Convergence Projects Update

The FASB and the IASB recently announced their plan to reexpose their proposed new lease accounting standard. This seems to be a theme as several other key projects are slated for reexposure this year. This is probably a good time to review some the FASB & IASB convergence projects, where they stand, and how they impact not-for-profits.

As a reminder convergence projects are areas where there are current differences between IFRS and US GAAP. In these particular areas the two boards have determined that neither existing set of standards is sufficient on the topic and so the two boards will issue a joint new standard to replace the current US GAAP and IFRS standards.

There are four convergence projects which are relevant to not-for-profits: Financial Statement Presentation, Leases, Revenue Recognition, and Financial Instruments.

The Financial Statement Presentation project has been delayed and has not yet been exposed for comment. As a result we won’t spend much time on it. But, it is worth watching going forward as initial discussions include ideas such as requiring the direct method of calculating the cash flow, and redesigning the balance sheet and income statement to include “operating”, “investing”, and “financing” sections just like the statement of cash flows.

 
The remaining three projects: Leases, Revenue Recognition, and Financial Instruments share a similar timeline:
• All have previous exposure drafts
• Comments were considered and some alterations were made to the proposed statements.
• All three are expected to be reexposed for further comment in the later part of 2011.
• Final statements are expected to be issued in 2012.
• Effective dates are likely 2014 or 2015 (BUT, nonpublic entities will probably have two additional years before these standards are effective).

 
Leases
I posted this previous blog suggesting that FASB was softening its previous stance on leases, perhaps allowing room for something similar to an operating lease. This is no longer the case. The latest momentum on this topic shows FASB has reaffirmed its original position that the present value of the minimum lease term for all leases should be capitalized as a “right-to-use” asset with an offsetting lease liability. The FASB has softened its stance on which lease renewals would be required to be included in the calculation. There are still more details to come on this, so pay attention to the new exposure draft when it is released.

 
Revenue Recognition
The Revenue Recognition project seeks to replace the various industry-specific revenue recognition standards with a single principle based rights & obligations approach. The good news for not-for-profits is that this standard does not seem to hold any new concepts for us. As a result it is likely going to have very little impact on us.

 
Financial Instruments
The Financial Instruments project covers all financial instruments not otherwise covered by other guidance (think pension liabilities or leases). It is important to note that pledge receivables are excluded from this project minimizing the impact on not-for-profits. However this will impact nonprofits in other areas such as investment pools, microfinance loan receivables, etc.

 
The proposed guidance would require most financial instruments to be held on the balance sheet at fair value. There are some limited exceptions for short term trade receivables and payables, and certain debt. There would be two categories, one where Fair Value fluctuations flow through the income statement and another where the fluctuations flow through other comprehensive income. As you can imagine these categories are not particularly meaningful for not-for-profits due to general statement of changes in net assets.

 
For all of these convergence projects, the process is still open and changes likely will occur. It is wise to monitor the changes. However there is also plenty of time. Due to the big wave of change cause by the convergence projects, the FASB has made it clear that there will be plenty of time to digest the changes prior to adoption dates. This is even truer for non-public entities like not-for-profits.