FASB Tracking & Alerts
What Investors Need to Know
4Q19

Introduction

Welcome to our report giving investors the scoop on what’s happening at the FASB and IASB and how it affects fundamental analysis.

The goal of this publication is to provide investors with a one-stop shop for research on how changes in accounting standards affect investing.

We will focus on rule changes that affect financial statements and how investors analyze fundamentals.

Note from the CEO

During my tenure on FASB’s Investor Advisory Committee, I experienced first-hand how difficult it is to keep up with what the FASB does. There’s lots of noise and lots of complexity.

The goal of this publication is to cut through that noise and give on-the-ground investors clear insights into what matters when it comes to accounting rule changes.

Importantly, we will focus on how the FASB affects or changes what investors need to do to understand the economics, not just accounting, of business performance and valuation. We view accounting data and results as just the first step in the assessment of corporate performance. The more important steps involve gathering all accounting data, especially footnotes, and organizing it according to its economic consequence.

This kind of work is our specialty. We’ve been doing it for over 20 years, and we’ve developed proprietary technology to help us do it better.

I won’t say that you’re going to like accounting after reading our research, but there is a very good chance that you won't hate it as much.

 

 

David Trainer, CEO and Founder

Most Impactful Rule Changes to Earnings Models Now

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ASU 2014-09 & IFRS 15 Revenue from Contracts with Customers

Deep dive: “FASB Changes Standard for Revenue Recognition

Summary:

In a joint effort, the FASB and International Accounting Standards Board (IASB) issued a new set of standards for revenue recognition. The new standard supersedes previous revenue recognition requirements and aims to remove many industry-specific revenue recognition rules through the use of a 5-step framework for recognizing revenue. The new standard should lead to a more principles-based system that allow companies to better reflect the underlying economics of transactions.

However, these changes can have significant impact on a firm’s reported results, as we recently showed in our article on Verint Systems (VRNT), “This Tech Laggard is Back in the Danger Zone.” VRNT’s profit was boosted by $51 million in 2018 (56% of NOPAT) through adoption of ASU 2014-09.

While most accounting changes require additional adjustments to our models, ASU 2014-09 represents a complete overhaul of exiting recognition process, to the point where there’s no way for us to fully disaggregate and adjust for its impact across all companies. Our only choice is to accept this new standard as the default going forward and study disclosures to see where it distorts profits.

ASU 2016-01 & IFRS 9 – Recognition and Measurement of Financial Assets and Financial Liabilities

Deep Dive: How ASU 2016-01 Impacts Invested Capital and OCI

Summary:

This update impacts companies that hold financial assets and liabilities and changes how they will recognize, measure, and disclose information about financial instruments. The most impactful change is to equity investment accounting. Under the new rule, all equity investments that are not accounted for under the equity method or consolidated must be measured at fair value, with changes in fair value recognized in net income. This is a change from the previous standard, where unrealized gains and losses were recognized in other comprehensive income (OCI) and only recognized in net income upon the sale of the securities.

An alternative measurement option may be available for equity investments without a readily determinable fair value. In this case, the investment would be measured at cost, less any impairment, +/- changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

In essence, the FASB eliminated classifications for equity investments, such as the available-for-sale designation, with the ultimate goal of marking more equity securities to market through net income.

One key difference between ASU 2016-01 and IFRS 9 is the latter provides filers the option to record changes in fair value through other comprehensive income for nonderivative equity investments that are not held for trading. This election is irrevocable and not available under ASU 2016-01.

Warren Buffet explained, in Berkshire Hathaway’s 2017 shareholder letter, that “the new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report.” He later noted, “for analytical purposes, Berkshire’s “bottom-line” will be useless. A quick analysis of the rule change reveals why Mr. Buffet feels this way. In 2017, Berkshire’s reported net income under previous accounting rules would have been $44.9 billion. Under ASU 2016-01, reported net income would be $63.9 billion, an increase of 42%.

To handle this fluctuation created entirely by accounting rules and no change to the underlying business, we treat these unrealized gains/losses as non-operating and remove them from our calculation of NOPAT.

