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Accounting and Auditing Supplement No. 3–2019

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Chapter 1

Accounting and Auditing Supplement No. 3–2019

Introduction

This update includes the more significant accounting and auditing developments from July 1, 2019,

through September 30, 2019. Included in this update are standard-setting and project activities of the

Auditing Standards Board (ASB), Accounting and Review Services Committee (ARSC), Professional

Ethics Executive Committee (PEEC), Financial Accounting Standards Board (FASB, Public Company

Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission (SEC).

These developments, although believed to be complete as of the date they were prepared for this course

material, may not cover all areas within accounting and auditing relevant to all users of this material.

This update may refer you to other sources of information, in which case you are strongly encouraged to

review that information if relevant to your needs.


Audit and accounting final and proposed standards

Final standards, interpretations, and regulations

AICPA

Auditing Standards Board

Statement on Auditing Standards

Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial

Statements of Employee Benefit Plans Subject to ERISA

Issue date

July 2019

Background

According to the AICPA report Enhancing Audit Quality, 2017 Highlights and Progress, enhanced oversight

of audits of employee benefit plans (EBPs) subject to the Employee Retirement Income Security Act of

1974 (ERISA) found troubling levels of nonconformity with the standards and with the two primary areas

challenging EBP audit practitioners that follow:

20% of engagements had material nonconformity related to improper use of system and organization controls (SOC) reports and certifications.

50% of engagements had material nonconformity related to inadequate or no documentation.

These findings prompted the ASB to propose a new audit standard for reporting on EBP audits subject to

ERISA. The proposal sought to:

help auditors better understand their responsibilities with respect to EBP audits and provide financial statement users with more information about auditors’ responsibilities.

SAS No. 136 creates a new AU-C section 703 in AICPA Professional Standards and addresses the

auditor’s responsibility to form an opinion and report on the audit of financial statements of EBPs subject

to ERISA. The SAS amends the form and content of the auditor’s report issued as a result of an audit of

ERISA plan financial statements.

This SAS applies to audits of single employer, multiple employer, and multiemployer plans subject to

ERISA. It applies to an audit of a complete set of general-purpose financial statements of EBPs subject to

ERISA, and includes performance requirements specific to auditing ERISA plans relating to engagement

acceptance, audit risk assessment and response relating to plan provisions, communication of

reportable findings to those charged with governance, responsibilities relating to the ERISA-required

supplemental schedules, etc.


Main provisions and significant changes

To enhance the communicative value and transparency of the auditor’s report, SAS No. 136 creates a

new reporting model for audits of ERISA plans in the following ways:

It changes the form and content of the auditor’s report when management elects to exclude from the audit certain investment information held and certified by a qualified institution.

It includes incremental performance requirements to effect certain new reporting requirements in addition to those currently set forth in the existing AU-C sections in AICPA Professional Standards.

Effective date

The SAS is effective for audits of ERISA plan financial statements for periods ending on or after

December 15, 2020. Early implementation is not permitted. New resources (the “At a Glance” document

and Frequently Asked Questions) are available.


SAS No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports

Issue date

July 2019

Background

This SAS supersedes SAS No. 118, Other Information in Documents Containing Audited Financial

Statements, as amended (AICPA, Professional Standards, AU-C sec. 720). The ASB believes the standard

will benefit financial statements users by providing transparency related to the auditor’s responsibility for

other information when the auditor has obtained all other information at the date of the auditor’s report

on the financial statements. SAS No. 137 is expected to reduce diversity in practice with respect to

information and documents within the scope of this SAS.

Main provisions and significant changes

This SAS addresses the auditor’s responsibilities relating to other information, whether financial or

nonfinancial (other than financial statements and the auditor’s report on the financial statements),

included in an entity’s annual report. An entity’s annual report may be a single document or a

combination of documents that serve the same purpose. Specifically, SAS No. 137 amends the following:

SAS No. 119, Supplementary Information in Relation to the Financial Statements as a Whole, as amended (AU-C sec. 725)

SAS No. 120, Required Supplementary Information, as amended (AU-C sec. 730) SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as amended

– AU-C section 210, Terms of Engagement – AU-C section 230, Audit Documentation – AU-C section 260, The Auditor’s Communication With Those Charged With Governance – AU-C section 450, Evaluation of Misstatements Identified During the Audit – AU-C section 600, Special Considerations — Audits of Group Financial Statements (Including the

Work of Component Auditors) – AU-C section 810, Engagements to Report on Summary Financial Statements


SAS No. 133, Auditor Involvement With Exempt Offering Documents (AICPA, Professional Standards, AU-C sec. 945)

SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, as amended – AU-C section 700, Forming an Opinion and Reporting on Financial Statements – AU-C section 705, Modifications to the Opinion in the Independent Auditor’s Report – AU-C section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the

Independent Auditor’s Report

Effective date

This SAS becomes effective for audits of financial statements for periods ending on or after December

15, 2020. Early implementation is not permitted.

Accounting and Review Services Committee

The ARSC did not issue any new or revised standards or interpretations in this period.

Professional Ethics Executive Committee

The PEEC did not issue any new or revised standards or interpretations in this period.

FASB

Accounting standards updates

Accounting Standards Update (ASU) No. 2019-07, Amendments to SEC Paragraphs Pursuant to SEC

Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-

10442, Investment Company Reporting Modernization, and Miscellaneous Updates

Issue date

July 2019

Background

The FASB Accounting Standards Codification® is the authoritative source of U.S. generally accepted

auditing principles (GAAP). It includes relevant portions of authoritative content issued by the SEC and

selected SEC staff interpretations and administrative guidance. The FASB updated the SEC portions of its

Codification to reflect changes the SEC made to simplify disclosures and modernize the reporting and

disclosure of information by registered investment companies.

