Effort to Refine U.S. GAAP Definition of a Liability Continues

FASB’s latest effort to update its Conceptual Framework is focusing on financial statement building blocks, particularly the definitions for assets and liabilities. In August 2017, the accounting board came close to a working definition, tentatively agreeing that a liability is “a present obligation of an entity to transfer an economic benefit.” But FASB did not finalize its decisions, and since then, financial reporting professionals have questioned the board about how the simpler definition will work. At its June 27 meeting, the board discussed how to distinguish between a present obligation and a business risk and how a present obligation can be created. Board members debated the circumstances that might create a present obligation, aside from a contract or law, and whether its concept of “standing ready” to complete an obligation requires modification. “The board that set that language probably tried really hard. I think we’ve tried really hard for decades since then to figure out, can we do a better job of precisely describing the fine line that gets you from constructive obligation to constructive obligation?” FASB Vice Chair James Kroeker said. FASB Chair Russell Golden concurred, saying, “I know we’ve worked on this for a number of years, and I think what we have is as good as it’s going to get.”

Proposed Clarification of Business Combinations Guidance to Be Released for Comment

FASB plans to release for public comment a plan developed by its Emerging Issues Task Force (EITF) to clarify an aspect of business combinations accounting that has caused confusion since the revenue standard was published in 2014. The plan calls on a business buying another business to recognize a liability in an acquired revenue contract based on the assumption of a performance obligation as opposed to the assumption of a legal obligation. The EITF, which discussed the issue on June 7, said that, in many cases, a legal obligation and a performance obligation would be the same thing; however, there could be cases where there was a difference, and FASB needed to ensure consistency between the standards for business combinations and revenue recognition. “This is going to be very helpful guidance,” FASB Vice Chair James Kroeker said. “Absent this guidance, we’re going to end up with diversity in practice.”

Cloud Computing Costs Can Be Capitalized

Companies will be able to capitalize the costs of setting up cloud computing systems, FASB agreed by a 4–2 vote on June 27. The board said it would publish a final update to U.S. GAAP by late summer or early fall based largely on Proposed Accounting Standards Update (ASU) 2018-230, Intangibles—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—a Consensus of the FASB Emerging Issues Task Force. The update, developed by the FASB’s Emerging Issues Task Force (EITF), is a response to requests from businesses that complained about the different accounting treatment for the setup costs for cloud-based services compared to software installed on a company’s servers. The differences have persisted in U.S. GAAP despite the similar economics of each type of purchase. The requests became more numerous as more businesses moved to cloud computing.