On the balance sheet side, these unrealized gains/losses were previously reported as an ending balance in accumulated other comprehensive income (OCI). Under the new rule, unrealized gains/losses no longer flow through OCI and instead are reported directly in net income. This change creates an incomparability between invested capital before and after ASU 2016-01 adoption. To ensure comparability between all periods, we adjust for the cumulative difference in the cost-basis vs. fair value of equity securities reported on the balance sheet at the end of the period. How we make these adjustments depends on the way companies disclose cost basis, fair value, and accumulative unrealized gains/losses in quarterly filings and is discussed in greater detail here.

ASU 2016-02 – Leases

Deep Dive: “The Impacts of Operating Leases Moving to the Balance Sheet

Summary:

This update changes lease reporting standards. Prior to this rule, GAAP required the assets and liabilities associated with capital leases to be reported on a company’s balance sheet. Typically, these leases are in relation to property, plant and equipment (PP&E), so the capital lease assets were recorded in PP&E while the lease liabilities were recorded in debt or other liabilities.

On the other hand, operating leases, both the assets and liabilities, were not reported on the balance sheet, despite the fact that entities were using the assets and contractually obligated to pay the lease. Also prior to this change, capital leases required separate depreciation and interest expenses, whereas operating leases required a lump-sum lease payment or rental expense.

The single largest change in FASB’s ASU 2016-02 is the requirement of operating leases to have the associated asset and liability recorded on the balance sheet at the present value of future lease payments. These large assets and liabilities, once hidden in the notes, will now be placed directly on the balance sheet. The new standard still requires just one lease/rental expense reported as an operating expense. However, because assets are now recognized, impairments will also be recognized on the income statement, outside of this single lease cost.

We have always included the effects of operating leases in our models, even when they were only disclosed in the footnotes. On the balance sheet side, we add the present value of the future minimum lease payments, discounted by a consistent cost of debt, to our measures of invested capital and operating debt. This methodology is virtually identical to the new treatment required by FASB, except for our calculation of the discount rate.

On the income statement, we subtract an estimated interest cost component from operating expenses in our calculation of NOPAT. Because operating lease expenses are recorded as a lump-sum, we need to remove the financing component as a non-operating expense, as we do with other financing costs.

IFRS 16 – Leases

Deep Dive: “The Impacts of Operating Leases Moving to the Balance Sheet

Summary:

This update applies to companies filing under International Financial Reporting Standards (IFRS) and makes similar efforts as ASU 2016-02 to include operating leases on the balance sheet. However, this update differs in that it eliminates classification of operating leases and establishes a single finance lease accounting model. Despite a joint effort between the IASB and FASB, full convergence did not occur on this topic. The IASB’s decision to treat all leases as finance leases results in expense recognition of lessees to be recognized as a two-component expense; a depreciation component and an interest expense component. Thus, all else equal, stated income from operations and other metrics such as EBITDA would be different under ASU 2016-02 and IFRS 9, simply due to accounting standards, not the true underlying economics of the business.

ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost

Deep Dive: “Pension Cost Accounting Rule Change

Summary:

This update changes reporting on a company’s net periodic benefit cost (NPBC), which is the total cost expensed for a firm’s pension or other defined benefit plans. Prior to the rule change, companies were generally allowed to aggregate components of NPBC within any line item on the income statement without disclosure as to which components were in which line item. As a result, they could use non-operating elements of the NPBC to influence operating results. Only through analysis of the footnotes or MD&A could one determine if non-recurring items were included in operating items.

After the rule change, any company that reports a subtotal of income of operations or operating income (which often excludes banks and other financial companies) must report:

  1. the service cost component of NPBC within a line item above the subtotal of income from operations
  2. all non-service cost components of NPBC within a line item below the subtotal of income from operations

In addition, companies must disclose which line items contain components of NPBC.

