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In historical documents, we have always removed the effect of NPBC components other than “service cost” and “amortization of prior service cost” that were buried in operating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.

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 2016-02 – Leases

Original Model Update: “The Impacts of Operating Leases Moving to the Balance Sheet”

Additional Model Update: "The Impacts of Variable and Not-Yet-Commenced Leases"

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.

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 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 2022-04 – Liabilities-Supplier Finance programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations

This update aims to enhance the transparency of supplier finance programs (also referred to as reverse factoring). Prior to this update, there were no explicit disclosure requirements for supplier finance programs and obligations covered by these programs were bundled into other balance sheet line items.

The amendments in this update will require companies to disclose additional information about the use of supplier finance programs so financial statement users can understand the effect of these programs on a company’s financial statements.

Supplier finance programs involve a buyer, a supplier, and a third-party finance provider. In a supplier finance program, a buyer will have an arrangement with the third-party finance provider, which can offer suppliers a discounted payment on behalf of the buyer before the invoice due date. In turn, the third-party provider will typically extend the invoice date and receive full payment from the buyer.

The amendments in this update require the buyer to disclose the following information about the supplier finance program:

1. The key terms of the program, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary
2. For the obligation amount that the buyer has confirmed as valid to the finance provider or intermediary:
   1. Amount outstanding (amount that remains unpaid by the buyer) as of the end of the annual period
   2. Description of where that amount is presented in the balance sheet
   3. A roll-forward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.

The amendments in this update are effective for the fiscal years beginning after December 15, 2022. This amendment will not affect our models as we already treat these (albeit rarely disclosed) obligations as debt. However, we expect to see increased disclosure, and therefore transparency, of this type of obligation. Investors should be aware that this amendment will impact reported GAAP (and perhaps non-GAAP) results.

ASU 2022-02 – Financial Instruments – Credit Losses (Topic 326)

This update addresses two problems brought up during the post implementation review of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).

The two key issues addressed in this update are:

1. Troubled Debt Restructurings (TDR) by Creditors
   1. ASU 2016-13 required entities to measure and record the lifetime expected credit losses on an asset upon origination or acquisition. As a result, credit losses from loans modified as TDRs have been incorporated into the allowance for credit losses. Additional designation of a loan modification as a TDR has since been deemed “unnecessarily complex.” The new update eliminates the prior guidance for TDRs and now requires entities to apply loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan.
2. Vintage Disclosures – Gross Write-offs.
   1. A public business entity must now disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. This disclosure was not required under the old standard.

Companies who have already adopted 2016-03 will apply this new update prospectively and there will be no changes to our current model given that we accounted for this adjustment in the period when the company adopted the standard. Companies have an option to apply a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings in the period of adoption. If a company chooses the retrospective transition method, we will update our company model with this cumulative adjustment. Specifically, we will include the cumulative amount in a company’s year-over-year change in Loss Reserves in the period the new standard is adopted, which will impact a company’s net operating profit after-tax (NOPAT) in that same period.

The amendments in this update are effective for fiscal years beginning after December 15, 2022 and create no changes to our models, outside of those companies that choose to apply a modified retrospective transition.

ASU 2021-04 - EPS (Topic 260), Debt – Modifications and Extinguishments, Stock Compensations, and Derivatives and Hedging – Contracts in Entity's own Equity

This update clarifies an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (warrants) that remain equity classified after modification or exchange. This new standard requires companies to account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as either:

1. an adjustment to equity, and, if so, the related EPS effects, or
2. an expense and if so, the manner and pattern of recognition.

This amendment targets special-purpose acquisition companies (SPAC) and the warrants they issue. These companies will now have to remove the warrants from Shareholders Equity and report them as a separate liability. The gains/ losses from the warrants will now be recognized on the income statement, and remeasurement of gains/losses will affect retained earnings. Many SPACs that choose to early adopt the new standard will have to reissue financial statements due to this change.

This rule is effective for all entities for fiscal years beginning after December 15, 2021. The first 10-Q’s filed under the rule will come out in 2022, and 10-K’s will come out in 2023. This amendment will not affect our models as we already treat these gains/losses as non-operating, but will impact reported GAAP (and, perhaps, non-GAAP) results in ways that investors need to be aware of.

