Many borrowers and lenders are frustrated with the complexity of financial reporting. So the Financial Accounting Standards Board (FASB) has launched a simplification initiative to reduce narrow, confusing areas of U.S. Generally Accepted Accounting Principles (GAAP). Here are some recent changes and works in progress.
Development stage entities
The FASB issued Accounting Standards Update (ASU) No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.The update removes incremental financial reporting requirements for new businesses in the development stage. Some noteworthy changes: Start-ups aren’t required to label themselves as “development stage entities” or describe the development activities that they’re engaged in.
GAAP requires businesses to classify, present and disclose one-time events and transactions. Previously, an event was considered “extraordinary” if it was unusual and wasn’t expected to recur in the foreseeable future. However, the threshold was considered so high that few companies reported extraordinary items. So, in January 2015, the FASB eliminated this seldom-used concept.
Under the new rules, companies continue to report unusual or infrequent events separately. But they won’t have to calculate the tax effect or the effect on per-share earnings.
Issued in July 2014, Proposed ASU 2014-210, Inventory (Topic 330): Simplifying the Measurement of Inventory, would require borrowers to measure inventory at the lower of cost or net realizable value. GAAP defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.”
This proposal should have been a quick-hit project to clear up confusion about how businesses calculate the value of their inventory stockpiles. More than 80% of companies and stakeholders that commented on the proposal favored the changes. But 20% of respondents — including some big-box retailers — caused the FASB to hit the pause button. They were concerned that the proposal doesn’t factor in the nuances of calculating inventory measured using last-in, first out (LIFO) or the retail inventory method (RIM). In May, the board voted to proceed with the project but to allow exceptions for the use of LIFO and RIM. Unfortunately, such exceptions perpetuate complexity under GAAP.
The FASB’s simplification agenda also includes efforts to reduce “disclosure overload.” Overly burdensome disclosures currently on the chopping block relate to income taxes, pension plans and fair value measurements. The board wants to lower the costs borrowers incur preparing their financial statements without depriving lenders and investors of valuable information. Contact an accounting professional for updated information about the FASB’s ongoing simplification initiative.
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