About the Panelists
The second day of the conference continued with a panel on major FASB standards, proposals, projects, and Emerging Issues Task Force (EITF) matters. The panel was moderated by Kimber Bascom, partner in charge of the accounting group of the department of professional practice at KPMG. Mark LaMonte, managing director, WilliamsMarston LLC; Lara Long, vice president and chief accounting office, AGCO Corp., and member of FASAC; and Hillary Salo, FASB technical director and chair of the EITF, participated on the panel. The following is an edited summary of that panel discussion. The comments made by the panelists represent their own thoughts and views, and are not necessarily representative of their employers or affiliated institutions. Official positions of FASB are reached only after extensive due process and deliberation.
Kimber Bascom began by stating that the panel would cover new accounting standards that were issued by FASB late last year, as well as a few projects currently on the Board’s agenda. The first standard, ASU 2021-10, relates to disclosure about governmental assistance.
“U.S. GAAP has not had guidance about how to account for government assistance over the years,” Bascom began. “As a result, companies have generally analogized to other GAAP and even to IFRS standards in some cases. During the pandemic, the frequency and amount of government assistance really ramped up.”
Bascom explained that ASU 2021-10 provides some disclosure requirements when accounting for government assistance, by analogy to either a grant model or a contribution model. “A grant model could be something like IAS 20; a contribution model can be ASC subtopic 958–605 for not-for-profit organizations.” The definition of government assistance, he said, is very broad: “The disclosures themselves are for the nature of the transactions, including the form of the assistance that’s received.”
“For example, if you’re a company and you’re saying, ‘I’m going to build a manufacturing plant in the city in order to get this assistance, that would be disclosed,” Bascom said. “And if there are any recapture provisions, where the government has the right to get back some of what it gave, that would be disclosed as well. Finally, any other contingencies associated with that support would be disclosed.”
Bascom then turned to Mark LaMonte to explain why it’s important for users to understand the nature of this assistance and how it’s reported. “I think people don’t realize how pervasive and widespread some of this assistance has been, even before COVID,” LaMonte replied. “The different types of government assistance that companies can get, the different forms it can take, and the amounts that can be very large, make it important to investors and users of financial statements.”
“Investors are not only interested in what government assistance companies are getting now, but how that government assistance is going to evolve over time,” LaMonte continued. “If you’re getting some type of special grant or special cost reduction for a period of time, and it has a sunset, and I’m an investor trying to model out the future performance of a company, I really want to know when this is ending or when the company might have to pay it back.”
Lara Long discussed the operational challenges that companies may encounter in preparing these disclosures: “For most of us, from a practical standpoint as preparers, similar to the lease exercise that we all went through a couple of years ago, it is the mere fact that most of us do not have databases or libraries of this sort of information.”
“If you’re a multinational like we are,” she explained, “it’s all in foreign jurisdictions. These agreements are in foreign languages … so it takes a while to understand them. You may need to get professionals from the Big Four, or other consultants from a tax perspective or a legal perspective, just to understand them. A lot of times, they’re not material, but then you have to look at the aggregation criteria.”
“We were really excited to be able to issue the guidance with regards to these expanded disclosures on government assistance,” commented Hillary Salo. “We heard through feedback to our invitation to comment that we issued last year that there’s still a potential improvement that stakeholders are looking for with regards to having specific recognition and measurement guidance and GAAP related to government grants.” Salo noted that FASB put a project on the research agenda last December to “get additional feedback with regards to whether there are certain requirements in IAS 20 related to the accounting for government grants that should be incorporated into GAAP.”
FASB has focused on IAS 20, Salo said, based on feedback from the investment tax credit (ITC) process. “People were interested in a project on recognition and measurement of government grants, not necessarily looking for the board to create a brand-new model,” she said, “but instead, to see if there’s the possibility to leverage existing models related to the recognition and measurement guidance.”
Bascom switched topics to ASU 2021-08, which deals with the accounting in a business combination for contract assets and liabilities from revenue arrangements. “Essentially, what this ASU is dealing with is the fact that after Topic 606 was effective, there were questions in practice about whether the existence of contract liabilities in particular ought to be triggered by a legal obligation or a performance obligation. Legal obligations were the idea that was in EITF 01-03. Topic 606 has the notion of a performance obligation, that’s a broader idea than a legal obligation. And so, there were questions in practice about whether which one of those ought to be used in business combination accounting for purposes of recognizing contract liabilities.”