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, 2022. The first 10-Q’s filed under the rule will come out in 2022, and the first 10-K’s will come out in 2023.

ASU 2020-06 – Debt with Conversion and Other Options and Derivatives and Hedging — Contracts in Entity’s Own Equity

This update addresses issues identified as a result of the complexity associated with applying GAAP for certain financial instruments, such as convertible instruments and contract’s in an entity’s own equity, with characteristics of both liabilities and equity.

The number of accounting models for convertible debt and convertible preferred stock were reduced to remove certain separation models that overly complicate reporting. Going forward, only convertible instruments with embedded features that are not clearly and closely related to the host contract that meet the definition of a derivative and convertible debt instruments issued with premiums substantial enough to be recorded as paid-in capital will be subject to separate accounting models.

The amendments in this update are effective beginning after December 15, 2021 and do not affect our models as any related gains or losses are disclosed as non-operating items.

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 2019-12 – Income Taxes

The amendments in this update simplify the accounting for income taxes by removing the following exceptions:

1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

These amendments are effective as of December 15, 2020 and will impact how companies calculate income tax. However, this update will not affect our model as we calculate operating cash taxes based on  effective tax rates and a three-year normalized average.

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.

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, 2029. 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 2017-12 – 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.

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.

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.

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.

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 2018-02 – 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.

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 2023-02 – Investments – Equity Method and Joint Ventures (Topic 323)

This update provides additional guidance regarding accounting for investments in qualified affordable housing projects. In ASU 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, companies were given the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements were met. ASU 2014-01 limited the proportional amortization method to investments in low-income housing tax credit (LIHTC) structure investments. Such limitations led to other equity investments in other tax credit structures to be typically accounted for using the equity method, which resulted in investment income, gains and losses, and tax credits being reported gross on the income statement.

ASU 2023-02 removes the prior limitation and allows companies to account for tax equity investments, regardless of the tax credit program from which the tax credits are received, using the proportional amortization method if conditions are met.

The amendments in this update are effective for fiscal years beginning after December 14, 2023 for public entities and require no changes to our model.

ASU 2023-01 – Leases (Topic 842)

This update addresses questions that remained following the adoption of ASU 2016-02 Leases (Topic 842). It specifically responds to private company stakeholders’ concerns about applying Topic 842 to related-party arrangements between entities under common control.

The following two issues are addressed in this update:

1. Terms and Conditions to be Considered
Previously, private entities had to determine the enforceable terms and conditions of a common control arrangement to apply Topic 842, which is often difficult and costly for these entities. The amendments in this update provide a practical expedient for private companies and not-for-profit entities to use written terms and conditions of a common control to determine the following:

• Whether a lease exists and, if so,
• The classification of and accounting for that lease.

This expedient may be applied on an arrangement-by-arrangement basis. If no written terms and conditions exists, the entity is prohibited from applying the practical expedient and must evaluate enforceable terms and conditions to apply Topic 842. This ASU is expected to reduce costs associated with implementing and applying Topic 842.

2. Accounting for Leasehold Improvements

Previously, private entities were required to amortize leasehold periods consistent with the shorter of remaining lease term and useful life of the improvements. Stakeholders noted that amortizing leasehold improvements associated with arrangements between entities under common control determined to be leases over a period shorter than the expected useful life of the leasehold improvements may lead to financial reporting that does not faithfully represent the economics of those leasehold improvements. This situation was most pertinent with common control leases with short lease terms. Multiple methods of accounting for these improvements also exist, which caused further reporting differences. The amendments in this update require leasehold improvements associated with common control leases to be:

• Amortized by the lessee over the useful life of the leasehold improvements as long as the lessee controls the use of the underlying asset.
• Accounted for as a transfer between entities under common control through an adjustment to equity if the lessee no longer controls the use of the underlying asset.

The amendments in this update are effective for fiscal years beginning after December 15, 2023 and require no changes to our models since we do not cover these types of entities.

