D. Organization and Offering Expenses and Selling Commissions–Limited Partnerships Trading in Commodity Futures
E. Accounting for Divestiture of a Subsidiary or Other Business Operation
F. Accounting Changes Not Retroactively Applied Due to Immateriality
G. Transfers of Nonmonetary Assets by Promoters or Shareholders
M. Other Than Temporary Impairment of Certain Investments in Equity Securities
N. Discounting by Property-Casualty Insurance Companies
3. Income statement presentation of restructuring charges
T. Accounting for Expenses or Liabilities Paid by Principal Stockholder(s)
W. Contingency Disclosures Regarding Property-Casualty Insurance Reserves for Unpaid Claim Costs
Y. Accounting and Disclosures Relating to Loss Contingencies
Z. Accounting and Disclosure Regarding Discontinued Operations
4. Disposal of operation with significant interest retained
5. Classification and disclosure of contingencies relating to discontinued operations
7. Accounting for the spin-off of a subsidiary
DD. Written Loan Commitments Recorded at Fair Value Through Earnings
EE. Income Tax Accounting Implications of the Tax Cuts and Jobs Act
Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.
Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.
Facts: Company A has adopted the policy of treating gains and losses from disposition of revenue producing equipment as adjustments to the current years provision for depreciation. Company B reflects such gains and losses as a separate item in the statement of income.
Question: Does the staff have any views as to which method is preferable?
Interpretive Response: Gains and losses resulting from the disposition of revenue producing equipment should not be treated as adjustments to the provision for depreciation in the year of disposition, but should be shown as a separate item in the statement of income.
If such equipment is depreciated on the basis of group of composite accounts for fleets of like vehicles, gains (or losses) may be charged (or credited) to accumulated depreciation with the result that depreciation is adjusted over a period of years on an average basis. It should be noted that the latter treatment would not be appropriate for (1) an enterprise (such as an airline) which replaces its fleet on an episodic rather than a continuing basis or (2) an enterprise (such as a car leasing company) where equipment is sold after limited use so that the equipment on hand is both fairly new and carried at amounts closely related to current acquisition cost.
Facts: Partnerships formed for the purpose of engaging in speculative trading in commodity futures contracts sell limited partnership interests to the public and frequently have a general partner who is an affiliate of the partnerships commodity broker or the principal underwriter selling the limited partnership interests. The commodity broker or a subsidiary typically assumes the liability for all or part of the organization and offering expenses and selling commissions in connection with the sale of limited partnership interests. Funds raised from the sale of partnership interests are deposited in a margin account with the commodity broker and are invested in Treasury Bills or similar securities. The arrangement further provides that interest earned on the investments for an initial period is to be retained by the broker until it has been reimbursed for all or a specified portion of the aforementioned expenses and commissions and that thereafter interest earned accrues to the partnership.
In some instances, there may be no reference to reimbursement of the broker for expenses and commissions to be assumed. The arrangements may provide that all interest earned on investments accrues to the partnership but that commissions on commodity transactions paid to the broker are at higher rates for a specified initial period and at lower rates subsequently.
Question 1: Should the partnership recognize a commitment to reimburse the commodity broker for the organization and offering expenses and selling commissions?
Interpretive Response: Yes. A commitment should be recognized by reducing partnership capital and establishing a liability for the estimated amount of expenses and commissions for which the broker is to be reimbursed.
Question 2: Should the interest income retained by the broker for reimbursement of expenses be recognized as income by the partnership?
Interpretive Response: Yes. All the interest income on the margin account investments should be recognized as accruing to the partnership as earned. The portion of income retained by the broker and not actually realized by the partnership in cash should be applied to reduce the liability for the estimated amount of reimbursable expenses and commissions.
Question 3: If the broker retains all of the interest income for a specified period and thereafter it accrues to the partnership, should an equivalent amount of interest income be reflected on the partnerships financial statements during the specified period?
Interpretive Response: Yes. If it appears from the terms of the arrangement that it was the intent of the parties to provide for full or partial reimbursement for the expenses and commissions paid by the broker, then a commitment to reimbursement should be recognized by the partnership and an equivalent amount of interest income should be recognized on the partnerships financial statements as earned.
