Option to Avoid Applying Credit Loss Rules to Trade Receivables May Be Considered
The new credit loss accounting rules did not move the needle on what nonfinancial companies would typically book for trade receivables, but they still had to put forth the effort to figure it all out, FASB’s Financial Accounting Standards Advisory Council (FASAC) told the board. “We saw a lot of companies that to be perfectly honest just sort of missed the ball and they’ve had to put in processes and in some cases they have a process to document why they don’t think the expected piece of the allowance calculation would ever be anything other than de minimis,” Paul Beswick, partner, assurance services (national office) of Ernst & Young LLP, said. “And so there’s been a 404 environment for small and medium sized companies—it is additional work and so I think there would be some appetite.” Beswick said he has never been a big fan of applying the current expected credit loss (CECL) model to trade receivables and there will be ongoing maintenance required. The remarks were made during a September 24 meeting in response to a question posed by FASB members about whether it would be feasible to introduce an option in the rules so that non-financial companies would not apply CECL to short-term trade receivables, in light of reports of minor impacts. Companies that have not yet adopted the rules might welcome an option to not apply the current expected credit loss (CECL) model to trade receivables.
Accounting for Impairment Isn’t Meshing With Unprecedented Coronavirus Pandemic
Companies are questioning whether the goodwill impairment accounting model works logically under the unprecedented economic uncertainty driven by the COVID-19 pandemic, according to September 24 discussions by the FASB’s FASAC. Reporting an impairment of assets is among the toughest reporting issues companies are currently wrestling with because the decline in asset value they have to record is viewed as temporary, some on the FASAC said during the discussions. The problems might be the way the rules were crafted, the discussions indicated. “Many times the FASB writes the guidance assuming there’s a one event thing that happens that causes an impairment, that causes say a segment change, that causes whatever it is. I think in actuality many times it isn’t a single event it’s an accumulation of a bunch of events or it’s a month or two at a time, so just something to consider as you think about guidance going forward,” Amie Thuener, vice president, chief accountant of Google’s parent Alphabet Inc., said. “It’s not as black and white as something happens on a day and then that’s the day we measure impairment or that’s the day we reallocate goodwill—it isn’t always that clear.”
Hoogervorst Touts Interplay of Principles-Based IFRS with Sustainability Issues
IASB Chairman Hans Hoogervorst said that IFRS standards already have “baked in” requirements that would cause companies to have to report on sustainability matters, particularly in light of trends such as net-zero emission economy goals. Hoogervorst told the IFRS Foundation virtual conference that the principles-based nature of IFRS standards means companies may already need to reflect climate-related risks in their financial statements, despite the words ‘climate’ and ‘sustainability’ not being mentioned in the standards. The potential interplay of IFRS requirements with sustainability issues is quite far-reaching, Hoogervorst said. The more urgent sustainability issues become and the more stringent public policy towards a zero-emission future becomes, the more likely it is that financial statements will be affected by these developments, he said. “These impairments, running into the tens of billions, were triggered by a considerable downward adjustment of estimates of oil prices in the next decades. The reasons for these lowered oil price projections were not just the pandemic, but also the growing realization that the transition to a low or net zero-emission economy will have its consequences for the price of oil. So, the growing realization by oil companies that some of their assets may become stranded as a result of this transition definitely played a role in these impairments,” Hoogervorst said. His remarks come at a time that the IFRS Foundation, the body with oversight of the IASB, has been studying whether to establish a separate board to develop sustainability accounting rules.