In historical documents, we have always removed the effect of NPBC components other than “service cost” and “amortization of prior service cost” that were buried in operating expenses. We will continue to treat NPBC components the same way. The difference post-adoption of the new accounting rule is we will no longer need to remove the effect of non-operating NPBC components if presented in non-operating line items on the income statement. Our NOPBT and NOPAT values will remain 100% comparable year-over-year with regard to pension costs.

Our policies differ from the FASB guidance regarding amortization of prior service cost. We believe that the effect of changes to the plan that bring charges or credits into the current period for prior services rendered should be included in current-period economic income. FASB took these concerns into consideration but ultimately decided not to pursue inclusion in operating income.

Accounting Rule Changes Impacting Models for 2019 10-Qs and 2020 10-Ks

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ASU 2017-12 – Derivatives and Hedging

Deep Dive: “Removing the Hedge Ineffectiveness Disclosure Requirement is Not Good for Investors

Summary:

This update is intended to reduce the cost of filing for companies by eliminating what the SEC considers redundant or unimportant disclosures. However, the change eliminates an important disclosure – hedge ineffectiveness – which investors need to accurately assess earnings and cash flow.

Through this update, firms are no longer required to separately measure and report hedge ineffectiveness. Hedge ineffectiveness is the degree to which a hedge fails to correlate with the underlying asset or forecasted transaction prices. Ineffectiveness is tested by the change in fair value of the derivative per the change in fair value of the hedged risk. Hedges that deviate outside set limits (80-125%) are deemed ineffective. For example, if a company hedged against falling commodity prices through a derivative contract, but then both the price of the commodity and the derivative fell by an amount outside the limit noted above, it would record a loss due to hedge ineffectiveness.

Hedge ineffectiveness was previously presented on the income statement in the period deemed ineffective. For non-financial companies, ineffectiveness is excluded from our calculation of NOPAT because it is a portion of the derivative contract that does not hedge the underlying asset and therefore serves no operating purpose. Accordingly, we classify ineffectiveness gains as non-operating income. If ineffectiveness is a loss, we still classify as a non-operating item, and we also classify as a write-down, which impacts reported assets and our calculation of invested capital.

The new amendment will cause significant reduction in the disclosure of hedge ineffectiveness. What would have been separately delineated as ineffectiveness will now be buried in other comprehensive income (OCI) until the entire hedge is recognized out of OCI and onto the income statement. When the hedge is re-classified from OCI into net earnings, it will be reported within the same line item as the hedged items, with no distinction between the ineffective and effective portion. This lack of delineation reduces transparency and analytical value of the financial statements.

SEC Disclosure Update & Simplification – Amortization of Capitalized Interest

Deep Dive: “Not Requiring the Amortization of Capitalized Interest Disclosure Is Not Good for Investors

Summary:

The SEC’s Disclosure Update and Simplification (Release No. 33-10532; 34-83875; IC 33206; File No. S7-15-16), is intended to reduce the cost of filing for reporting entities by eliminating what the SEC considers redundant or unimportant disclosures. However, one specific change in the Disclosure Update and Simplification eliminates an important disclosure – amortization of capitalized interest– which investors need to accurately assess earnings and cash flow.

Through this amendment, the SEC eliminated the requirement that companies report the ratio of earnings to fixed charges exhibit. This exhibit contains a specific line item, amortization of capitalized interest, which is a non-operating expense included in operating earnings. We remove this expense when calculating NOPAT because it is related to the financing of a company’s operations, not the operations themselves, to provide a more accurate measure of normal, recurring profits.

Most of the time, interest costs are immediately expensed and (for non-financial companies) reported as non-operating. However, in certain cases where debt is used to finance a long-term asset, accrued interest can be capitalized on the balance sheet and expensed as amortization over time. As a result, GAAP allows the cost of interest to be classified as an operating expense, despite the fact that it is really a financing cost.

ASU 2018-02 – Addressing Stranded Tax Effects Resulting from U.S. Tax Reform

This update aims to clean up leftover accounting loopholes that derived from the Tax Cuts and Jobs Act of 2017. Prior to this rule, entities were required to adjust deferred tax liabilities and assets for the change in tax laws, with the effect included in income from continuing operations. This guidance was applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income (OCI) were originally recognized in other comprehensive income (rather than in income from continuing operations). The adjustment to deferred taxes mean items within accumulated OCI no longer reflected the appropriate tax rate.