Question 4: Under the arrangements where commissions on commodity transactions are at a lower rate after a specified period and there is no reference to reimbursement of the broker for expenses and commissions, should recognition be given on the partnerships financial statements to a commitment to reimburse the broker for all or part of the expenses and commissions?
Interpretive Response: If it appears from the terms of the arrangement that the intent of the parties was to provide for full or partial reimbursement of the brokers expenses and commissions, then the estimated commitment should be recognized on the partnerships financial statements. During the specified initial period commissions on commodity transactions should be charged to operations at the lower commission rate with the difference applied to reduce the aforementioned commitment.
Facts: Company X transferred certain operations (including several subsidiaries) to a group of former employees who had been responsible for managing those operations. Assets and liabilities with a net book value of approximately $8 million were transferred to a newly formed entity Company Y wholly owned by the former employees. The consideration received consisted of $1,000 in cash and interest bearing promissory notes for $10 million, payable in equal annual installments of $1 million each, plus interest, beginning two years from the date of the transaction. The former employees possessed insufficient assets to pay the notes and Company X expected the funds for payments to come exclusively from future operations of the transferred business. Company X remained contingently liable for performance on existing contracts transferred and agreed to guarantee, at its discretion, performance on future contracts entered into by the newly formed entity. Company X also acted as guarantor under a line of credit established by Company Y.
The nature of Company Ys business was such that Company Xs guarantees were considered a necessary predicate to obtaining future contracts until such time as Company Y achieved profitable operations and substantial financial independence from Company X.
Question: If deconsolidation of the subsidiaries and business operations is appropriate, can Company X recognize a gain?
Interpretive Response: Before recognizing any gain, Company X should identify all of the elements of the divesture arrangement and allocate the consideration exchanged to each of those elements. In this regard, we believe that Company X would recognize the guarantees at fair value in accordance with FASB ASC Topic 460, Guarantees; the contingent liability for performance on existing contracts in accordance with FASB ASC Topic 450, Contingencies; and the promissory notes in accordance with FASB ASC Topic 310, Receivables, and FASB ASC Topic 835, Interest.
Facts: A registrant is required to adopt an accounting principle by means of retrospective adjustment of prior periods financial statements. However, the registrant determines that the accounting change does not have a material effect on prior periods financial statements and, accordingly, decides not to retrospectively adjust such financial statements.
Question: In these circumstances, is it acceptable to adjust the beginning balance of retained earnings of the period in which the change is made for the cumulative effect of the change on the financial statements of prior periods?
Interpretive Response: No. If prior periods are not retrospectively adjusted, the cumulative effect of the change should be included in the statement of income for the period in which the change is made. Even in cases where the total cumulative effect is not significant, the staff believes that the amount should be reflected in the results of operations for the period in which the change is made. However, if the cumulative effect is material to current operations or to the trend of the reported results of operations, then the individual income statements of the earlier years should be retrospectively adjusted.
Facts: Nonmonetary assets are exchanged by promoters or shareholders for all or part of a companys common stock just prior to or contemporaneously with a first-time public offering.
Question: Since FASB ASC paragraph 845-10-15-4 (Nonmonetary Transactions Topic) states that the guidance in this topic is not applicable to transactions involving the acquisition of nonmonetary assets or services on issuance of the capital stock of an enterprise, what value should be ascribed to the acquired assets by the company?
Interpretive Response: The staff believes that transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the companys initial public offering normally should be recorded at the transferors historical cost basis determined under GAAP.
The staff will not always require that predecessor cost be used to value nonmonetary assets received from an enterprises promoters or shareholders. However, deviations from this policy have been rare applying generally to situations where the fair value of either the stock issued1or assets acquired is objectively measurable and the transferors stock ownership following the transaction was not so significant that the transferor had retained a substantial indirect interest in the assets as a result of stock ownership in the company.