Major provisions and significant changes

The SEC amended its disclosure rules in 2018 with the aim of providing investors with more useful

disclosure information and to simplify compliance without altering the mix of information being provided.

ASU 2019-07 updates the Codification to reflect the amendments of various SEC disclosure requirements

that the agency determined were redundant, duplicative, overlapping, outdated, or superseded.


Effective date

Upon issuance.

SEC

The SEC did not issue any new or revised regulations or guidance in this period.

PCAOB

PCAOB Staff Guidance: Auditing Accounting Estimates

Issue Date

August 2019

Background

New requirements for auditing accounting estimates will take effect for audits of financial statements for

fiscal years ending on or after December 15, 2020. These requirements will apply to estimates in

significant accounts and disclosures and will replace three PCAOB standards with a single, uniform risk-

based approach to auditing estimates, including fair value measurements.

The new requirements are reflected in the revised and retitled AS 2501, Auditing Accounting Estimates,

Including Fair Value Measurements, and related amendments to other PCAOB standards. When the

revised standard takes effect, AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503,

Auditing Derivative Instruments, Hedging Activities, and Investments in Securities, will be rescinded.

Main provisions and significant revisions

This publication highlights aspects of the new requirements for auditors as they begin to plan and

perform work on audits subject to the new requirements. It also illustrates relevant considerations for

certain key areas of the revised standard, including certain information from the adopting release.

Appendix 3 of the adopting release includes a detailed discussion of the new requirements, including

differences from and similarities to current requirements. The information included in this publication is

not a substitute for any rule or standard; only PCAOB’s rules and standards provide auditors with

definitive requirements.

Staff guidance on new requirements for auditing the fair value of financial instruments, included in

Appendix A to AS 2501 (Revised), is also available. (See Staff Guidance Auditing the Fair Value of

Financial Instruments — Insights for Auditors.) Guidance on the use of specialists, including in developing

and auditing estimates, is also available. (See Staff Guidance Using the Work of a Company’s Specialist

and Staff Guidance: Supervising or Using the Work of an Auditor’s Specialist.)


PCAOB Staff Guidance: Auditing the Fair Value of Financial Statements

Issue date

August 2019

Background

New requirements for auditing the fair value of financial instruments will take effect for audits of financial

statements for fiscal years ending on or after December 15, 2020. These requirements are included in AS

2501, Auditing Accounting Estimates, Including Fair Value Measurements. Appendix A of that standard

provides specific requirements when auditing the fair value of financial instruments, primarily when

pricing information is obtained from third parties. It applies when the auditor uses third-party pricing

information to develop an independent expectation as well as when the auditor evaluates third-party

pricing information used by the company.

This publication highlights information for auditors as they begin to plan and perform work on audits

subject to the new requirements. It also illustrates relevant considerations for auditing the fair value of

financial instruments, especially when pricing information from pricing services, brokers and dealers, and

other third-party sources is used, including certain information from the adopting release. Appendix 3 of

the adopting release includes a detailed discussion of the new requirements, including differences from

and similarities to current requirements. The information in this publication is not a substitute for any rule

or standard; only PCAOB’s rules and standards provide auditors with definitive requirements.

More general staff guidance on new requirements for auditing accounting estimates in AS 2501 (Revised)

is also available. (See Staff Guidance Auditing Accounting Estimates.) Guidance on the use of specialists,

including in developing and auditing estimates, is also available. (See Staff Guidance Using the Work of a

Company’s Specialist and Staff Guidance Supervising or Using the Work of an Auditor’s Specialist.)


The guidance addresses the following areas:

Applying Appendix A of AS 2501 – Identifying and assessing risks of material misstatement – Determining whether pricing information provides sufficient appropriate evidence

Using information from pricing services – What is a pricing service? – Assessing reliability of pricing information – Performing procedures to assess reliability at interim dates – Assessing relevance of pricing information – Multiple pricing services

Using broker quotes Using pricing information from other sources Unobservable Inputs


PCAOB Staff Guidance: Supervising or Using the Work of an Auditor’s Specialist

Issue date

August 2019

Background

New requirements for supervising the work of a specialist employed by the auditor’s firm or for using the

work of a specialist engaged by the auditor’s firm apply to audits of financial statements for fiscal years

ending on or after December 15, 2020. The new requirements can be found in Appendix C to AS 1201,

Supervision of the Audit Engagement (when using the work of an auditor-employed specialist); and AS

1210, Using the Work of an Auditor-Engaged Specialist.

This publication highlights information for auditors as they begin to plan and perform work on audits to

which the new requirements apply. It also illustrates relevant considerations for the auditor when

supervising the work of an auditor-employed specialist or using the work of an auditor-engaged

specialist, including certain information from the adopting release. Appendix 3 of the adopting release

includes a detailed discussion of the new requirements, including differences from and similarities to

current requirements. The information included in this publication is not a substitute for any rule or

standard; only the rules and standards provide the auditor with definitive requirements.

Staff guidance on the new requirements for using the work of a company’s specialist as audit evidence is

also available. (See Staff Guidance Using the Work of a Company’s Specialist.) Guidance on auditing

accounting estimates and on auditing the fair value of financial instruments is also available. (See Staff

Guidance Auditing Accounting Estimates and Staff Guidance Auditing the Fair Value of Financial Instruments.)



