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Weekly Summary of Accounting, SEC and Auditing Developments: June 11-15, 2018

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ACCOUNTING AND SEC HEADLINES:
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EITF Flash Report -- EITF Reaches Final Consensus on Cloud Computing Arrangements
The EITF held a meeting on June 7, 2018, and discussed the following issues:

EITF Issue No. 17-A, "Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Contract";
EITF Issue No. 18-A, "Recognition under Topic 805 for an Assumed Liability in a Revenue Contract"; and
EITF Issue No. 18-B, "Improvements to Accounting for Episodic Television Series."

The EITF members voted to issue a final consensus on Issue 17-A.

Issue 17-A Discussion

The objective of the project is to reduce complexity and diversity in practice by clarifying the accounting for implementation costs of a cloud computing arrangement that is a service contract. The EITF discussed feedback received on proposed Accounting Standards Update, Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements. The EITF reached a number of decisions to include in the final consensus, including the following:

To require an entity to capitalize implementation costs of a hosting arrangement that is a service contract using the guidance in Subtopic 350-40 on internal-use software.
To require an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which would include renewal options that are reasonably certain to be exercised, and present it in the same line item in the statement of income as the fee associated with the hosting arrangement.
Clarified that capitalized implementation costs should be presented in the same line item on the balance sheet as a prepayment of fees related to the hosting arrangement.
Clarified that the cash flows related to capitalized implementation costs should be classified in the same manner as the cash flows for the fees related to the hosting arrangement.
To not provide guidance on the application of the project stages in Subtopic 350-40 to hosting arrangements.
To require an entity to apply the impairment model included in Subtopic 350-40 with the clarification that the unit of accounting for abandonment is the asset related to a module or a component of the hosting arrangement.
Amended the definition of “Hosting Arrangement” in the Master Glossary to remove the reference to licensing.
Allow an entity to choose between prospective transition and retrospective transition when adopting the guidance in any amendments resulting from Issue 17-A.
For Public Business Entities, Issue 17-A would be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2019.
For all other entities, Issue 17-A would be effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
Permit early adoption for all entities in any annual or interim period for which the entity’s financial statements have not yet been issued or made available for issuance.

Issue 18-A Discussion

The issuance and adoption of Topic 606, Revenue from Contracts with Customers, has raised questions about what definition should be applied in the recognition of a liability under Topic 805 for an assumed liability in a revenue contract for a business combination that occurs after the adoption of Topic 606. Given the diversity of potential views, the objective of this project is to narrow this diversity in practice.

The EITF presented two alternative views on accounting for an assumed liability in a revenue contract for a business combination that occurs after the adoption of Topic 606:

Alternative A: Legal Obligation: A Company recognizes a contract liability only for its legal obligation to the customer as of the acquisition date because Topic 606 did not consequentially amend Topic 805 and current practice is to use the legal obligation concept.
Alternative B: Performance Obligation: A Company recognizes a contract liability if it has a performance obligation to the customer as of the acquisition date based on Topic 606.

The majority of the EITF supported the performance obligation in Alternative B. The EITF also discussed measurement issues and generally agreed that:

The acquirer would use the acquisition date fair value for measurement of an assumed liability in a revenue contract.
Direct costs to fulfill a performance obligation would consider assets that were included in the acquired set when measuring the fair value of a contract liability recognized in a business combination.

The majority of the EITF supported a prospective transition method with no transition disclosures required.

Issue 18-B Discussion

The entertainment industry has experienced significant change in production and distribution models over the recent years. As a result, some stakeholders have questioned whether the constraint in the capitalization guidance for episodic content still provides relevant information to investors considering these changes. For example, the internet has introduced new distribution channels with streaming capabilities and new participants into the industry with different business models, such as subscription-based revenue models. The objective of this project is to determine whether the existing capitalization models still provide relevant financial reporting in the current business environment.

The majority of the EITF supported the view that companies that produce episodic television series would capitalize production costs in the same manner as film production costs. This alternative would eliminate the current hurdle in the capitalization of production costs for episodic television series. As a result, companies no longer would need to assess contracted revenues in the initial market or establish estimates of secondary market revenue. Current amortization guidance in Subtopic 926-20 would remain unchanged.

The EITF expressed the desire for additional feedback on practical considerations from the working group for this project to be considered at future meetings.

Public Accounting Report -- Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits
We have published a new edition of the Public Accounting Report (PAR), Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits - June 2018. Other topics discussed in this edition include:

Millennials view business with increasing disillusionment;
Consider alternative dispute resolution in crafting solid engagement letters; and
People, firms and promotions.