ASU 2022-05 – Financial Services—Insurance (Topic 944)

This update aims to reduce implementation costs and complexity associated with the adoption of ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI).

Prior to this update, ASU 2018-12 required companies to communicate why previously recognized gains or losses have changed because of the adoption of a new accounting standard.

With this latest update, insurance entities may now elect to exclude contracts that meet certain criteria from applying the amendments in ASU 2018-12. To qualify for such accounting policy elections, the following conditions must be met:

1. Insurance contracts must have been derecognized because of a sale or disposal of individual or a crop of contracts or legal entities and
2. The entity must not have significant continuing involvement with derecognized contracts.

FASB believes that because derecognized long duration contracts have no effect on an insurance company’s future cash flows, requiring reclassification under ASU 2018-12 would not have been useful to investors.

The amendments in this update are effective beginning December 15^th, 2022. This update has no effect on an insurance company’s cash flows and requires no changes to our models.

ASU 2022-01 – Derivatives and Hedging (Topic 815): Fair Value Hedging

This update addresses questions that remained following the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815), which aimed to improve hedge accounting to better portray the economic results of an entity’s risk management activities. This update builds upon ASU 2017-12 and:

1. Expands the current last-of layer method to allow multiple hedged layers within a single closed portfolio. The “last-of-layer” method will now be renamed the “portfolio layer” method.
2. Expands the scope of the portfolio layer method to include non-prepayable financial assets.
3. Provides additional guidance on accounting for and disclosure of hedge basis adjustments under the new portfolio layer method.
4. Specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

These amendments for hedge accounting better reflect the effects of risk management activities in financial statements. The amendments in this update are effective for fiscal years beginning after December 15^th, 2022 and create no changes to our models.

ASU 2021-10 – Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance

This update increases the transparency of government assistance by requiring companies to disclose:

1. The types of assistance
2. An entity’s accounting for the assistance
3. The effect of the assistance on the entity’s financial statements

Currently, there is a lack of specific authoritative guidance regarding government assistance in GAAP. This update will greatly improve the transparency and comparability of information to financial statement users.

The amendments in this update are effective for all entities beginning December 15, 2021. This requires no changes to our models.  We applaud FASB for increasing the transparency around these transactions.

ASU 2021-09 – Leases (Topic 842): Discount Rate for Leases That are Not Public Business Entities

This update affects lessees that are not public business entities, including not-for-profit entities. These entities can now elect as an accounting policy to use a risk-free rate as the discount rate for all leases. Lessees can now make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. The entity will also be required to disclose which asset classes it has elected to apply a risk-free rate.

This amendment also requires that when the rate implicit in the lease is readily determinable for any individual lease, the lessee uses that rate rather than making a risk-free rate election.

The amendments in this update are effective after December 15, 2022. This update requires no changes to our models.

ASU 2021-08 – Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

This update requires an entity to recognize and measure contract assets and liabilities acquired in a business combination in accordance with a previous accounting standard (Topic 606). At the acquisition date, an acquirer should account for the revenue contracts as if it had originated the contracts. Generally, this update should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements.

Before this update, acquirers recognized these assets and liabilities at fair value during a business combination.

The amendments in this update improve the comparability by specifying for all acquired revenue contracts regardless of their timing of payment:

1. The circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and
2. How to measure those contract assets and liabilities

The amendments in this update are effective for fiscal years beginning after December 15, 2022. This update requires no changes to our models.

ASU 2021-07 – Compensation – Stock Compensation (Topic 718) Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards

This update allows a nonpublic entity to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees using the reasonable application of a reasonable valuation method. Characteristics of the reasonable application of a reasonable valuation method include:

1. Date on which a valuation’s reasonableness is evaluated
2. Factors that a reasonable valuation should consider
3. Scope of information that a reasonable valuation should consider
4. Criteria that should be met for the use of a previously calculated value to be considered reasonable

The amendments in this update are effective for fiscal years beginning after December 15, 2021 and create no changes to our models.

Amendment to IAS 1 — Classification of Liabilities as Current or Non-current 

This amendment clarifies the requirements for classifying liabilities as current or non-current. Specifically, the amendment clarifies the conditions which exist at the end of the reporting period which determine if a right to defer settlement of a liability exists.

