FASB plans updates on contract assets and liabilities, and credit losses

The Financial Accounting Standards Board has decided to tweak some of its standards related to contract assets and liabilities for construction contractors in response to recommendations from its Private Company Council, as well as credit losses for financial institutions.

During a meeting last week, according to a summary posted to FASB’s website, FASB endorsed a recommendation from the PCC to provide an alternative for private companies to present contract assets and contract liabilities on a gross basis on the statement of financial position. The scope would be limited to private construction companies. The presentation alternative would apply at the entity level, and companies would be required to disclose when they elected to use the presentation alternative. The PCC and FASB both decided to require a full retrospective transition approach and related transition disclosures. But when a private company initially applies the presentation alternative for its contract assets and liabilities, it wouldn’t need to justify why that approach is preferable. FASB has asked its staff to draft a proposed accounting standards update that would be voted on by written ballot. There will be a 45-day comment period for the proposed update.

FASB also discussed another PCC project at the meeting on the application of the credit losses standard to current accounts receivable and contract assets arising from revenue transactions. It decided that private companies and not-for-profit entities (except for nonprofit conduit bond obligors) would be eligible for a simplified approach. FASB endorsed the PCC’s decision that the scope of the simplified approach would be current accounts receivable and contract asset balances arising from transactions accounted for under FASB’s revenue recognition standard.

FASB also backed the PCC’s decision to provide a recognition and measurement practical expedient and, for entities that elect the practical expedient, an accounting policy election designed to simplify the credit loss allowance determination. An entity that opts for the practical expedient wouldn’t be required to adjust historical loss information to reflect changes related to relevant economic data. The entity instead would assume that current economic conditions as of the balance sheet date will persist throughout the forecast period.

An entity that elects the practical expedient would be allowed to make an accounting policy election to consider subsequent cash collection after the balance sheet date but prior to the date the financial statements are available to be issued.

FASB endorsed the PCC’s decision to require an entity to disclose when the practical expedient and accounting policy election have been used, as well as to require a prospective transition method, with the ability for an entity to forgo a preferability assessment the first time it elects the practical expedient and the accounting policy election.

As with the contract assets and liability changes, FASB asked its staff to draft a proposed accounting standards update that can be voted on by written ballot, along with a 45-day comment period for the proposed update.

FASB chair Richard Jones and board member Hillary Salo suggested during the meeting that similar changes might be considered for public companies, although other board members seemed skeptical about the need for it. The board members seem to be open to at least including a question in the proposal about whether public companies want to use the practical expedient.