What is an auditor’s specialist? – Auditor-employed specialist – Auditor-engaged specialist

Supervising or using the work of the auditor’s specialist – Assessing knowledge, skills and ability (KSA) – Determining independence or objectivity (as applicable) – Informing the auditor’s specialist of the work to be performed – Determining the extent of review of the work of an auditor’s specialist – Evaluating the work of the auditor’s specialist


PCAOB Staff Guidance: Using the Work of a Company’s Specialist

Issue date

August 2019

Background

New requirements for when an auditor uses the work of company specialists as audit evidence will take

effect for audits of financial statements for fiscal years ending on or after December 15, 2020. The new

requirements are included in Appendix A to AS 1105, Audit Evidence, and supplement existing

requirements in AS 1105.

This publication highlights information for auditors as they begin to plan and perform work on audits to

which the new requirements apply. It also illustrates relevant considerations for the auditor when evaluating

the work of a company’s specialist, including certain information from the adopting release. Appendix 3 of

the adopting release includes a detailed discussion of the new requirements, including differences from

and similarities to current requirements. The information included in this publication is not a substitute for

any rule or standard; only the rules and standards provide the auditor with definitive requirements.

Staff guidance on new requirements for supervising the work of a specialist employed by the auditor’s

firm or using the work of a specialist engaged by the auditor’s firm is also available. (See Staff Guidance

Supervising or Using the Work of an Auditor’s Specialist.) Guidance on auditing accounting estimates and

on auditing the fair value of financial instruments is also available. (See Staff Guidance Auditing

Accounting Estimates and Staff Guidance Auditing the Fair Value of Financial Instruments.)



What is a company’s specialist? The auditor’s responsibilities when using the work of a company’s specialist

– Understanding the specialist’s work – Assessing the KSA of the company’s specialist and the specialist’s relationship to the company – Evaluating the specialist’s work

Testing and evaluating data Evaluating significant assumptions Evaluating the specialist’s methods Evaluating the specialist’s work to obtain the necessary audit evidence Evaluating the specialist’s findings


Proposed standards, interpretations, and regulations

AICPA


Proposed SAS: Auditing Accounting Estimates and Related Disclosures

Issue date

August 22, 2019

Comment deadline

November 22, 2019

Background

The proposed SAS seeks to enhance the standard for auditing accounting estimates by enabling auditors

to address increasingly complex scenarios that arise from new accounting standards that require

estimates and related disclosures. The proposed SAS also seeks to enhance the auditor’s focus on

factors driving estimation uncertainty and potential management bias. Inspection findings globally have

highlighted accounting estimates as a key area where enhancing standards was needed to improve audit

performance.

The ASB has considered the revisions to auditing accounting estimates resulting from the International

Auditing and Assurance Standards Board (IAASB) and PCAOB projects in developing the proposed

changes, which the ASB believes will help auditors in their procedures to audit accounting estimates and

related disclosures while enhancing auditor skepticism and improving audit quality.

Proposed changes

The proposed SAS would supersede SAS No. 122, Statements on Auditing Standards: Clarification and

Recodification, as amended, AU-C section 540, Auditing Accounting Estimates, Including Fair Value

Accounting Estimates, and Related Disclosures.

The proposed SAS would also amend the following SASs:

SAS No. 122, as amended – AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in

Accordance With Generally Accepted Auditing Standards – AU-C section 230, Audit Documentation – AU-C section 240, Consideration of Fraud in a Financial Statement Audit (AU-C section 240) – AU-C section 260, The Auditor’s Communication With Those Charged With Governance (AU-C

section 260) – AU-C section 501, Audit Evidence — Specific Considerations for Selected Items

(AU-C section 501) – AU-C section 580, Written Representations (AU-C section 580)


SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements, as amended – AU-C section 700, Forming an Opinion and Reporting on Financial Statements – AU-C section 701, Communicating Key Audit Matters in the Independent Auditor’s Report

SAS No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (AU-C sec. 703)

Proposed SAS: Amendments to AU-C Sections 800, 805, and 810 to Incorporate Auditor Reporting Changes from SAS No. 134

Issue date

August 28, 2019

Comment deadline

October 28, 2019

Background

In May 2019, the ASB issued SAS No. 134, Auditor Reporting and Amendments, Including Amendments

Addressing Disclosures in the Audit of Financial Statements. The overall objective of SAS No. 134 was to

update the form and content of auditors’ reports on nonissuers’ financial statements to be more

consistent with standards of the IAASB and recent updates to PCAOB standards. This proposed SAS

aligns the AU-C 800 series with the relevant auditor reporting standards in SAS No. 134.

Following are some of the more significant changes introduced by SAS No. 134, categorized by the AU-C

section in which the change occurs:

AU-C section 700, Forming an Opinion and Reporting on Financial Statements – Requires the “Auditor’s Opinion” section of the report to be the first section of the report for

enhanced visibility; requires the “Basis for Opinion” section of the report to immediately follow the “Auditor’s Opinion” section

– Requires the auditor’s report to include a statement that the auditor is required to be independent of the entity and to meet the auditor’s other ethical responsibilities, in accordance with relevant ethical requirements relating to the audit

– Enhances auditor reporting related to going concern by requiring a description of the respective responsibilities of management, when required by the applicable financial reporting framework, and responsibilities of the auditor relating to going concern

– Expands the description of the auditor’s responsibilities, including those relating to professional judgment and skepticism, and the auditor’s communications with those charged with governance

AU-C section 701, Communicating Key Audit Matters in the Independent Auditor’s Report – Addresses the auditor’s responsibility to communicate key audit matters (KAMs) in the auditor’s

report when engaged to do so; does not otherwise require the communication of KAMs