SAB 118 does not provide an option to defer application of the income tax accounting guidance. While some stakeholders requested a deferral option, the SEC staff opted to not follow that approach. Instead, the SEC staff believes that the approach highlighted in SAB 118 provides investors with better and more timely information and addresses the financial reporting concerns raised by various stakeholders leading up to the enactment of the Act.
SAB 118 categorizes the accounting for the income tax effects of the Act into one of three “buckets:”
Bucket 1 represents the income tax accounting effects of the Act that an entity is able to complete. Some entities, however, may not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act.
Bucket 2 represents the specific income tax accounting effects of the Act that are not yet complete, but for which an entity can determine a reasonable estimate. The reasonable estimate should be reported as a provisional amount in the first reporting period a reasonable estimate can be determined. Additionally, there may be certain situations in which a reasonable estimate cannot be determined.
Bucket 3 represents those specific income tax effects for which a reasonable estimate cannot be determined. In such cases there should be no provisional amount included in the financial statements for those specific income tax effects for which a reasonable estimate cannot be determined.
Depending on their facts and circumstances and for specific income tax effects, some entities may complete the accounting in the early to middle parts of the measurement period, while other entities may not be able to complete the accounting for certain income tax effects until the end of the measurement period. There are no bright lines as to when the accounting for a specific income tax item should be completed during the measurement period; when the accounting is completed will clearly vary depending on an entity’s facts and circumstances. The key is to simply be progressing in good faith when looking to the staff’s guidance in SAB 118.
Disclosure guidance in SAB 118 should not be overlooked. These disclosures provide important information to financial statement users about the financial reporting impact of the Act where the accounting is incomplete and are a meaningful component of SAB 118.

Implementation Efforts on New GAAP Standards

Teotia also provided an update on implementation efforts associated with new accounting standards on revenue recognition, leases, and credit losses. Highlights of Teotia’s remarks included:

While consultations received by the SEC staff to date on the new revenue recognition standard have related to a number of topics, several of which have been communicated in previous speeches, the most frequently discussed issues related to the identification of performance obligations and the application of the principal versus agent guidance.
For those companies that are still working on adoption of the new revenue recognition standard, the SEC staff encourages you to keep the momentum going.
The new leases standard has been a significant focus of the SEC staff, and its focus is naturally increasing as the effective date nears.
With respect to guidance on lease implementation, Teotia emphasized what the SEC staff has previously stated: for those underway, keep going, and for anyone else, get going. Implementation will require (among other steps): understanding the accounting and disclosure requirements of the new standard; identifying relevant arrangements and leases within those arrangements; determining appropriate accounting policies, including applicable transition elections; applying the new standard to arrangements within the scope of the standard; preparing transition and ongoing disclosures; and establishing adequate and appropriate processes and controls to support implementation and application of the standard, including the preparation of required disclosures.
It is important for registrants to ensure their implementation plans include sufficient time to identify arrangements that include leases subject to Topic 842. Teotia emphasized this point because it may require time to complete. Registrants should carefully evaluate all of their arrangements and transactions to evaluate the appropriate accounting literature.
Teotia believes that registrants, auditors, and audit committees all have key roles to play. Registrants and their auditors should be actively working to identify and resolve any application and transition issues related to the new standard. Registrants, with the oversight of their audit committees, should ensure any issues related to adopting and applying the new standard are identified and resolved.
Regarding the new credit losses standard, the dialogue the SEC staff is having has moved towards a focus on implementation and the staff has noted meaningful progress to date being made by the institutions that have engaged with them. Teotia indicated that registrants and their auditors are actively working to identify and resolve accounting and implementation issues related to this new standard.

Financial Reporting -- SEC Chief Accountant Discusses Importance of Financial Reporting
SEC Chief Accountant Wesley Bricker recently spoke about the importance of financial reporting as a cornerstone on which the process of capital allocation is built. Bricker indicated that good "accounting and auditing may not readily grab the general public’s attention, but they are essential to our livelihoods." Highlights of Bricker's remarks included:

If the starting point of the financial reporting process does not begin with management using high-quality financial information for its preparation of financial statements, then what could result are increased risks and costs in each subsequent phase of financial reporting.
The strength of financial reporting, and of our capital markets, depends on thorough and objective audits performed by auditors who are ethical, independent, skeptical, and who apply the diligence necessary to meet professional and regulatory standards.
Capital markets present both opportunities and challenges to the securities regulators in executing their mandates to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.
The quality and quantity of the available financial statement information in an economy influence the efficiency of resource allocation and the cost of capital.
I make the distinction between general and special purpose objectives to emphasize the value of keeping and maintaining general purpose financial reporting free from other objectives. Standard-setters for general purpose financial reporting are concerned with, among other things, the qualities of information that relate to broad classes of investment and credit decision makers rather than to particular ones.
Information provided by general purpose financial reporting should be comprehensible to those with a reasonable understanding of business and economic activities who are willing to study the information with reasonable diligence.
One crucial preventive measure is the development of high-quality audit standards, which aid, but can never wholly replace, the role of decision making and judgment by auditors.
High-quality audit standards make audits—and the work of audit committees and others that oversee the audits of companies on behalf of investors—considerably more effective.And so, we all have an interest in the accountability and inclusiveness of the international audit-related standard-setters.

Stock Buybacks -- SEC Commissioner Jackson Highlights Concerns About Corporate Stock Buybacks
SEC Commissioner Robert J. Jackson, Jr. recently spoke about concerns he has with corporate stock buybacks. Jackson indicated that "there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay." Jackson urged his fellow SEC Commissioners to update the agency's rules to limit executives from using stock buybacks to cash out from America’s companies. Topics discussed by Jackson included:

Stock buybacks and executive pay;
How executives use buybacks to cash out; and
A path forward to address the practice of executives using buybacks as a chance to sell their shares.