This update allows companies to reclassify the tax effects in accumulated OCI to retained earnings. Entities have the option, not requirement to reclassify these amounts. Our calculation of invested capital will be impacted should entities choose to re-classify these “stranded” tax effects out of accumulated OCI.

This update creates no changes to our model, but, similar to ASU 2014-09, will impact operating results, and invested capital in this case, in ways that investors need to be aware of.

ASU 2018-07 – Compensation – Stock Compensation

This update is part of FASB’s “Simplification Initiative”, which is meant to maintain or improve the usefulness of information provided to users of financial statements while reducing cost and complexity in financial reporting. Specifically, the update changes how nonemployee share-based payment awards (for goods or services) are measured. Under current rules, these share-based payments are measured at the fair value on the performance commitment date or the date performance is complete.

Under the new rules, these nonemployee share-based payments will be aligned with employee share-based payment awards and measured at the grant-date fair value. This change will impact our calculation of NOPAT, as equity-based compensation in reported in operating items and is an operating expense. These costs may be reported lower than previously due to the new fair value measurement requirements.

This update creates no changes to our model, but, similar to ASU 2014-09, will impact operating results in ways that investors need to be aware of.

ASU 2018-16 – Derivatives and Hedging

This update officially recognizes the Secured Overnight Financing Rate as U.S. benchmark interest rate that is eligible to be hedged, as it is expected to replace the existing London Inter-Bank Offered Rate (LIBOR).

This update will impact our calculation of NOPAT, with adjustments required for financial companies. Any changes to hedging between LIBOR and SOFR will be treated as operating. If financial firms incur (and disclose) material costs related to the implementation of SOFR, we may elect to treat them as non-operating, as they would be non-recurring costs as part of a one-time switch in benchmark interest rates.

For non-financial companies, any implementation costs would likely be treated as non-operating items and would cause no change to our NOPAT calculation.

Amendment to IAS 19 – Employee Benefit Plan Amendments

This update amends the prior rules put forth in IAS 19 related to defined benefit plans. The new rules require an entity to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment, or settlement. Furthermore, this update requires entities to recognize in profit or loss as part of past service cost, or a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognized because of the impact of the asset ceiling. These changes have the potential to impact net periodic benefit cost components when there is an amendment, curtailment or settlement which may result in additional volatility in reported earnings. Get details on how we already adjust for net periodic benefit costs here.

Accounting Rule Changes Impacting Models for 2020 10-Qs and 2021 10-Ks

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ASU 2016-13 – Measurement of Credit Losses on Financial Instruments

This update changes how entities account for credit losses, specifically those that, under current rules, are expected but do not yet meet the “probable” threshold. For trade receivables, loans, and held-to-maturity debt securities, entities will now be required to estimate lifetime expected credit losses. This estimation will result in earlier recognition of credit losses. Further clarifying treatment, for available-for-sale debt securities, entities will be required to recognize an allowance for credit losses, rather than a reduction to the carrying value of the asset. If expected cash flows improve, an entity will reduce the allowance and reverse the expense through income.

This standard will have an impact on virtually all firms, but will most materially impact financial companies, as substantial changes in reported loan loss reserves are likely. Loan loss reserves impact both NOPAT and Invested Capital, and are generally held by financial companies. Get details on the adjustments we make for changes in reserves here. For non-financial companies, we may expect to see more reversals to allowance for doubtful accounts since bad debt expenses will be charged at an earlier time.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Q’s filed under the rule will come out in 2020, and the first 10-K’s will come out in 2021.