“Beyond that, there were some other ancillary concerns with previous business combination accounting for contract liabilities, particularly because you could get really different post-acquisition revenue than what the acquiree was going to record as a result of doing your business combination accounting where you go through a fair value measurement exercise,” he explained. “These were issues that the EITF originally tried to tackle, but couldn’t come to an agreement on, so this ASU was issued by the FASB. It requires acquirers to use Topic 606 as the basis for identifying contract assets and liabilities in a business combination, and basically puts the acquiror in the shoes of the acquiree as it relates to those contracts. … The result is a lot more post-acquisition revenue than probably would have been the case prior to this ASU.”
Bascom asked Salo to share how the board thought about some of these issues, particularly the timing of cash flows and deciding to look to ASC Topic 606. “What we heard from investors was that they didn’t find the historical practice of recognizing deferred revenue only if it represented a legal obligation as particularly decision useful,” she said. “And we also heard that investors didn’t believe that the timing of payment of a revenue contract should substantially affect the post-acquisition revenue that’s recognized by the acquirer.” According to Salo, investors commented that prior practice obscured revenue trend information for the combined company.
After the Board conducted investor outreach, Salo said, it considered the divergence from IFRS. “We did hear consistent feedback from stakeholders,” she said, “that the decision-useful information about revenue trends and acquired contracts really outweighed the cost of that potential divergence in this scenario.”
“I’ve seen a pretty much 100% take up on this new standard from an early adoption perspective,” added LaMonte. “The two big benefits I’m seeing for companies are, one, they’re not having to pay a valuation firm to value their deferred revenue, and two, it makes the post-acquisition accounting a lot easier when you’re not having to track this additional purchase accounting difference that you know will unwind. This really can make preparers’ lives a lot easier.”
“Investors and users of financial statements like revenue trends that are not lumpy,” LaMonte continued. “This is not only about the revenue trend, but also the margin trend. Because the cost of effectively delivering on deferred revenue … really doesn’t change just because you did an acquisition. If you’re recognizing a different amount of revenue for the same amount of cost, you’re also going to have margin trends that are not consistent over time, which makes analysis harder.”
The third issue discussed was ASU 2021-09. “Under Topic 842, the FASB provided a practical expedient for nonpublic company lessees to use a risk-free discount rate to discount their leases, because of concerns that were raised about difficulties in obtaining an incremental borrowing rate when you don’t have a sophisticated treasury function and you may not be issuing public data.” But Bascom explained that nonpublic companies had some serious concerns about this option, which was only available on an all-or-nothing basis.
“This ASU allows them to use the practical expedient by class of underlying asset,” Bascom explained. “You can be much more surgical in your approach … you might decide, ‘I want to do this for all of my office equipment because I’ve got thousands of transactions, but they don’t add up all that much—but I don’t want to do it for real estate because real estate’s big dollars, and I can take the time to look at those few transactions and come up with my incremental borrowing rate for those.’”
Bascom asked the panelists to relate their public company experience that might benefit the private companies now going through this process. “The first thing you have to do if you haven’t already started as a private company is that data collection. Data collection is 90% of the compliance with this standard,” Long replied. “The second biggest thing you have to do, depending on how many leases you have—and we had over 10,000—is to get a software tool,” Long continued. “You have to pick the tool that fits you the best in your industry. I will tell you it’s been several years since all of us in the public sector have adopted the standard, and the software tools are not perfect.”
“Get going with this,” Lamonte advised. “The public companies that adopted had started years before, and it was a very long cycle project to get this done. I’m finding that private companies are very behind in even getting started. We’re now five months into the year when they have to adopt, and many haven’t even started yet.”
In response to a question from Bascom about next steps, “the post-implementation review, or PIR, process is a really important part of our standard setting process,” Salo said, “because it is the quality control aspect, associated with the leasing guidance and we’re also doing this for revenue recognition and the current expected credit loss. “With regards to leasing specifically … we also issued an ASU related to the accounting for lessees for leases with variable lease payments that we issued last summer. And we have one project that’s on our agenda related to lease modifications, and this is really based on feedback that we had gotten as part of our post implementation review [PIR] process at our 2020 Leasing Roundtable. … Some of the feedback that we got on the project was a bit mixed with regards to the specific scope of the lease modification issue that was addressed in that ASU.” Salo said the Board will consider whether to prioritize the project based on that information. She also implored nonpublic entities to call FASB with questions, which helps them understand the types of issues people are dealing with as they adopt the standard.
