broad stakeholder feedback about the future standard-setting agenda of the FASB. The feedback on the ITC is essential in ensuring that the FASB continues to allocate its finite resources to achievable standard-setting projects that fulfill its primary mission of improving financial accounting and reporting standards and addressing topics that are of the highest priority to its stakeholders.

The FASB staff is issuing the ITC to obtain broad stakeholder feedback. The ITC does not include Board views; the Board will consider the feedback received in response to the ITC when making decisions about potential changes to its agenda. Those decisions include which topics, if any, should be added to the FASB’s agenda (and in what order) and whether the current agenda projects remain a priority to stakeholders or could be reimagined.

The ITC and agenda consultation process are intended to complement, not replace, the FASB’s formal agenda request process; stakeholders are encouraged to continue to submit agenda requests about needed improvements to generally accepted accounting principles (GAAP) as they arise.

All stakeholders are invited to provide feedback on all matters in the ITC. The FASB staff welcomes comments from those who are interested only in a specific topic or topics described in the ITC. Comments are most helpful if they are as specific as possible, identify and clearly explain the topic or question to which they relate, and are specific to financial accounting and reporting. The ITC includes both general questions about the future of the FASB’s technical agenda and directed questions on specific topics.

Stakeholders are encouraged to submit comments on any aspect of the ITC by September 22, 2021, using one of the following methods:

Submitting comments through the electronic feedback form

Emailing comments to director@fasb.org, File Reference No. 2021-004

Sending a letter to “Technical Director, File Reference No. 2021-004, FASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116.”

SEC ANNOUNCES WIDE-SPREAD CHANGES IN LEADERSHIP OF THE PCAOB

On June 4, 2021, the Securities and Exchange Commission announced that it has removed William D. Duhnke III from the Public Company Accounting Oversight Board (PCAOB). The Commission designated Duane M. DesParte to serve as Acting Chairperson, effective immediately.

The PCAOB was established by the Sarbanes-Oxley Act of 2002 and oversees the audits of the financial statements of public companies and brokers and dealers through registration, standard setting, inspection, and disciplinary programs. Under the Act, the Commission selects members and the Chairperson of the Board.

“The PCAOB has an opportunity to live up to Congress’s vision in the SarbanesOxley Act,” said SEC Chair Gary Gensler. “I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”

Mr. DesParte, a CPA, was appointed as a member of the PCAOB by the SEC in December 2017 and was sworn in on April 9, 2018. He joined the Board after retiring from Exelon Corporation, where he served as corporate controller and in other financial roles for 15 years, following an 18-year career in the audit assurance profession. He graduated with highest honors from the University of Illinois at Urbana-Champaign with a B.S. in accountancy.

The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB. The Commission has directed its Office of the Chief Accountant to begin the process for soliciting new applications; additional information about that process will be provided in the coming weeks.