The Financial Accounting Standards Board (FASB) has released a flurry of new standards — and guidance on old ones — in recent years. Some of the changes clarify existing standards, and others strive to converge U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS). It’s important to review the recent standards and guidance that are most likely to affect your company.

ASU 2010-06: Expanded fair value disclosures
Accounting Standards Update (ASU) 2010-06, Improving Disclosures About Fair Value Measurements, requires companies to provide additional details in their financial statements. Such information includes the methods companies use to measure the fair value of certain assets and liabilities.

The update amends Accounting Standards Codification (ASC) Topic 820, formerly known as Statement of Financial Accounting Standards (SFAS) No. 157. Among other things, ASC 820 establishes a three-tier valuation hierarchy based on the types of inputs used to measure an asset’s or liability’s fair value:

• Level 1 inputs are quoted prices in active markets for the identical asset or liability.
• Level 2 inputs are observable inputs other than those included in Level 1, such as prices in active markets for similar assets or liabilities.
• Level 3 inputs are unobservable inputs, such as the company’s internal data.

In determining fair value, greater weight is given to Level 1 inputs, if available, followed by Level 2 and Level 3 inputs.

The update requires companies to disclose all transfers of fair value measurements into and out of Levels 1 and 2. It also asks companies to provide greater detail about purchases, sales, issuances and settlements related to Level 3 measurements. Companies must further provide disclosures for each class of assets and liabilities, and describe valuation techniques and inputs for both recurring and nonrecurring Level 2 and Level 3 measurements.

ASU 2010-06 generally applies to interim and annual reporting periods beginning after Dec. 15, 2009. The new rules regarding Level 3 purchases, sales, issuances and settlements are delayed until fiscal years beginning after Dec. 15, 2010, and interim periods within those years.

Note that the final version of ASU 2010-06 drops an earlier proposal that would have required companies to conduct a sensitivity analysis and disclose the potential impact on fair value of “reasonably possible alternative Level 3 inputs.” However, FASB may revisit this proposal in the future.

ASU 2010-09: Relaxed subsequent events disclosures
ASC Topic 855, originally issued last year as SFAS 165, established accounting and disclosure standards for events that occur after the balance-sheet date, but before financial statements are issued. Among other things, ASC 855 required companies to disclose the “cutoff date” through which they have evaluated subsequent events. For public companies, this requirement created a potential conflict with SEC guidance regarding the identification and disclosure of subsequent events.

ASU 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements, eliminates this potential conflict. It provides that SEC filers need not disclose the cutoff date in their financial statements.

ASU 2010-10: Consolidation of VIEs
In 2009, FASB issued SFAS 166, Accounting for Transfers of Financial Assets, and SFAS 167, Amendments to FASB Interpretation No. 46(R). SFAS 167 overhauled the rules regarding consolidation of variable interest entities (VIEs), while SFAS 166, among other things, eliminated the consolidation exception for qualified special purpose entities (QSPEs). Together, the statements make it more difficult for companies to remove certain financial assets or VIEs from their balance sheets.

In December 2009, FASB issued ASU 2009-16 and ASU 2009-17, formally incorporating Statements 166 and 167 into the FASB codification as part of ASC Topic 860 and ASC Topic 810, respectively. The new rules generally apply for fiscal years beginning after Nov. 15, 2009.

In February 2010, however, FASB issued ASU 2010-10, which defers the consolidation requirements for certain interests in investment funds until FASB and the International Accounting Standards Board (IASB) develop joint guidance on consolidating these interests. Such interests include mutual, hedge, private equity and venture capital funds, as well as certain REITs. Deferral of the consolidation requirements doesn’t, however, relieve companies of the obligation to disclose these interests.

ON THE HORIZON

The Financial Accounting Standards Board (FASB) continues to refine U.S. Generally Accepted Accounting Principles (GAAP) and to work with the International Accounting Standards Board (IASB) to converge U.S. and international standards. The two boards are working together on the following:

Financial statement presentation. This would create a common global format for financial statements. Some of the changes being considered are common categories across the balance sheet, income statement and cash flow statement, and additional details about earnings and cash flows in the footnotes.

Accounting for insurance contracts. Significant changes to the way insurers account for contracts for policyholders are being explored. For example, the boards may eliminate the current practice of deferring policy acquisition costs.

Revenue recognition. This would clarify the principles for recognizing revenue and create a joint revenue recognition standard. The boards expect to issue an exposure draft in 2010 and a final standard in 2011.

Stay on top of trends
Accounting standards seem to be in a constant state of flux. Although it’s sometimes hard to keep track of them, many standards will have a significant impact on your company’s financial statements, so it’s important to monitor FASB and its Emerging Issues Task Force’s activities and adjust your strategies accordingly.

Consult a Financial Adviser for more information.