Investment Markets -- SEC Commissioner Stein Discusses Investment Market Rules
SEC Commissioner Kara M. Stein recently discussed the important role rules in the investment markets play in building wealth. Stein highlighted uncertainties in investment markets given the large number of choices of investments. Stein indicated that the rules "govern investment markets are designed to address this uncertainty. They provide a framework for trust so that businesses can grow and savings aren’t either tucked under mattresses or lost to the dishonest." Topics discussed by Stein included:

More choices for investment as markets develop further;
The important impact technology is having on investment markets; and
The risk associated with more complex investment products.

Codification Improvements -- Investments in Equity Securities, Income Taxes, and Financial Services
We have published a new edition of the GAAP Update Service. This new edition discusses recent improvements made to the FASB Accounting Standards Codification^TM. The FASB recently issued three such ASUs. Two ASUs affect the SEC content of the Codification by (i) deleting guidance on other-than-temporary impairments of investments in equity securities that is no longer relevant and (ii) adding guidance on accounting for income taxes as a result of the new tax law. Both of these changes result from SEC Staff Accounting Bulletins. The third ASU eliminates an outdated paragraph in US GAAP that discussed the presentation of net deferred taxes in regulatory financial statements of banks.

Insurance -- FASB Discusses Targeted Improvements to Accounting for Long-Term Duration Contracts
As reported in its "Summary of Board Decisions" publication, the FASB met on June 6, 2018, and redeliberated the amendments in the September 2016 proposed Accounting Standards Update, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.The FASB decided to revise the modified retrospective transition method discount rate whereby as of the beginning of the earliest period presented (that is, the transition date) an insurance entity would retain the discount rate assumption for purposes of calculating net premiums and interest accretion. For balance sheet purposes, the liability would be remeasured at the current upper-medium grade fixed-income instrument yield, resulting in an adjustment to opening accumulated other comprehensive income at the transition date.

The FASB decided that the effective date of the amendments in the final Update should be as follows:

For public business entities, the amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.
For all other entities, the amendments will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

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AUDITING AND INTERNAL CONTROLS HEADLINES:
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Public Accounting Report -- Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits
As discussed above, we have published a new edition of the Public Accounting Report (PAR), Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits - June 2018. Other topics discussed in this edition include:

Millennials view business with increasing disillusionment;
Consider alternative dispute resolution in crafting solid engagement letters; and
People, firms and promotions.

PAR is the leading provider of competitive intelligence for public accounting firms and the profession. It is renowned for its straight reporting and analysis of the news, developments, and trends that have defined the profession for more than 20 years. Public Accounting Report is written for public accounting firm partners and professionals, opinion leaders, and industry observers.

AICPA Risk Alert Discussed -- Developments in Preparation, Compilation, and Review Engagements (Part II)
We have published a new edition of the GAAS Update Service. This new edition of the GAAS Update is the second of a two-part series that examines the AICPA's Alert, Developments in Preparation, Compilation, and Review Engagements. This Alert provides accountants with an update on recent practice issues and professional standards that affect preparation, compilation, and review engagements.

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GOVERNMENT HEADLINES:
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OPEB Plan Reports -- GFOA Issues Questions for the Actuarial Section of OPEB Plan Reports
The Government Finance Officers Association (GFOA) has issued Questions for the Actuarial Section of an OPEB Plan’s Comprehensive Annual Financial Report (Questions).

The GFOA has directed that these Questions be used in place of the actuarial section of the GFOA checklist, Postemployment benefit systems and investment pools. The checklist is used with the comprehensive annual financial reports (CAFRs) for plans that provide other post-employment benefits (OPEBs). However, the Questions should be used only for the actuarial section of the CAFRs for OPEBs that have implemented GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.

GASB Statement 74 was adopted in June 2015 and is effective for plan fiscal years beginning after June 15, 2016.

The GFOA expects to issue an update for the entire checklist in the near future.

Public Accounting Report -- Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits
As discussed above, we have published a new edition of the Public Accounting Report (PAR), Service, Leadership, HR and Financials: Top-Notch Firms Have Common Traits - June 2018. Other topics discussed in this edition include:

Millennials view business with increasing disillusionment;
Consider alternative dispute resolution in crafting solid engagement letters; and
People, firms and promotions.

PAR is the leading provider of competitive intelligence for public accounting firms and the profession. It is renowned for its straight reporting and analysis of the news, developments, and trends that have defined the profession for more than 20 years. Public Accounting Report is written for public accounting firm partners and professionals, opinion leaders, and industry observers.

GASB Standards -- GASB Technical Plan Discussed
We have published a new edition of the Governmental GAAP Update Service. This new edition discusses the GASB's Technical Plan. Specifically, this update discusses the elements of the Technical Plan along with the two new projects added covering public-private partnerships and cloud computing arrangements.

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