Annual Accounting and Auditing Workshop. Kurt Oestriecher
at a premium, the unamortized premium is recorded as a loss in earnings. In addition, there was diversity in practice in the amortization period of premiums of callable debt securities and how the potential for a call was factored into current impairment assessments.
Who is affected by this ASU?
The amendments in this update affect all entities that hold investment in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium).
What are the main provisions of this ASU?
The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the premium is to be amortized to the earliest call date. Discounts continue to be amortized to maturity.
When will this ASU be effective?
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018.
For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early application is permitted.
The amendments should be applied using a modified retrospective basis through a cumulative-effect adjustment directly into retained earnings as of the beginning of the period of adoption.
Knowledge check
1 ASU No. 2017-08 requires the bond premiums paid on callable bonds to be amortized over which time period?The earliest call date.The maturity date of the bonds.The expected call date.Bond premiums will now be expensed at acquisition of the bond.
FASB ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
Why was this ASU issued?
This update has two parts and was undertaken to address narrow issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of both liabilities and equities.
Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance has created cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option.
Part II of this update addresses the difficulty of navigating FASB ASC 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB ASC. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.
Who is affected by this ASU?
Part I of this update affects all entities that issue financial instruments that include down round features. The amendments in Part II do not have an accounting effect.
What are the main provisions of this ASU?
The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with FASB ASC 260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in FASB ASC 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in FASB ASC 260).
The amendments in this update also revise the guidance for instruments with down round features in FASB ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in FASB ASC 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated.
The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of FASB ASC 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
What is the effective date of this ASU?
For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years, beginning after December 15, 2020.
Early application is permitted for all entities, including adoption in an interim period.
The amendments in part 1 of this update should be applied in either of the following ways:
1 Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective
2 Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The amendments in Part II of this update do not require any transition guidance because those amendments do not have an accounting effect.
FASB ASU No. 2017-15, Codification Improvements to Topic 995, U.S. Steamship Entities: Elimination of Topic 995
Why was this ASU issued?
A provision in the tax code that provided for tax deferral for statutory reserve deposits reached its 25-year expiration in 2017. As a result, FASB ASC 995, U.S. Steamship Entities, was no longer relevant. FASB issued a separate update for the elimination of FASB ASC 995 to increase stakeholder awareness and to expedite improvements to GAAP.