ASU 2017-04 – Intangibles – Simplifying the Test for Goodwill Impairment

This update is aimed at providing public companies a simpler way to test for goodwill impairment and bring guidelines in line with changes made for private companies in 2014. The new rule eliminates the requirement to calculate the implied fair value of goodwill, which is currently step two of today’s goodwill impairment test. Instead, under the new rule, entities can record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value – a one-step methodology of assessing goodwill impairment that aligns more closely to IFRS. This update creates no changes to our existing measurement of goodwill, but may accelerate the timing of goodwill impairment charges (click here to see how we adjust for this accounting loophole). Under today’s guidance, it is possible for a reporting unit to qualify for goodwill under step one, but not be impairment based on how impairment is measured in step two.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Q’s filed under the rule will come out in 2020, and the first 10-K’s will come out in 2021.

ASU 2019-02 – Improvements to Accounting for Costs of Films and License Agreements

This update aims to better reflect the economics of an episodic television series and align the accounting with films. Prior to this update, entities were able to fully capitalize costs of movie production, but not episodic television series. Product costs for a series were capitalized up to the amount of revenue contracted for each episode, with additional amount available once an entity could prove there was a secondary market for the product.

Under the new rule, episodic series costs can now be fully capitalized as incurred, and are no longer restricted until proof of a secondary market exists. In addition, new guidance requires firms to determine their predominant monetization strategy for content, ie. title-by-title basis or a film group. This classification will impact firm’s estimates of use for a film group, and should a change in estimates occur, the firm must not prospectively amortize the change over the remaining life of the film. Lastly, the update provides new impairment indicators and changes requirements for testing for impairment.

This update applies to broadcasters and firms that produce and distribute films and episodic televisions series.  We expect these entities to capitalize more production costs, rather than expense them. Assuming all else constant, we expect this update to result in higher reported earnings and the capitalized cost is depreciated and amortized, rather than expensed all at once.

This update creates no changes to our model, but, similar to ASU 2014-09, will impact reported results in ways that investors need to be aware of.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under this rule will come out in 2020, and the first 10-Ks will come out in 2021.

Accounting Rule Changes Impacting Models for 2021 10-Qs and 2022 10-Ks

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ASU 2018-12 – Financial Services – Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts

This update improves the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by insurance entities. The existing model does not provide sufficient useful information in a timely and transparent manner.

Under current rules, the assumptions used to measure the liability for future policy benefits was locked at contract inception and held constant over the term of the contract. With this new rule, insurers will have to review, and, if necessary, update the assumptions they use to project future cash flows and the rate they use to discount those future cash flows when measuring liabilities for future policyholder benefits. We expect this change to have a significant impact to reported earnings and increase earnings volatility. Updating the cash flow assumptions throughout the life of the contract will result in periodic fluctuations in income that may have been deferred to future periods under existing rules.

This will be one of the most impactful accounting standard changes to impact life insurers’ financial reporting. We will be analyzing these changes in more detail to determine what, if any, adjustments are needed, and writing an in-depth breakdown of what investor’s should expect.

This rule will go into effect for fiscal years beginning after December 15, 2020. The first 10-Q’s filed under the rule will come out in 2021, and the first 10-K’s will come out in 2022.

ASU 2018-14 – Disclosure Framework – Changes to Defined Benefit Plans

Similar to ASU 2018-13, this update modifies existing disclosure requirements related to Defined Benefit Plans. The update removes disclosures, such as amounts in accumulated OCI expected to be recognized as components of net periodic benefit cost over the next year, amount and timing of plan assets expected to be returned to the employer, and disclosures related to the June 2001 amendment’s to Japanese Welfare Pension Insurance Law. However, it also adds required disclosures that could provide insights into decisions regarding benefit plans.

Specifically, this update will require all sponsors of defined benefit plans to provide (1) the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rate and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

This update creates no changes to our model, but, will increase disclosures regarding changes in benefit obligations that should be useful to investors.

This rule will go into effect for fiscal years beginning after December 15, 2020. The first 10-Q’s filed under the rule will come out in 2021, and the first 10-K’s will come out in 2022.