AU-C section 705, Modifications to the Opinion in the Independent Auditor’s Report – Aligns the form and content of the auditor’s report with the changes in AU-C section 700 when the

auditor concludes that an unmodified auditor’s opinion in accordance with AU-C section 700 is not appropriate (qualified, adverse, or disclaimer of opinion); the revisions to AU-C section 705 do not change existing requirements regarding circumstances in which a modification to the auditor’s opinion is required or for determining the type of modification to the auditor’s opinion)

AU-C section 706, Emphasis-of-Matter and Other-Matter Paragraphs – Clarifies the relationship between emphasis-of-matter (EOM) paragraphs and the communication

of KAMs; when engaged to communicate KAMs, the use of an EOM paragraph is not a substitute for including the matter in the KAM section if the matter meets the definition of a KAM

– Requires that use of an appropriate heading; when KAMs are communicated, the heading is required to include the term “Emphasis of Matter”

AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern – Amends AU-C section 570 to require inclusion of a separate section in the auditor’s report when

substantial doubt exists and to require that the heading of that section be titled “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern”

The amendments to the AU-C 800 sections also reflect the issuance of the following SASs:

SAS No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. SAS No. 136 addresses the auditor’s responsibility to form an opinion on the financial statements of EBPs subject to ERISA.

SAS No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports, which supersedes SAS No. 118, Other Information in Documents Containing Audited Financial Statements, as amended and codified in AU-C section 720.

Effective date

If issued as final, the proposed SAS will be effective for audits of financial statements for periods ending

on or after December 15, 2020. Early implementation is not permitted.

Proposed shanges

The following list summarizes what the ASB believes will be the most significant changes.

Changes to AU-C section 800:

Designates cash, tax, regulatory, contractual, and other bases of accounting as examples of special-purpose frameworks rather than as part of the definition of special-purpose framework

Adds an introductory paragraph stating that section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, applies to audits of special-purpose financial statements

Clarifies that, in all audits of special-purpose financial statements, the auditor is required to do the following: – Conclude whether substantial doubt exists about the entity’s ability to continue as a going

concern for a reasonable period – When substantial doubt exists, evaluate the adequacy of the financial statement disclosures as

required by the applicable financial reporting framework For special-purpose financial statements prepared in accordance with a contractual or other basis of

accounting, adds a new requirement that the EOM paragraph in the auditor’s report state that the financial statements may not be suitable for another purpose.



Adds paragraph .A21, which indicates that the applicable financial reporting framework may not have a requirement for management to assess going concern for a single financial statement or element (or going concern may not be relevant at all to the framework)

Adds examples of factors that may be relevant in considering whether a matter included in the auditor’s report on a complete set of financial statements is relevant in the context of an engagement to report on a single financial statement or a specific element, account, or item of a financial statement


Amends paragraph .15e — which addresses the paragraph in the auditor’s report describing the auditor’s responsibilities — to delete the description of procedures performed by the auditor

Accounting and Review Services Committee

The ARSC did not propose any new or revised standards or interpretations in the period.

Professional Ethics Executive Committee

The PEEC did not propose any new or revised standards or interpretations in the period.

FASB

Proposed ASU

Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —

Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts

in an Entity’s Own Equity

Issue date

July 31, 2019

Comment deadline

October 14, 2019

Background

This project addresses issues identified as a result of the complexity associated with applying GAAP to

certain financial instruments with characteristics of liabilities and equity. Accounting complexity appears

to be a significant contributing factor to numerous financial statement restatements and adds

complexity for users. In addressing the complexity, the FASB amended the guidance on convertible

instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity.

For convertible instruments, the Board reduced the number of accounting models for convertible debt

instruments and convertible preferred stock. Limiting accounting models would result in fewer

embedded conversion features being separately recognized from the host contract as compared with


current GAAP. Conversion features that would continue to be separately recognized are those embedded

conversion features that are not clearly and closely related to the host contract, that meet the definition

of a derivative, and that do not qualify for a scope exception from derivative accounting.

The FASB expects that eliminating certain accounting models would simplify the accounting for

convertible instruments, reduce complexity for preparers and practitioners, and improve the decision

usefulness and relevance of the information provided to financial statement users. The Board also

decided to enhance information transparency by making targeted improvements to the disclosures for

convertible instruments and earnings-per-share (EPS) guidance.

The Board proposed revised guidance for the derivatives scope exception for contracts in an entity’s own

equity to reduce form-over-substance-based accounting conclusions. The Board also decided to improve

and amend related disclosure and EPS guidance.

The amendments in this proposed ASU affect entities that issue convertible instruments and/or

contracts in an entity’s own equity.

Proposed amendments

Under current GAAP, there are five accounting models for convertible debt instruments. Except for the

traditional convertible debt model that recognizes a convertible debt instrument as a single debt

instrument, the other four models require that embedded conversion features be separated from the host

contract and classified as equity under Subtopic 470-20, Debt — Debt with Conversion and Other Options,

or as liabilities under Subtopic 815-15, Derivatives and Hedging — Embedded Derivatives. Convertible

preferred stock should be assessed under similar models.

Feedback from preparers and practitioners indicated that the accounting guidance for convertible

instruments is unnecessarily complex and difficult to navigate, resulting in applying or interpreting the

guidance incorrectly or inconsistently. Consequently, accounting for convertible instruments has been

the subject of a significant number of restatements.

According to the FASB, most users do not find the current separation models for convertible instruments

useful and relevant because they generally view and analyze those instruments on a whole-instrument

basis. Because a convertible debt instrument will be either repaid at maturity or converted to stock, users

of financial statements asserted that separating the instrument into two components is confusing and

creates a result in the financial statements inconsistent with their views. Many users also indicated that

cash (coupon) interest expense is more relevant information for their analyses rather than the imputed

interest expense that results from the separation of conversion features required by GAAP. Overall, most

users of financial statements stated a preference for a simple recognition, measurement, and

presentation approach with disclosures for convertible instruments to have a simplified and consistent

starting point across entities.

