Other Changes in 2009
Collaborative arrangements
ASC 808 (formerly EITF 07-1) addresses situations in which entities enter
into arrangements without the creation of a separate legal entity to
participate in a joint operating activity. These activities might include
the development and commercialization of intellectual property, a drug
candidate, software, computer hardware, or a motion picture. The new
literature provides guidance on the income statement presentation of costs
incurred and revenue generated from third parties, as well as payments
between the participants in the collaborative arrangement. A number of
disclosures are also required.
Escrowed share
arrangements
In EITF Topic D-110, the SEC staff updated its views on arrangements in
which shareholders of a company place a portion of their shares in escrow in
connection with an initial public offering or other capital-raising
transaction. The escrowed shares are released back to the shareholders only
if certain performance targets are met. Historically, the SEC staff believed
these arrangements were compensatory, equivalent to a reverse stock split
followed by the grant of a restricted stock award under a performance-based
plan. When evaluating the substance of the transaction and whether the
presumption of compensation can be overcome, the staff believes an
arrangement in which the shares are forfeited if employment terminates is
compensation. Otherwise, if the escrowed shares will be released or canceled
without regard to continued employment, the facts and circumstances may
indicate that the arrangement is in substance an inducement made to
facilitate the transaction on behalf of the company. In such cases, the
staff now believes that the arrangement should be recognized and measured as
a reduction of the proceeds allocated to the newly-issued securities.
Further, the staff observed discounts on debt securities are amortized using
the effective interest method, while discounts on common equity are not
generally amortized.
Financial asset transfers
ASC 860-10 (formerly FSP FAS 140-3) was updated to address questions about
the accounting for a repurchase financing, which is a repurchase agreement
that relates to a previously transferred financial asset between the same
counterparties, that is entered into contemporaneously with, or in
contemplation of, the initial transfer. The guidance discusses whether the
initial transfer and related repurchase financing should be evaluated
jointly or separately for sale accounting under ASC 860. If they must be
evaluated jointly and do not qualify for sale accounting, then the linked
transactions may meet the definition of a derivative under ASC 815.
Financial asset transfers
and interests in VIE disclosures
As an interim measure prior to its revision to the accounting models for
securitizations and off-balance sheet entities (see “2010 Developments”
below), the FASB amended its disclosure guidance on these topics (formerly
FSP FAS 140-4 and FIN 46(R)-8) to expeditiously meet user requests for
greater transparency into financial asset transfers and an entity’s
involvement with certain off-balance sheet entities.
Financial guarantee
insurance
ASC 944 (formerly FAS 163) was updated to address inconsistent recognition
and measurement of claim liabilities because of differing views about when a
loss has been incurred. ASC 944 requires that an insurance enterprise
recognize a claim liability prior to an event of default (insured event)
when there is evidence that credit deterioration has occurred in an insured
financial obligation. It also clarifies the accounting for financial
guarantee insurance contracts, including the recognition and measurement of
premium revenue and claim liabilities. Lastly, it enhances the disclosures
about financial guarantee insurance contracts.
Leases
Leases increasingly include maintenance deposits to ensure that the leased
asset is properly maintained. ASC 815-10-05-9A (formerly EITF 08-3)
clarifies that the lessee should treat the payment as a deposit asset, and
either expense or capitalize the cost of maintenance at the time the
maintenance is performed, consistent with the lessee’s maintenance
accounting policy.
Not-for-Profit
Organizations (NFPs)
In ASC 958-205, the FASB provided guidance on the net asset classification
of donor-restricted endowment funds under the Uniform Prudent Management of
Institutional Funds Act of 2006 (UPMIFA). It also requires enhanced
disclosures by all NFPs that have endowments (whether donor restricted or
not) and regardless of whether the organization is currently subject to
UPMIFA.
Pension disclosures
ASC 715-10-50 (formerly FSP FAS 132(R)-1) now requires additional
disclosures by employers that sponsor defined benefit pension or other
postretirement plans, which provide more information about plan assets,
investment decisions, and related risks.
Financial Reporting News is provided by Somerset’s Assurance Team for our clients and other interested persons upon request. For additional information on the issues discussed, please contact us. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review.
These articles were written by and published herein with the permission from professionals of BDO Seidman, LLP. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
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