Accounting Rule Changes with Minimal (or no) Impact on Models

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ASU 2017-08 – Receivables – Nonrefundable Fees and Other Costs

This update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e. yield-to-earliest call amortization). This amortization method is expected to better align with expectations incorporated in market pricing on the underlying securities. Under ASU 2017-08, interest income would generally be lower in the periods before the earliest call date and higher thereafter, if the security is not called, compared to current GAAP. This update requires no change to our model, as we already make necessary adjustments for reported non-operating items such as interest income. These items are related to the financing of a company’s operations, not the operations themselves. One must remove items like these, as we already do, to calculate NOPAT on an unlevered basis.

ASU 2017-11 – Distinguishing Liabilities from Equity Derivatives and Hedging

This update is aimed to reduce complexity of accounting for certain financial instruments with down round features. Down round features are part of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings.

This update eliminates the current requirement to consider down round features when determining whether equity-linked financial instruments are indexed to an entity’s own stock. As a result of this change, fewer free-standing equity-linked instruments with down round features will be accounted for as liabilities than under current rules. This change will also lead to fewer reported liabilities and income statement volatility. However, any changes to the fair value of these liabilities through the income statement were and will remain non-operating, and therefore no additional adjustments to our models are required.

Amendment to IFRS 3 – Business Combinations

This update establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets, liabilities, and goodwill acquired, any interest in the acquiree held by other parties, and what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. The largest change in IFRS states that when a party to a joint operation obtains control of that joint operation, it must remeasure to fair value the interest it previously held in that joint venture. Any realized remeasurement gains/loss will be treated as non-operating, which is similar to our existing calculation, and requires no additional adjustment.

Amendment to IFRS 11 – Joint Arrangements Changes

This update creates guidelines for reporting by entities that have an interest in arrangements that are controlled jointly, what IFRS considers “joint arrangements.” A joint arrangement is an arrangement of which two or more parties have joint control. IFRS 11 requires that when a party that participates in, but does not have joint control over, a joint operation, acquires joint control over that joint operating, it must not remeasure the interest it previously held in that joint operation.

This update creates no changes to our model, but further defines accounting treatment for joint operations.

Amendment to IAS 12 – Income Taxes

This update clarifies accounting treatments for income taxes under the existing rule. Specifically, it notes that an entity must recognize all income tax consequences of dividends in profit or loss, other comprehensive income, or equity, depending on where the entity recognized the originating transaction that generated the profits giving rise to the dividend.

This update creates no changes to our model, but further defines existing tax treatment.

Amendment to IAS 23 – Borrowing Costs

This update pertains to the calculation of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. Borrowing costs are the interest and other costs that an entity incurs in connection with the borrowing of funds. This update clarifies that, when computing the capitalization rate for funds borrowed, an entity should exclude borrowing costs applicable to borrowings made specifically for obtaining a quality asset, only until the asset is ready for its intended use or sale.

This update creates no changes to our model, but further defines borrowing costs and how to record them.

Amendment to IFRS 9 – Prepayment Features with Negative Compensation

This update is meant to clarify whether instruments with prepayment options qualify for amortized cost or fair value through OCI. Generally, the update permits more assets to be measured at amortized cost than under previous versions. Furthermore, gains or loss arising on the modification of a financial liability that does not result in derecognition, calculated by discounting the change in contractual cash flows at the original effective interest rate, is immediately recognized in profit or loss.

Neither of these changes will impact our model, as amortized cost is not re-measured at fair value and the gain/loss due to modification of financial liabilities would be treated as non-operating.

Amendment to IAS 28 – Long Term Interests

This update clarifies a prior exclusion that was included in IFRS 9 related to interests in associates and joint ventures. Under this update, if an entity applies IFRS 9 to long-term interests in a joint venture to which the equity method is not applied, but form part of the net investment in the joint venture, the entity does not take account of any losses of the joint venture, or any impairment losses on the net investment.

This update creates no changes to our model, but further defines joint venture accounting.

IFRIC 23 – Uncertainty Over Income Tax Treatments

This update provides requirements that add to the requirements in IAS 12 by specifying how to reflect the effects of uncertainty in accounting for income taxes. Specifically, IFRIC 23 notes that an uncertain tax treatment is any tax treatment applied by a company when it is unclear whether that treatment will be accepted by the tax authorities. Examples include tax deductibility of certain expenses, tax-exemption of certain income, and transfer pricing rules to allocate income between jurisdictions. IFRIC 23 clarifies the tests used to determine uncertain tax treatments.