In response to the feedback, the Board decided to simplify the accounting for convertible instruments by

removing the separation models in Subtopic 470-20 for convertible instruments. Under the proposed

ASU, for convertible instruments with conversion features that are not required to be accounted for as


derivatives under Topic 815, the embedded conversion features would no longer be separated from the

host contract. Consequently, a convertible debt instrument would be accounted for as a single liability

measured at its amortized cost and a convertible preferred stock would be accounted for as a single

equity instrument measured at its historical cost if no other features require bifurcation and recognition

as derivatives. By removing those separation models, the interest rate of convertible debt instruments

typically would be closer to the coupon interest rate when applying the guidance in Topic 835, Interest.

The FASB expects that the amended ASU would provide financial statement users with a simpler and

more consistent starting point to perform analyses across entities. The Board also expects the proposed

amendments to improve the operability of the guidance and to reduce, to a large extent, the complexities

in accounting for convertible instruments and difficulties with the interpretation and application of the

relevant guidance.

Under current guidance in Subtopic 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity,

an entity must determine whether a contract qualifies for a scope exception from derivative accounting.

This guidance must be applied to freestanding financial instruments and embedded features that have all

the characteristics of a derivative instrument and freestanding financial instruments that can be settled

in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative

instrument. The analysis to determine whether a contract meets this scope exception includes two

criteria: (1) the contract is indexed to an entity’s own stock and (2) the contract is classified as equity. If

both criteria are not met, the contract must be recognized as an asset or a liability.

Under the scope and scope exceptions section of Subtopic 815-40, the concept of indexation is defined

as an application of the following two-step process:

Step 1: An entity evaluates the feature for any contingent exercise provisions. This step is not within the scope of the amendments in this proposed ASU.

Step 2: An entity evaluates the feature’s settlement provisions. The fixed-for-fixed principle underlying step 2 means that an embedded feature or equity contract is considered indexed to an entity’s own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount. However, most contracts subject to this guidance contain adjustment provisions upon the occurrence of contingent events. As a result, a list of exceptions exists to supplement the principle. In performing this assessment under the indexation criterion, an entity should consider any potential settlement adjustment provisions regardless of the likelihood of the contingent events occurring.

Under the recognition section of Subtopic 815-40, an entity must determine whether a contract meets

specific conditions to be classified as equity. Analyzing whether a contract meets the settlement criterion

involves evaluating the contract’s settlement optionality and conditions necessary for share settlement.

The guidance includes seven conditions for performing this assessment.

The amendments in this proposed ASU would revise the guidance in Subtopic 815-40 as follows:

1. Add a likelihood threshold to the existing indexation guidance. All other existing indexation guidance would remain. However, an entity would no longer be required to evaluate potential adjustments that have a remote likelihood of occurring.


2. Remove the following from the settlement guidance: a. Requirement to evaluate contingent events that could require net cash settlement but have a

remote likelihood of occurring b. Condition about settlement in unregistered shares c. Condition about collateral d. Condition about shareholder rights

3. Clarify the condition about failure to timely file in the settlement guidance that penalty payments do not preclude equity classification.

The amendments in this proposed ASU would also

reduce or eliminate situations in which classification conclusions are driven by remote contingent events and

change the population of contracts currently recognized as assets or liabilities.

The FASB also decided to change the frequency of reassessing whether the derivatives scope exception

is met. Under current guidance, reassessment is required at each balance sheet date. The proposed ASU

would reduce the frequency of reassessment by requiring it only upon the occurrence of a reassessment

event (such as an adjustment to the instrument’s strike price or the number of shares used to calculate

the settlement amount).

In considering improvements to the EPS guidance, the Board focused on the areas included in the

project’s overall scope of (a) convertible instruments and (b) instruments that qualify for the derivatives

scope exception for contracts in an entity’s own equity in Subtopic 815-40 and consequences of the

amendments in this proposed ASU to classification, recognition, and measurement in those areas of the

guidance.

Effective date

The effective date will be determined after the FASB considers stakeholders’ feedback on the

amendments in this proposed ASU.

Proposed ASU

Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323),

and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and

Topic 815

Issue date

July 30, 2019

Comment deadline

August 29, 2019

Background

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321,

Investments — Equity Securities, and made targeted improvements to address certain aspects of


accounting for financial instruments. One improvement enabled an entity to measure certain equity

securities without a readily determinable fair value at cost, minus impairment, if any. Paragraph 321-10-

35-2, as amended, states that if an entity identifies observable price changes in orderly transactions for

the an identical or similar investment of the same issuer, it should measure the equity security at fair

value as of the date that the observable transaction occurred (hereinafter referred to as the measurement

alternative).

Stakeholders raised questions about interactions between the measurement alternative in Topic 321 and

the equity method of accounting in Topic 323, Investments — Equity Method and Joint Ventures.

Stakeholders noted that diverse views have emerged about the application of the measurement

alternative and the equity method of accounting since the adoption of ASU 2016-01.

Stakeholders also raised questions about the interactions among Topic 321, Topic 323, and Topic 815,

Derivatives and Hedging, related to the application of the guidance for certain forward contracts and

purchased options to purchase securities that, upon settlement or exercise, would be accounted for

under the equity method of accounting. Stakeholders noted that diverse views have emerged about

whether these forward contracts and purchased options should be accounted for in accordance with

Topic 321, Topic 323, or Topic 815.

