By Tad N. Render, CPA

Miller, Cooper & Co., Ltd.

The Financial Accounting Standards Board (FASB) has recently launched what it is calling the Simplification Initiative. The Simplification Initiative is a focused effort to make narrow-scope simplifications and improvements to accounting standards and related financial reporting. The program is intended to improve or maintain the usefulness of information reported to financial statement users while reducing cost and complexity.

Several recently completed projects the FASB has undertaken to simplify Generally Accepted Accounting Principles (GAAP) include:

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement – If a company’s cloud computing arrangement includes a software license, then the company should account for the software license element of the arrangement in accordance with licenses of other intangible assets. If the arrangement does not include a software license, the company should account for the arrangement as a service contract. Effective date: Years beginning after December 15, 2015

Extraordinary Items – FASB has eliminated the concept of extraordinary items by eliminating the extraordinary classification from the income statement. Items previously meeting the narrow requirements of “extraordinary” will now be reported in a Company’s operating income. Effective date: Years beginning after December 15, 2015

Measurement Date of Defined Benefit Pension Plans – Entities with a fiscal year-end that does not coincide with a month-end are now permitted to measure defined benefit pension plan assets and obligations using the month-end closest to the entity’s fiscal year-end as a practical expedient. Effective date: years beginning after December 15, 2015 (public entities) and years beginning after December 15, 2016 (all other entities)

Presentation of Debt Issuance Costs – FASB now requires that debt issuance costs be presented in the balance sheet as a reduction from the carrying amount of the related debt liability. Effective date: Years beginning after December 15, 2015

Measurement of Inventory Costs – Companies are now provided clear guidance on valuation of inventory. This FASB update eliminates the concept of lower of cost or market and instead uses lower of cost or net realizable value. The FASB’s definition of net realizable value is “estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation.”

In addition to the above, the FASB has several projects in process as part of the Simplification Initiative as follows:

• Simplifying the Accounting for Measurement Period Adjustments in a Business Combination
• Balance Sheet Classification of Debt Instruments
• Accounting for Income Taxes
• Streamlining Stock-Based Compensation
• Reduced Complexity of Applying the Equity Method of Accounting

It should be noted the above GAAP modifications are applicable to both public and private companies. The above simplification efforts are separate from the FASB’s Private Company Council efforts aimed to further simplify accounting and financial reporting for private companies.

About Tad N. Render

Mr. Render is a partner in Miller, Cooper & Co., Ltd.’s Mergers and Acquisitions practice with over 15 years of experience working with financial and strategic buyers and sellers in a diverse range of industries including manufacturers, distributors, and service companies.  His experience includes pre-acquisition and pre-sale due diligence, post-acquisition accounting assistance, general business consulting, and internal control reviews.

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