This update creates no changes to our model, but aims to clarify uncertain tax treatments.

ASU 2018-13 – Fair Value Measurement

This update modifies the disclosure requirements on fair value measurements in Topic 820 and actually removes disclosures that are required under existing rules. This rule removes the requirement to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy. The policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements are also eliminated. On the flip side, public companies will now be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

These updates to disclosure requirements are not expected to have any changes on our models.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under the rule will come out in 2020, and the first 10-Ks will come out in 2021.

ASU 2018-15 – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

This update adds further guidance to the existing rule, ASU 2015-05, which helped entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Ultimately, this update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment further requires a customer in a hosting arrangement to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense.

This update creates no changes to our model, but, similar to ASU 2014-09, will impact reported results in ways that investors need to be aware.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Q’s filed under the rule will come out in 2020, and the first 10-K’s will come out in 2021.

ASU 2018-18 – Clarification of Collaborative Agreements

This update clarifies the interaction between Topic 808, Collaborative Agreements, and Topic 606, Revenue from Contracts with Customers. Essentially, this update clarifies accounting rules for collaborative arrangements but has no impact on our models.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under the rule will come out in 2020, and the first 10-Ks will come out in 2021.

ASU 2018-19 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses

This update addresses certain concerns stakeholders had regarding the rules outlined in ASU 2016-13. First, this amendment minimizes transition complexity by simplifying when the guidelines are required for nonpublic business entities. Second, the update clarifies that operating lease receivables are not within the scope of the credit loss standard defined in ASU 2016-13 and should be accounted for under the guidance for new leasing standard (ASC 842).

This update has no impact on our models.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under the rule will come out in 2020, and the first 10-Ks will come out in 2021.

Amendments to IFRS 3 – Definition of a Business

This update is meant to assist entities when determining whether a transaction should be accounted for as a business combination or as an asset acquisition. This update clarifies that to be a business, an acquiree must include an input and substantive process that together significantly contributes to the ability to create outputs. It also narrows the definitions of a business by focusing on goods and services provided to customers and adds guidance to help entities assess whether a substantive process has been acquired.

This update, while providing clarification, has no impact on our models. Asset purchases and business combinations are treated, and have the same impact on, our calculation of invested capital.

This rule will go into effect for fiscal years beginning on or after January 1, 2020. Any acquisitions or business combinations completed on or after the beginning of that period will be subject to the new rule.

ASU 2019-01 – Leases (Topic 842) Codification Improvements

This update provides clarification on certain items originally adopted in ASU 2016-02. Specifically, it clarifies (1) how lessors that are not manufacturers of dealers determine the fair value of underlying assets, (2) how to present cash flows from leases by lessors from sales-type and direct financing leases, and (3) disclosures related to transition in interim periods.

This update has no impact on our models and simply clarifies prior change made in ASU 2016-02.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under this rule will come out in 2020, and the first 10-Ks will come out in 2021.

ASU 2019-03 – Updating the Definition of Collections

This update aims to better align FASB’s treatment of collections with the American Alliance of Museum’s treatment of collections. Specifically, it modifies the definition of the term collections and provides guidance on how proceeds from the sale of collections can be used. Prior to the update, proceeds from the sale of collections could only be used in the acquisition of other items for collection. Under the new rule, proceeds can now be used to acquire new collection items or for the direct care of existing collections.

This update is effective for all firms, but will primarily impact not-for-profit entities and has no impact on our models.

This rule will go into effect for fiscal years beginning after December 15, 2019. The first 10-Qs filed under this rule will come out in 2020, and the first 10-Ks will come out in 2021.

ASU 2019-04 – Codification Improvements to Credit Losses, Derivatives & Hedging, & Financial Instruments

This update provides clarification on changes made in ASU 2016-01, ASU 2016-13, and ASU 2017-12.  In regards to credit losses, the update allows firms to measure allowance for credit losses on accrued interest receivables, clarifies that firms should include expected recoveries in estimates of the allowance for credit losses, and added guidance on the use of future interest rate projections. It also clarified items related to prepayments.