This amendment is effective for annual reporting periods beginning on January 1, 2022. This update does not impact our models, but it does shed light on how companies determine and report liabilities on their balance sheets.

Amendment to IFRS 17 — Insurance Contracts 

The amendments to IFRS 17 aim to assist entities implementing the standard previously issued in 2017, specifically the requirements for rights, obligations, risks, and performance arising from insurance contracts. Additionally, the amendment increases transparency in financial reporting and makes accounting consistent for all insurance contracts. Companies will now make an accounting policy choice of whether to recognize all insurance financial income and expenses on the income statement or to recognize some income and expenses in other comprehensive income.

This amendment is effective January 1, 2023 and does not affect our models as we already adjust for these non-operating items.

ASU 2021-05 – Leases – Lessors – Certain Leases with Variable Lease Payments

This update is aimed at increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Specifically, this update impacts lessors with (1) lease contracts that have variable lease payments that do not depend on a reference index or a rate and (2) would have resulted in the recognition of a selling loss at lease commencement (day-one loss) if classified as sales-type or direct financing.

Under prior rules, a lessor was not permitted to estimate most variable payments and had to exclude variable payments that are not estimated and do not depend on a reference index or a rate from the lease receivable. These excluded variable payments are recognized entirely as lease income when the changes in facts and circumstances of those payments occur. As a result, the net investment in the lease may be less than the carrying amount of the underlying asset derecognized at commencement. As a result, the lessor recognizes a day-one loss even if the lessor expects the arrangement to be profitable overall.

Under the new rule, companies can classify and account for leases with variable lease payments as an operating lease if certain criteria are met. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and therefore, does not recognize a selling profit or loss.

This update creates no changes to our model but provides further disclosure about operating leases.

This rule goes into effect for fiscal years beginning after December 15, 2021.

ASU 2020-07 – Not-for-Profit Entities 

This update improves transparency of contributed nonfinancial assets for not-for-profit (NFP) entities through enhancements to presentation and disclosure. The update specifically applies to NFPs that receive contributed assets such as fixed assets, use of fixed assets, materials and supplies, or intangible assets.

This amendment requires NFPs to disclose:

1. nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets
2. qualitative information about whether the assets were monetized or utilized during that reporting period

The amendments in this update should be applied on a retrospective basis and are effective for annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022.

This update does not affect our models since we do not cover Not-for-Profit entities, but we applaud FASB for increasing transparency around these types of disclosures.

ASU 2020-04 – Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting 

The amendments in this update provide optional guidance for a limited period of time to ease the accounting for reference rate reform on financial reporting. This update was created in response to concerns about the risks of interbank offered rates, particularly LIBOR, and regulatory reform initiatives that will cause accounting issues in transitioning rates away from LIBOR.

Specifically, reference rate changes may disallow the application of certain hedge accounting guidance. Additionally, certain hedging relationships may not qualify as highly effective during periods of market-wide transitions to a replacement rate.

The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.

The amendments in this update are effective for all entities through December 31, 2022 and do not change anything in our models, but they shed light on how companies will transition though the change away from LIBOR.

ASU 2020-01 – Investments—Equity Securities, Investments—Equity Method and Joint Ventures, and Derivatives and Hedging 

The update addresses two issues:

1. accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and
2. scope considerations for forward contracts and purchase options on certain securities.

The first issue clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying the equity method. This means companies should consider using the measurement alternative method unless the transaction that took place allows them to apply the equity method.

The second issue clarifies that an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method or the fair value option in accordance with the financial instruments guidance. An entity also would evaluate the remaining characteristics to determine the accounting for those forward contracts and purchased options.

The amendments are effective beginning December 15, 2021 and create no changes to our models, but they do clarify how entities account for certain equity securities.

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.

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 2019-05 – 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 2019-04 – 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 2019-03 – 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 2019-01 – 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.

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 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.

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 2018-15 – 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 2018-13 – 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.

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.

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.

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 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 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 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 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.

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.

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.