The amendments in this proposed ASU would affect all entities that apply the guidance in Topics 321,

323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or

purchase an option to purchase securities that, upon settlement of the forward contract or exercise of

the purchased option, would be accounted for under the equity method of accounting.

Proposed amendments

Issue 1: Accounting for certain equity securities upon the application or discontinuation of the equity method of accounting

The proposed amendments would clarify that an entity should consider observable transactions that

require it to either apply or discontinue the equity method of accounting for the purposes of applying the

measurement alternative in accordance with Topic 321 immediately before applying or upon

discontinuing the equity method.

Issue 2: Scope considerations for forward contracts and purchased options on certain securities

The proposed amendments would clarify that for the purpose of applying paragraph 815-10-15-141(a) an

entity should not consider whether, upon the settlement of the forward contract or exercise of the

purchased option, individually or with existing investments, the underlying securities would be accounted

for under the equity method in Topic 323. An entity would also evaluate the remaining characteristics in

paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased

options.

The amendments in this proposed Update would clarify certain interactions between the guidance to

account for certain equity securities under Topic 321, the guidance to account for investments under the


equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an

entity accounts for an equity security under the measurement alternative or a forward contract or

purchased option to purchase securities that, upon settlement of the forward contract or exercise of the

purchased option, would be accounted for under the equity method of accounting. These proposed

amendments would improve current GAAP by reducing diversity in practice and increasing comparability

of the accounting for these interactions.

Effective date

The effective date and the ability to early adopt the amendments will be determined after the Emerging

Issues Task Force considers stakeholder feedback on this proposed ASU. The amendments in this

proposed ASU would be applied prospectively.

Proposed ASU

Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases

(Topic 842)

Issue date

August 15, 2019

Comment deadline

September 16, 2019

Background and proposed amendments

Since 2014, the FASB has issued several major ASUs. Based on feedback obtained from outreach with

stakeholders and monitoring of implementation, the Board has gained a greater understanding about the

implementation challenges encountered by all types of entities when adopting a major ASU. The

challenges are often magnified for private companies, smaller public companies, and not-for-profit

organizations. Following are some factors that affect the severity of challenges encountered by those

entities when transitioning to a major ASU:

1. Availability of resources 2. Timing and sources of education 3. Knowledge or experience gained from implementation issues encountered by larger public

companies 4. Comprehensive transition requirements 5. Understanding and applying guidance from post-issuance standard-setting activities 6. The development or acquisition of the following:

a. Sufficient information technology and expertise in developing new systems or effecting system changes

b. Effective business solutions and internal controls c. Better data or estimation processes

In response to those issues and requests to defer certain major ASUs not yet effective for all entities, the

FASB developed a philosophy to extend and simplify how effective dates are staggered between larger


public companies and all other entities. Those other entities include private companies, smaller public

companies, not-for-profit organizations, and EBPs.

Under this philosophy, a major ASU would first be effective for larger public companies — entities that are

SEC filers (per the Master Glossary definition) but excluding entities eligible to be smaller reporting

companies (SRCs) under the SEC’s definition. For all other entities, the Board will consider, with respect

to major ASUs, requiring an effective date staggered at least two years after that for larger public

companies.

For existing major ASUs not yet effective, determining whether an entity is eligible to be a smaller

reporting company will be based on an entity’s most recent determination in accordance with SEC

regulations as of the issuance of this final ASU. For future major ASUs, the determination will be based

on an entity’s most recent determination in accordance with SEC regulations as of the date that the

future final ASU is issued.

The FASB proposes in this ASU to apply this change in philosophy to the effective dates for the following

major ASUs (including amendments issued after the issuance of the original ASU):

1. ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses)

2. ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (Hedging)

3. ASU No. 2016-02, Leases (Topic 842) (Leases)

The Board also will address the application of this change in philosophy to ASU No. 2018-12, Financial

Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

(Insurance), as part of a separate project.

Effective dates

The Credit Losses currently is not effective for any entities; early application is permitted for fiscal years

beginning after December 15, 2018. Its mandatory effective dates are as follows:

1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years

2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years

3. All other entities (private companies, not-for-profit organizations, and EBPs) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years

Under the revised effective date philosophy, the mandatory effective dates for Credit Losses in this

proposed Update would be amended to the following:

1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years

2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years


Hedging currently is effective for some entities. Its effective dates are as follows (early application is

allowed):

1. Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020

Because Hedging already is effective for all public business entities, the FASB retained the effective date

for those entities, including SRCs. The Board also decided to defer the mandatory effective date for

Hedging for all other entities by an additional year. Therefore, Hedging would be effective for entities

other than public business entities for fiscal years beginning after December 15, 2020, and interim

periods within fiscal years beginning after December 15, 2021. Early application would continue to be

allowed.

Leases currently is effective for some entities. Its effective dates are as follows (early application is

allowed):

1. Public business entities; not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and EBPs that file or furnish financial statements with or to the SEC for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020

Because Leases already is effective for entities listed within the preceding no. 1, the FASB retained the

effective date for those entities, including SRCs. The Board also decided to defer the effective date for all

other entities by an additional year. Therefore, Leases would be effective for entities listed within the

preceding no. 2 for fiscal years beginning after December 15, 2020, and interim periods within fiscal

years beginning after December 15, 2021. Early application would continue to be allowed.

