Have you ever thought to yourself, “Why does accounting have to be so complex”? If you’re like many of us, you’ve often thought there has to be a simpler way to account for certain transactions. The Financial Accounting Standards Board (“FASB”) has solved this problem by implementing the Simplification Initiative in an attempt to improve selected accounting standards through a series of short-term projects. This initiative intends to “maintain the usefulness of the information reported to investors while reducing cost and complexity in financial reporting” (FASB.org). This means that the end users of financial statements will receive the same quality but at a significant cost reduction to the entity.
To date, FASB has completed four major simplification projects and has eight more projects ongoing. The completed updates to GAAP that will be effective December 15, 2015 are as follows:
- Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
- This update separates the requirements for accounting for a cloud computing arrangement depending on the presence of a software license. For arrangements including a software license, the accounting should be consistent with the acquisition of other software licenses. However, if it does not include a software license, the arrangement should be accounted for as a service contract.
- Extraordinary Items
- FASB update 2015-01 completely eliminates the concept of extraordinary items. With the adoption of this update, items that were previously considered unusual and infrequent will now be considered ordinary for presentation purposes. Presently, an item is classified as an extraordinary gain or loss when it is determined to be both unusual and infrequent. These extraordinary gains and losses are reported separate from operating income, net of tax.
- Measurement Date of Defined Benefit Pension Plan Assets
- This update to the accounting standards allows for an entity with a fiscal year-end that does not align with a month-end (e.g. December 15) to measure defined benefit plan assets and obligations as of the month-end closest to the entity’s fiscal year-end in order to align with valuation information provided from third parties. Additionally, in the case of an interim significant event that causes a remeasurement of defined benefit plan assets or obligations, the entity can use the month-end closest to the date of the significant event.
- Presentation of Debt Issuance Costs
- The FASB update on debt issuance costs aligns the presentation of debt issuance costs with the presentation of debt discounts or premiums. Currently, debt issuance costs are required to be presented as a deferred charge on the balance sheet. When the new update takes effect, debt issuance costs will be reported as a deduction from the carrying amount of the related debt liability.
FASB has made great progress towards a simpler Accountings Standards Codification with the completion of these four updates, and they have several current projects which will provide even more simplification going forward. Those projects are as follows:
- Simplifying the Accounting for Measurement-Period Adjustments
- Simplifying the Measurement of Inventory
- Balance Sheet Classification of Debt
- Accounting for Income Taxes
- Stock-based Compensation
- Equity Method of Accounting
- Accounting for Financial Instruments – Hedging
- Liabilities & Equity – Targeted Improvements
Continue to check in for more updates on the FASB accounting simplification project, and contact Anders for assistance on applying the new GAAP updates to your business.
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