Facts: On November 30, 1984, AcSEC and its Task Force on LIFO Inventory Problems (task force) issued a paper, Identification and Discussion of Certain Financial Accounting and Reporting Issues Concerning LIFO Inventories. This paper identifies and discusses certain financial accounting and reporting issues related to the last-in, first-out (LIFO) inventory method for which authoritative accounting literature presently provides no definitive guidance. For some issues, the task forces advisory conclusions recommend changes in current practice to narrow the diversity which the task force believes exists. For other issues, the task forces advisory conclusions recommend that current practice should be continued for financial reporting purposes and that additional accounting guidance is unnecessary. Except as otherwise noted in the paper, AcSEC generally supports the task forces advisory conclusions. As stated in the issues paper, Issues papers of the AICPAs accounting standards division are developed primarily to identify financial accounting and reporting issues the division believes need to be addressed or clarified by the Financial Accounting Standards Board. On February 6, 1985, the FASB decided not to add to its agenda a narrow project on the subject of LIFO inventory practices.
Question 1: What is the SEC staffs position on the issues paper?
Interpretive Response: In the absence of existing authoritative literature on LIFO accounting, the staff believes that registrants and their independent accountants should look to the paper for guidance in determining what constitutes acceptable LIFO accounting practice.7In this connection, the staff considers the paper to be an accumulation of existing acceptable LIFO accounting practices which does not establish any new standards and does not diverge from GAAP.
The staff also believes that the advisory conclusions recommended in the issues paper are generally consistent with conclusions previously expressed by the Commission, such as:
1. Pooling-paragraph 4-6 of the paper discusses LIFO inventory pooling and concludes establishing separate pools with the principal objective of facilitating inventory liquidations is unacceptable. In Accounting and Auditing Enforcement Release 35, August 13, 1984, the Commission stated that it believes that the Company improperly realigned its LIFO pools in such a way as to maximize the likelihood and magnitude of LIFO liquidations and thus, overstated net income.
2. New Items-paragraph 4-27 of the paper discusses determination of the cost of new items and concludes if the double extension or an index technique is used, the objective of LIFO is achieved by reconstructing the base year cost of new items added to existing pools. In ASR 293, the Commission stated that when the effects of inflation on the cost of new products are measured by making a comparison with current cost as the base-year cost, rather than a reconstructed base-year cost, income is improperly increased.
Question 2: If a registrant utilizes a LIFO practice other than one recommended by an advisory conclusion in the issues paper, must the registrant change its practice to one specified in the paper?
Interpretive Response: Now that the issues paper is available, the staff believes that a registrant and its independent accountants should re-examine previously adopted LIFO practices and compare them to the recommendations in the paper. In the event that the registrant and its independent accountants conclude that the registrants LIFO practices are preferable in the circumstances, they should be prepared to justify their position in the event that a question is raised by the staff.
Question 3: If a registrant elects to change its LIFO practices to be consistent with the guidance in the issues paper and discloses such changes in accordance with FASB ASC Topic 250, Accounting Changes and Error Corrections, will the registrant be requested by the staff to explain its past practices and its justification for those practices?
Interpretive Response: The staff does not expect to routinely raise questions about changes in LIFO practices which are made to make a companys accounting consistent with the recommendations in the issues paper.
Facts: FASB ASC paragraph 320-10-35-33 (Investments Debt and Equity Securities Topic) does not define the phrase other than temporary for available-for-sale equity securities. For its available-for-sale equity securities, Company A has interpreted other than temporary to mean permanent impairment. Therefore, because Company As management has not been able to determine that its investment in Company Bs equity securities is permanently impaired, no realized loss has been recognized even though the market price of Company Bs equity securities is currently less than one-third of Company As average acquisition price.
Question: For equity securities classified as available-for-sale, does the staff believe that the phrase other than temporary should be interpreted to mean permanent?
Interpretive Response: No. The staff believes that the FASB consciously chose the phrase other than temporary because it did not intend that the test be permanent impairment, as has been used elsewhere in accounting practice.8
The value of investments in equity securities classified as available-for-sale may decline for various reasons. The market price may be affected by general market conditions which reflect prospects for the economy as a whole or by specific information pertaining to an industry or an individual company. Such declines require further investigation by management. Acting upon the premise that a write-down may be required, management should consider all available evidence to evaluate the realizable value of its investment in equity securities classified as available-for-sale.
