Financial Accounting Standards Board (fasb)

Financial Accounting Standards Board

EXPLAIN RECENT CHANGES AT FASB

Introduction

The FASB is the independent institution that was established in 1973. It is a private sector not for profit-organization, based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP). The FASB is widely recognized by the Securities and Exchange Commission as the designated accounting standard setter for public companies.

FASB standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of CPAs (AICPA). The FASB often develops and issues financial accounting standards in a transparent and inclusive process intended to promote financial reporting that provides useful information to investors and other institutions which use financial reports. The Financial Accounting Foundation (FAF) supports and oversees the FASB.

However, there are changes that have been contemplated through discussion by the relevant stakeholders of the FASB. One of the major changes anticipated is the requirement that would see public companies and organizations break out the reporting of their operating segments to in particular cases disclose the inventory balances of each of these segments, for example, an operating segment that would be containing in the financial or manufacturing units of a corporation.

In addition, such organizations would have to disclose the segments inventory components for example, how much of it consists of raw materials, work-in-process, finished goods, and supplies. In fact, private companies and public ones that do not participate in segment reporting would also have to provide component breakdowns. Component disclosures would supply investors with crucial information about a company s revenue and cash-flow prospects (Charles Mulford, 2016).

For instance, even if a company reports a substantial amount of inventory, an analyst would not easily establish that the company did not possess enough finished goods on hand to meet purchaser demand. Another key provision in the update would require companies to disclose non-routine reasons for changes in inventory other than the routine buying, selling, and manufacturing of goods. An example of a non-routine change is the acquisition of a company that has a large supply of inventory. Other non-routine changes might stem from write-downs of the value of goods or company divestitures.

However, owning these disclosures, investors could regard the non-routine changes as anomalies and then possibly get a real image of a company s actual inventory turns. And yet another big change is for at least for the many retailers that use the retail inventory method of accounting that would be for companies reporting under RIM to disclose the critical assumptions used in the calculation of inventory in accordance to the update.

Generally, this Accounting Standards Update (ASU) is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Moreover, these ASU will require organizations that lease assets referred to as lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by these particular leases.
The guidance also reflects the input companies receive during their extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping them to develop a cost-effective and operational standard.

Under this new guidance, a lessee will be expected to recognize assets and liabilities for leases with lease terms for a period of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease.

However, unlike current GAAP which usually requires only capital leases to be recognized on the balance sheet, the new ASU will need both types of leases to be recognized on the balance sheet. The ASU will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

The accounting by organizations that own the assets leased by the lessee that are recognized as lessor accounting will largely remain unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued way back in 2014.

The FASB and the International Accounting Standards Board (IASB) initially embarked on a joint project way back in 2006 with the purpose of improving the financial reporting of leasing activities. Since then, the FASB and the IASB have issued three documents for public to express their views and for the record this generated more than 1,700 comment letters from different people.

Throughout the project, the FASB and the IASB also conducted extensive outreach with diverse groups of stakeholders. That outreach included more than 200 series of meetings with preparers and users of financial statements 15 public roundtables, with more than 180 representatives and organizations 15 preparer workshops attended by representatives from more than 90 organizations and 14 meetings with preparers. The FASB and the IASB also met with more than 500 users of financial statements covering a broad range of industries.

When the new FASB and IASB leases standards takes effect, they will provide investors across the globe with more transparent, comparable information about lease obligations held by companies and other organizations (Mr. Golden, 2016). The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

For all other organizations, the ASU on leases is expected to take effect for fiscal years beginning after December 15, 2019, so company s financial statements for 2017 and 2018 will need to be restated to comply with the new proposed changes. And since most leases are five or more years in length, the impact is likely to be immediate. Organizations general corporate real estate strategy will be perhaps get affected.

Companies should anticipate their leases to inflate their balance sheet significantly, which may make long-term leases very less attractive. Depending on company s situation, it may choose to shed current leases and consider owning properties instead. They need to look at every space in terms of how long the company need to occupy and what makes sense, from both a financial and a business point of view.

Conclusion

These upcoming changes to lease accounting rules will have a major impact on U.S. companies and will impact return on assets and other key financial ratios significantly. Treating lease obligations off the balance sheet has helped to buffer real estate performance. The new guidance responds to requests from investors and other financial statement users for purposes of faithful representation of an organization s leasing operations. This shall end what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.