2nd Post Discussion:

Respond to the post below from your fellow classmate. Any opinions, or anything you would like to add to discuss about their post. Must be three substantial paragraphs, and three references.

Hello everyone:

The video I selected to discuss is “FASB Board Meeting – Wednesday, August 19, 2020 – Topic 1. Codification improvements to financial instruments. The Board will discuss clarifications related to Subtopic 310-20, Receivables–Nonrefundable Fees and Other Costs.”

The Accounting Standards Update No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued on March 2017, and took effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other entities, the amendments were effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.

But, to put ourselves in context, let us start by explaining why the FASB issued this accounting standards update.

The Board issued this Update to amend the amortization period for certain purchased callable debt securities held at a premium. The Board shortened the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument.

In the video, the FASB’s board discusses the comment letter feedback on a clarification related to subtopic 310-20 along with the staff’s analysis and recommendations. The amendments under discussion were included in the proposed accounting standards, update codification improvements, which was issued on November 26, 2019.

After summarizing the Accounting Standards update No. 2017-08, Mackenzie Hitchcock, PTA at the FASB, states that late 2018 and early 2019, several stockholders questioned the appropriate date to which entities should amortize the premium associated with the callable debt security, that has multiple call dates and prices. Specifically, stockholders questioned whether entities would need to be re-evaluated whether the security is within the scope of paragraph 30-20-35-33 throughout the life of the security or whether the entity’s initial scope assessment, when recognizing the security would influence the accounting outcome for the remainder of the securities’ life. The amendments and the proposed update clarified the board’s intent that an entity should re-evaluate whether a callable debt security, that has multiple call dates, is within the scope of paragraph 310-20-35 for each reporting period.

Mackenzie explains that the handout of that day is a summary of the comment letter feedback, as well as two alternatives to address stakeholder concerns regarding the transition and the effective date.

Alternative 1. Under this alternative, the proposed amendments would be effective upon the issuance of a final standard on a modified retrospective basis. This would require that all entities apply the guidance in Update 2017-08 as the Board had intended by recording an adjustment (if necessary) to the opening retained earnings balance for fiscal years beginning after December 15, 2019.

Alternative 2. Under this alternative, the proposed amendments would not be effective immediately. Instead, all entities would be provided with additional time to correctly apply Update 2017-08 as the Board intended. Additionally, under this alternative, the amendments would be applied prospectively for new and existing instruments.

The staff recommends alternative 2 in light of the comments received and the challenges that entities are facing during the unprecedented COVID-19 crisis. Staff note that while alternative two may create some non-comparability, any impact on comparability would be minimal, since based on staff’s outreach, it seems that most entities are applying update 2017-08 as the board intended.

The questions for the Board are:

1. Does the Board affirm its previous decisions for the amendments to Subtopic 310-20 in the proposed Update?

2. What effective date and transition requirements does the Board want for the amendments to Subtopic 310-20?

3. Has the Board received sufficient information and analysis to make an informed decision on the perceived costs of the changes? If not, what other information or analysis is needed?

4. Does the Board think that the benefits justify the costs? If so, does the Board grant the staff permission to begin drafting a final Accounting Standards Update for vote by written ballot?

All participants in the meeting support the staff recommendations and agreed to reaffirm the previous decisions, based on the fact they did not learn anything new that could change those decisions. Also, all the participants agreed that they do not need additional information and the support of the written ballot.

Some of the arguments used by the participants to support the staff’s recommendation were:

· “There will be a little less comparability here, but when you weigh all the costs and benefits, the comparability in this particular issue is not that important and can be handled through company disclosures.” (Hal Schroeder, Board Member)

· “When the staff did outreach, none of the auditors were aware of clients who would need the transition guidance, and, in addition, the large custodian of securities that we spoke with also was unaware of any of their clients that would need transition guidance, so what that is telling me is that people are doing it in the way that we thought that.” (Christine Botosan, Board Member)

· “You could argue maybe not quite as clear in the standard, but given that we found, no one is actually doing it the alternative way that is. They are already doing it in accordance with what we are clarifying here and if there are any, it is probably a minimum amount of companies, and this issue is likely to be immaterial.” (Jim Kroeker, Vice-Chairman)

In general, I can say that it was interesting to see how a FASB meeting works. In this particular meeting, although I had to go to read the handout that was being discussed at the meeting, in order to understand it a little better, the point of view contributed by the participants provided me with arguments for the proposals discussed there.

References:

FASB. (2017, March). Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20). https://asc.fasb.org/imageRoot/69/109124169.pdf

FASB. (2020, August 19). FASB Board Meeting – Wednesday, August 19, 2020 – Topic 1. https://www.youtube.com/watch?v=S9oGVRiQE4U

FASB. (2020, August 19). August 19, 2020. FASB Board Meeting Handout. https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176175094594&rss=1