Proposed ASU

Financial Services — Insurance (Topic 944)

Issue date

August 21, 2019

Comment deadline

September 20, 2019

Background

On August 15, 2018, the FASB issued ASU No. 2018-12, Financial Services — Insurance (Topic 944):

Targeted Improvements to the Accounting for Long-Duration Contracts, which made targeted

amendments to improve, simplify, and enhance the financial reporting requirements for long-duration

contracts issued by insurance entities. For public business entities, the amendments in ASU No. 2018-12

are effective for fiscal years (and interim periods within those fiscal years) beginning after December 15,

2020. For all other entities, those amendments are effective for fiscal years beginning after December 15,


2021, and interim periods within fiscal years beginning after December 15, 2022. Early application of the

amendments is permitted.

The Board received a technical agenda request to defer the effective date of the amendments in ASU No.

2018-12 for public entities by one year.

Separately, the Board issued a proposed ASU, Financial Instruments — Credit Losses (Topic 326),

Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, on August 15, 2019. The

FASB developed a philosophy to extend and simplify how effective dates are staggered between larger

public companies and all other entities. Under this philosophy, a major Update would first be effective for

entities that are SEC filers (per the Codification’s Master Glossary definition), excluding entities eligible to

be SRCs under the SEC definition. For all other entities, the Board will consider requiring an effective date

staggered at least two years after the effective date for SEC filers, excluding entities eligible to be SRCs.

The amendments in this proposed ASU would address the agenda request and would apply the new

proposed philosophy on effective dates to the amendments in ASU No. 2018-12.

Proposed amendments — Effective date

The amendments in this proposed ASU would defer the effective date of the amendments in ASU No.

2018-12 for all entities.

For SEC filers, excluding entities eligible to be SRCs as defined by the SEC, the amendments in ASU No.

2018-12 would be effective for fiscal years beginning after December 15, 2021, and interim periods within

those fiscal years. The determination of whether an entity is an SRC would be based on an entity’s most

recent determination in accordance with SEC regulations as of the issuance of amendments in a final

ASU on the effective date for Topic 944. Early application of the amendments in ASU No. 2018-12 would

be permitted.

For all other entities, the amendments in ASU No. 2018-12 would be effective for fiscal years beginning

after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early application of the amendments in ASU No. 2018-12 would be permitted.

Proposed ASU

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial

Reporting

Issue date

September 5, 2019

Comment deadline

October 7, 2019

Background

The FASB is proposing optional guidance for a limited time to ease the potential burden in accounting for

(or recognizing the effects of) reference rate reform on financial reporting.


In response to concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk

of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the

world have undertaken reference rate reform initiatives to identify alternative reference rates that are

more observable or transaction-based and less susceptible to manipulation.

Stakeholders raised certain operational challenges likely to arise in accounting for contract modifications

and hedge accounting due to reference rate reform. Some challenges relate to the significant volume of

contracts and other arrangements, such as debt agreements, lease agreements, and derivative

instruments, which will need to be modified to replace references to discontinued rates with references

to replacement rates. For accounting purposes, such contract modifications are required to be evaluated

in determining whether the modifications result in the establishment of new contracts or the continuation

of existing contracts. Stakeholders indicated that due to the significant volume of affected contracts and

other arrangements, together with a compressed time frame for making contract modifications, the

application of existing accounting standards on assessing modifications versus extinguishments could

be costly and burdensome and financial reporting results should reflect the intended continuation of

such contracts and arrangements.

Stakeholders raised additional accounting concerns specific to hedge accounting. Specifically, changes

in a reference rate could disallow the application of certain hedge accounting guidance, and certain

hedging relationships may not qualify as highly effective during the period of the market-wide transition

to a replacement rate. Stakeholders indicated that the inability to apply hedge accounting because of

reference rate reform would result in financial reporting outcomes that do not reflect entities’ intended

hedging strategies when those strategies continue to operate as effective hedges.

The amendments in this proposed ASU would be elective and would apply to all entities, subject to

meeting certain criteria, for contract modifications or hedging relationships that reference LIBOR or

another reference rate expected to be discontinued due to reference rate reform.

Proposed amendments

The amendments in this proposed ASU would provide optional expedients and exceptions for applying

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if

certain criteria are met.

The amendments in this proposed ASU would apply only to contracts and hedging relationships that

reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The

proposed expedients and exceptions provided by the amendments would not apply to contract

modifications made and hedging relationships entered into or evaluated after December 31, 2022.

For other Topics and Subtopics in the Codification, the amendments in this proposed ASU also include a

general principle that would permit entities to:

1. Consider modifications of contracts due to reference rate reform to be a continuation of those contracts

2. Not reassess previous determinations


When elected, the optional expedients for contract modifications would be applied consistently for all

contracts or transactions within the relevant Topic, Subtopic, or Industry Subtopic within the Codification

that contains the guidance that otherwise would be required to be applied.

The proposed ASU also addresses the following:

Exceptions to Topic 815 guidance related to changes in critical terms of a hedging relationship Optional expedients for fair value hedges Optional expedients for cash flow hedges

Effective date

The amendments in this proposed ASU would be effective for all entities upon issuance of the final ASU.

Upon adoption, an entity may elect to apply the proposed amendments prospectively to contract

modifications made and to hedging relationships existing as of or entered into on or after the date of

adoption and through December 31, 2022. The proposed amendments would not apply to contract

modifications made and hedging relationships entered into or evaluated after December 31, 2022.

Proposed ASU

Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus

Noncurrent) — Revision of exposure draft issued January 10, 2017

Issue date

September 12, 2019

Comment deadline

October 28, 2019

Background

The FASB is issuing this proposed ASU as part of its initiative to reduce complexity in accounting

standards (Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate,

and improve areas of GAAP for which cost and complexity can be reduced while maintaining or

improving the usefulness of the information provided to financial statement users.