Specific to hedging, the update clarifies how not-for-profits apply cash flow hedging, how to measure the change in fair value of a hedged item, and at what cost available-for-sale debt securities should be disclosed.

Specific to financial instruments, the update clarifies the entities that are exempt from fair value disclosures for financial instruments not measured at fair value on the balance sheet, how to treat equity securities without readily determinable fair values and when to remeasure these securities, and adds health and welfare plans to the list of entities excluded from prior rules.

This update has no impact on our models and simply clarifies changes made in prior updates.

This rule will go into effect on the same effective dates as the prior standards ASU 2016-01, ASU 2016-13, and ASU 2017-12.

ASU 2019-05 – Targeted Transition Relief for Credit Losses

This update is aimed at easing the transition for entities adopting ASU 2016-13 and improve the comparability of information. Prior to this update, firms would be required to maintain dual measurement methodologies for identical or similar financial instruments that are being managed in the same manner. The information provided would also not be comparable, as the portion of an entity’s financial instruments measured at fair value may not be comparable to other identical or similar instruments measured at amortized cost basis.

With the exception of held-to-maturity debt securities, this update allows firms to irrevocably elect to apply the fair value option to financial instruments that were previously recorded at amortized cost basis within the scope of subtopic 326-20 in ASU 2016-13.

This change will increase comparability of financial statements but requires no additional changes to our model outside of those from ASU 2016-13.

This rule will go into effect on the same effective dates as the prior standard, ASU 2016-13.

ASU 2019-06 – Extending Private Company Accounting Alternatives to Not-For-Profit Entities

This update extends private company alternatives for goodwill and identifiable intangible assets from ASU 2014-02 and ASU 2014-18 to not-for-profit entities.  The update allows not-for-profit entities to elect to amortize goodwill on a straight-line basis over 10 years, or, less than 10 years if a shorter useful life is appropriate. If an entity elects this alternative, they’re required decide to test for impairment at the entity level or reporting unit level.

Additionally, this update allows not-for-profit entities to elect to subsume into goodwill and amortize customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business. Importantly, if a not-for-profit entity elects the alternative for intangible assets, it must also adopt the alternative for goodwill. However, an entity can adopt the alternative for goodwill impairment but not intangible assets.

This update creates no changes to our model, but rather provides alternatives for goodwill and intangible asset treatment.

This rule applies to all non-for-profit entities as defined in the Master Glossary of the Codification and went into effect immediately upon issuance, in Q219.

ASU 2019-07 – Codification Updates to SEC Sections

This update officially codifies changes the SEC made as part of its efforts to simplify disclosures that were redundant, overlapping, and duplicative, and reduce the cost of filing to reporting entities. The codification is the official source of GAAP rules from FASB and includes issuances by the SEC. This update officially adds certain issuances from the SEC to the FASB’s codification.

Specifically, the changes made to the codification include the updates made by the SEC in its Disclosure Update and Simplification (which we covered here), Investment Company Reporting Modernization (Rule No. 33-10532), and Miscellaneous Updates (Rule No. 33-10442). The latter rules require certain registered investment companies to report information about their portfolio holdings and disclose additional information on ETFs and securities lending.

This codification update requires no changes to our models. This rule went into effect immediately upon issuance in 3Q19.

Key Stats

    • Through September 17, 2019, we parsed 9,432 10-Ks and 10-Qs and collected 672,316 data points.
    • In 3Q19 alone (through 9/17/19), we parsed a total of 3,121 10-Ks and 10-Qs and collected 184,151 data points.
    • In 2019, through 9/17/19, we’ve used these data points to make a total of:
      • 27,143 income statement adjustments with a total value of $1.9 trillion
      • 28,416 balance sheet adjustments with a total value of $13.5 trillion
      • 11,459 valuation adjustments with a total value of $15.3 trillion

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