There are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case. The staff believes that the following are only a few examples of the factors which, individually or in combination, indicate that a decline in value of an equity security classified as available-for-sale is other than temporary and that a write-down of the carrying value is required:
a. The length of the time and the extent to which the market value has been less than cost;
b. The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or
c. The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
Unless evidence exists to support a realizable value equal to or greater than the carrying value of the investment in equity securities classified as available-for-sale, a write-down to fair value accounted for as a realized loss should be recorded. Such loss should be recognized in the determination of net income of the period in which it occurs and the written down value of the investment in the company becomes the new cost basis of the investment.
Topic 5.M is no longer applicable upon a registrants adoption of ASC Topic 321. Topic 5.M provided the staffs views on evaluating whether an impairment loss should be recognized in net income for investments in equity securities that were measured at fair value with changes in fair value presented in other comprehensive income. ASC Topic 321 establishes new guidance that eliminates the ability to present changes in the fair value of investments in equity securities within other comprehensive income, which eliminates the need for Topic 5.M. Registrants that have not yet adopted ASC Topic 321 should continue to refer to Topic 5.M.
Facts: A registrant which is an insurance company discounts certain unpaid claims liabilities related to short-duration9insurance contracts for purposes of reporting to state regulatory authorities, using discount rates permitted or prescribed by those authorities (statutory rates) which approximate 3 1/2 percent. The registrant follows the same practice in preparing its financial statements in accordance with GAAP. It proposes to change for GAAP purposes, to using a discount rate related to the historical yield on its investment portfolio (investment related rate) which is represented to approximate 7 percent, and to account for the change as a change in accounting estimate, applying the investment related rate to claims settled in the current and subsequent years while the statutory rate would continue to be applied to claims settled in all prior years.
Question 1: What is the staffs position with respect to discounting claims liabilities related to short-duration insurance contracts?
Interpretive Response: The staff is aware of efforts by the accounting profession to assess the circumstances under which discounting may be appropriate in financial statements. Pending authoritative guidance resulting from those efforts however, the staff will raise no objection if a registrant follows a policy for GAAP reporting purposes of:
Discounting liabilities for unpaid claims and claim adjustment expenses at the same rates that it uses for reporting to state regulatory authorities with respect to the same claims liabilities, or
(1) The payment pattern and ultimate cost are fixed and determinable on an individual claim basis, and
(2) The discount rate used is reasonable on the facts and circumstances applicable to the registrant at the time the claims are settled.
Question 2: Does the staff agree with the registrants proposal that the change from a statutory rate to an investment related rate be accounted for as a change in accounting estimate?
Interpretive Response: No. The staff believes that such a change involves a change in the method of applying an accounting principle,i.e., the method of selecting the discount rate was changed. The staff therefore believes that the registrant should reflect the cumulative effect of the change in accounting by applying the new selection method retroactively to liabilities for claims settled in all prior years, in accordance with the requirements of FASB ASC Topic 250, Accounting Changes and Error Corrections. Initial adoption of discounting for GAAP purposes would be treated similarly. In either case, in addition to the disclosures required by FASB ASC Topic 250 concerning the change in accounting principle, a preferability letter from the registrants independent accountant is required.
Facts: FASB ASC paragraph 730-20-25-5 (Research and Development Topic) states that conditions other than a written agreement may exist which create a presumption that the enterprise will repay the funds provided by other parties under a research and development arrangement. FASB ASC subparagraph 730-20-25-6(c) lists as one of those conditions the existence of a significant related party relationship between the enterprise and the parties funding the research and development.
Question 1: What does the staff consider a significant related party relationship as that term is used in FASB ASC subparagraph 730-20-25-6(c)?
Interpretive Response: The staff believes that a significant related party relationship exists when 10 percent or more of the entity providing the funds is owned by related parties.10In unusual circumstances, the staff may also question the appropriateness of treating a research and development arrangement as a contract to perform service for others at the less than 10 percent level. In reviewing these matters the staff will consider, among other factors, the percentage of the funding entity owned by the related parties in relationship to their ownership in and degree of influence or control over the enterprise receiving the funds.
Question 2: FASB ASC paragraph 730-20-25-5 states that the presumption of repayment can be overcome only by substantial evidence to the contrary. Can the presumption be overcome by evidence that the funding parties were assuming the risk of the research and development activities since they could not reasonably expect the enterprise to have resources to repay the funds based on its current and projected future financial condition?