Stakeholders have told the Board that the guidance on determining whether debt should be classified as

current or noncurrent in a classified balance sheet is overly complex. Topic 470 includes guidance on

various narrow-scope, fact-specific debt transactions. The amendments in this proposed ASU would

replace the current, fact-specific guidance with an overarching, cohesive principle for debt classification.

The FASB issued a proposed ASU, Debt (Topic 470): Simplifying the Classification of Debt in a Classified

Balance Sheet (Current versus Noncurrent), for public comment on January 10, 2017, with comment

letters due on May 5, 2017. The Board added the proposed requirements to preclude the consideration of

unused long-term financing arrangements and to allow the consideration of grace periods in this revised

proposed ASU but has not made significant changes to the other aspects of the 2017 proposed

amendments. The Board decided to re-expose the 2017 proposed amendments to raise awareness of


the revisions with all entities, including private company and not-for-profit organization stakeholders, and

to avoid unintended consequences of the final guidance.

The amendments in this proposed ASU relate to separate classifications of current debt and noncurrent

debt within a classified balance sheet. Separate classification of current debt and noncurrent debt is not

required for entities that do not present a classified balance sheet.

The amendments in this proposed ASU would apply to all entities that enter into a debt arrangement and

present a classified balance sheet. A debt arrangement provides a lender with a contractual right to

receive consideration and a borrower with a contractual obligation to pay consideration on demand or on

fixed or determinable dates. The proposed amendments also would apply to convertible debt

instruments, liability-classified mandatorily redeemable financial instruments, and lease liabilities.

Proposed amendments

The amendments in this proposed ASU would introduce a principle for determining whether debt or other

instruments within the scope of the proposed amendments would be classified as a noncurrent liability

as of the balance sheet date. According to that principle, an entity would classify an instrument as

noncurrent if either of the following criteria is met as of the balance sheet date:

1. The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.

2. The entity has a contractual right to defer settlement of the liability for a period greater than one year (or operating cycle, if longer) after the balance sheet date.

The amendments in this proposed ASU also would require more comprehensive disclosures about

defaults resulting from violations of a loan covenant, grace periods within which a debtor may cure a

violation, and triggers of a subjective acceleration clause.

The amendments in this proposed ASU could shift classification of certain debt arrangements between

noncurrent liabilities and current liabilities as compared with current guidance. The existing classification

guidance would be superseded by a principle that may result in a classification that differs from the

classification produced under existing rules.

There could be a change in classification when a borrower violates a provision of a long-term debt

arrangement and the debt arrangement provides a specified grace period. Current GAAP requires that an

entity classify that debt as a current liability unless it is probable that the violation will be cured within the

period, which would prevent the debt from becoming callable. The amendments in this proposed ASU

would require that the principle be applied in that scenario, which would result in a noncurrent liability

classification if either of the criteria in the principle is met as of the balance sheet date.

Effective date

In the first set of interim and annual financial statements following the effective date of the amendments

in this proposed ASU, an entity would apply the proposed amendments on a prospective basis to debt

that exists at that date and after that date. Early adoption of the proposed amendments would be

permitted.


After considering stakeholder feedback, the FASB will determine the effective date of the amendments in

this proposed ASU.

SEC

Release Nos. 33-10668; 34-86614; File No. S7-11-19: Modernization of Regulation S-K Items 101, 103, and 105

Issue date

August 8, 2019

Comment deadline

October 22, 2019

Background

The SEC proposed amendments to modernize the description of business, legal proceedings, and risk-

factor disclosures that registrants are required to make pursuant to Regulation S-K. The proposed

amendments improve disclosures and simplify compliance.

These proposals are part of a comprehensive evaluation of the SEC’s disclosure requirements that was

recommended in the staff’s Report on Review of Disclosure Requirements in Regulation S-K (S-K Study).

The report was mandated by Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”).

Based on the S-K Study’s recommendation, the staff initiated an evaluation of the information registrants

are required to disclose, how this information is presented, where this information is disclosed, and how

the SEC can better leverage technology as part of these efforts (collectively, the Disclosure Effectiveness

Initiative). The overall objective of the Disclosure Effectiveness Initiative is to improve the SEC’s

disclosure regime for both investors and registrants.

Proposed amendments

The proposed amendments would revise the following items and emphasize a more principles-based

approach:

Item 101(a) (description of the general development of the business) Item 101(c) (narrative description of the business) Item 105 (risk factors)

The flexible approach may elicit more relevant disclosures about these items. The proposed amendment

of Item 103 (legal proceedings) would continue the current approach because that requirement depends

less on the specific characteristics of registrants.


The proposed amendment of Item 101(a) would:

Make it largely principles-based by providing a nonexclusive list of the types of information that a registrant may need to disclose

Require disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business

Include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations

Eliminate a prescribed time frame for this disclosure Permit a registrant, in filings made after a registrant’s initial filing, to provide only an update of the

general development of the business that focuses on material developments in the reporting period (an active hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business)

The proposed amendment of Item 101(c) would:

Clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c)

Include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, if such disclosures would be material to an understanding of the registrant’s business

Refocus the regulatory compliance requirement by including material government regulations as a topic

The proposed amendment of Item 103 would:

Expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document;

To adjust for inflation, revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000

The proposed amendment of Item 105 would:

Require summary risk factor disclosure if the risk factor section exceeds 15 pages Refine the principles-based approach of that rule by changing the disclosure standard from the “most

significant” factors to the “material” factors required to be disclosed Require risk factors to be organized under relevant headings

PCAOB

Public Company Accounting Oversight Board

The PCAOB did not propose any new or revised standards or guidance during this period.

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