The next topic was the project on intangible assets and software development costs. “There’re basically two prongs to this project,” Bascom stated. “One deals with the accounting for intangible assets and, in particular, whether to have internally generated intangibles recognized on the balance sheet. The second deals with software development costs and revamping the model for recognition of those costs and the differences that exist between software that’s for internal use versus for external distribution.”
“We already did have a research project on our agenda related to the accounting and disclosure of intangible assets,” Salo noted. She said the feedback received with regard to software costs led the board to add the topic to the research agenda; the next step will be considering whether to add the topic to the technical agenda.
“We will also be bringing back our broader research project related to the accounting and disclosure of intangible assets in the next few months. That’s something that we’re really looking to get additional feedback on from the board of what direction they would like to take,” Salo continued. “I think one of the things through the agenda consultation process is really understanding some of the feedback that we got from our stakeholders. Not all of the respondents were very interested in us taking on a full-fledged recognition and measurement of intangible assets project. Some were more supportive of it increased capitalization. And we certainly got feedback that perhaps enhanced disclosures are going to be really key in this area.”
“Personally, I feel that software costs both for internal use and external use, we need to relook at that standard, because I think it’s very outdated,” Long said. “With our IT personnel, the way they’re going about development, it significantly impacts the way you think about accounting for it. … In terms of intangible assets, I personally believe that that should be a disclosure project because of the differences between acquisition and acquiring intangible assets versus internally developed.”
“I don’t think,” Lamonte said, “we should be trying to reconcile balances balance sheets to market cap. That’s what users are in the business of doing, trying to figure out the value of a company. And we don’t need the company necessarily to tell you what the value is. We’re going to model the cash flows, we’re going to model the future performance, and we’re going to figure it out. So, it would just seem like an extraneous exercise.”
“On the software side,” LaMonte continued, “I think this is something that needs to be looked at, particularly with the increased delivery of software through the cloud.”
The conversation turned to FASB’s project on goodwill and intangible assets. “After the decisions that were made to use an impairment-only model for goodwill, there have been concerns expressed over the years about the costs and effort associated with executing those requirements,” Bascom noted. “FASB has addressed those at several points in time in various ASUs. But it is now really looking at the question of whether goodwill should be amortized and also whether there are specific assets that are recognized outside of goodwill that ought to be subsumed and treated as part of goodwill.”
Bascom said that FASB seems to be moving toward “requiring goodwill to be amortized straight-line over a default period, probably 10 years, but providing an option for entities to elect a different period, based on their individual facts and circumstances, that would be subject to likely a cap and a floor.” He suggested that customer relationships, whether contractual or noncontractual, would be subsumed into goodwill if they are not separable. But FASB, he said, would still be “retaining impairment tests that would take place at the reporting unit level and scoping all of that guidance to include any goodwill that’s generated as a result of restructurings, or in pushdown accounting, or in equity method accounting, as well as normal business combinations.”
“There’s no great answer here,” LaMonte commented. “Impairment charges are more often than not a trailing indicator of problems at a company. The investors and users are usually out ahead of knowing that’s coming, knowing there are problems before the charges are taken. That said, beginning to amortize goodwill is also going to be widely ignored by investors and users. It’s going to increase the focus on EBITDA [earnings before interest, taxes, depreciation, and amortization]-type measures that back that out, it will make EPS [earnings per share]-type managers less relevant. Goodwill’s largely ignored, as well the amortization of that goodwill.”
Long agreed with LaMonte: “I think that even when you have impairments, a lot of folks ‘non-GAAP’ that as an infrequent item, and I believe that most folks will focus on EBITDA measures if we start amortizing intangibles. From a preparer’s perspective, it really doesn’t impact me that much, it lessens my problems, but I think my auditors are still going to really be looking at triggers from an annual standpoint, and costs probably will not be significantly reduced in terms of the evaluation.”
“I think the bigger issue of what investors want to know is: Why did you do that acquisition in the first place? And what if what you paid is ultimately wasn’t worth the value of what you paid?” And with that, the panel concluded.