Interpretive Response: No. FASB ASC paragraph 730-20-25-3 specifically indicates that the enterprise may settle the liability by paying cash, by issuing securities, or by some other means. While the enterprise may not be in a position to pay cash or issue debt, repayment could be accomplished through the issuance of stock or various other means. Therefore, an apparent or projected inability to repay the funds with cash (or debt which would later be paid with cash) does not necessarily demonstrate that the funding parties were accepting the entire risks of the activities.
Facts: Restructuring charges often do not relate to a separate component of the entity, and, as such, they would not qualify for presentation as losses on the disposal of a discontinued operation. Additionally, since the charges are not both unusual and infrequent11they are not presented in the income statement as extraordinary items.
Question 1: May such restructuring charges be presented in the income statement as a separate caption after income from continuing operations before income taxes (i.e., preceding income taxes and/or discontinued operations)?
Interpretive Response: No. FASB ASC paragraph 225-20-45-16 (Income Statement Topic) states that items that do not meet the criteria for classification as an extraordinary item should be reported as a component of income from continuing operations.12Neither FASB ASC Subtopic 225-20, Income Statement Extraordinary and Unusual Items, nor Rule 5-03 of Regulation S-X contemplate a category in between continuing and discontinued operations. Accordingly, the staff believes that restructuring charges should be presented as a component of income from continuing operations, separately disclosed if material. Furthermore, the staff believes that a separately presented restructuring charge should not be preceded by a sub-total representing income from continuing operations before restructuring charge (whether or not it is so captioned). Such a presentation would be inconsistent with the intent of FASB ASC Subtopic 225-20.
Question 2: Some registrants utilize a classified or two-step income statement format (i.e., one which presents operating revenues, expenses and income followed by other income and expense items). May a charge which relates to assets or activities for which the associated revenues and expenses have historically been included in operating income be presented as an item of other expense in such an income statement?
Interpretive Response: No. The staff believes that the proper classification of a restructuring charge depends on the nature of the charge and the assets and operations to which it relates. Therefore, charges which relate to activities for which the revenues and expenses have historically been included in operating income should generally be classified as an operating expense, separately disclosed if material. Furthermore, when a restructuring charge is classified as an operating expense, the staff believes that it is generally inappropriate to present a preceding subtotal captioned or representing operating income before restructuring charges. Such an amount does not represent a measurement of operating results under GAAP.
Conversely, charges relating to activities previously included under other income and expenses should be similarly classified, also separately disclosed if material.
Question 3: Is it permissible to disclose the effect on net income and earnings per share of such a restructuring charge?
Interpretive Response: Discussions in MD&A and elsewhere which quantify the effects of unusual or infrequent items on net income and earnings per share are beneficial to a readers understanding of the financial statements and are therefore acceptable.
MD&A also should discuss the events and decisions which gave rise to the restructuring, the nature of the charge and the expected impact of the restructuring on future results of operations, liquidity and sources and uses of capital resources.
Beginning with the period in which the exit plan is initiated, FASB ASC Topic 420, Exit or Disposal Cost Obligations, requires disclosure, inallperiods,including interimperiods, until the exit plan is completed, of the following:
a. A description of the exit or disposal activity, including the facts and circumstances leading to the expected activity and the expected completion date
b. For each major type of cost associated with the activity (for example, one-time termination benefits, contract termination costs, and other associated costs):
(1) The total amount expected to be incurred in connection with the activity, the amount incurred in the period, and the cumulative amount incurred to date
(2) A reconciliation of the beginning and ending liability balances showing separately the changes during the period attributable to costs incurred and charged to expense, costs paid or otherwise settled, and any adjustments to the liability with an explanation of the reason(s) therefor
c. The line item(s) in the income statement or the statement of activities in which the costs in (b) above are aggregated
d. For each reportable segment, the total amount of costs expected to be incurred in connection with the activity, the amount incurred in the period, and the cumulative amount incurred to date, net of any adjustments to the liability with an explanation of the reason(s) therefor
e. If a liability for a cost associated with the activity is not recognized because fair value cannot be reasonably estimated, that fact and the reasons therefor
Question: What specific disclosures about restructuring charges has the staff requested to fulfill the disclosure requirements