Accounting Changes Coming in 2012

By Baker Newman Noyes January 8, 2012

The pace of accounting changes took a slight break heading into 2012. While there are some changes, they are not widespread and focus on disclosures.

Here is a summary of the changes we think will be of interest.

FASB recently issued guidance (ASU 2011-08) that actually simplifies the evaluation of goodwill impairment. Companies may make a qualitative assessment of whether it is more likely than not that goodwill is impaired. In other words, whether the fair value of a reporting unit is less than its carrying amount. If it is unlikely that goodwill is impaired, then performing the current two-step test is unnecessary. This is effective for years beginning after December 15, 2011; early adoption is permitted in certain circumstances.

The presentation of comprehensive income will change based on new FASB guidance (ASU 2011-05). Currently, many companies present the components of other comprehensive income (such as changes in unrealized gain on available for sale securities and changes in foreign currency translation) in the statement of stockholders’ equity. The new requirement is to present that activity either as part of the income statement or in a separate statement immediately following the income statement. For public companies, the requirement is effective for years and interim periods within those years beginning after December 15, 2011; for nonpublic companies it is effective for years ending after December 15, 2012. Early adoption is permitted. Note that certain disclosure provisions were deferred by ASU 2011-12.

FASB issued new guidance (ASU 2011-09) for disclosures for employers participating in a multiemployer pension or other postretirement benefit plan. New disclosures should be made regarding various matters such as the name of the plan, the employer’s level of participation in the plan, amount of contributions, and the funded status of the plan. For nonpublic entities, the changes are effective for years ending after December 15, 2012 with retrospective disclosure for all years presented; public entities are required to adopt a year earlier. Early adoption is permitted.

New fair value disclosures are required by ASU 2010-06 for transfers of assets or liabilities in and out of Level 1 and 2 and activity within Level 3 assets and liabilities must now be disaggregated to present purchases, sales, issuances and settlements on a gross basis. The disclosures for transfers in and out of Levels 1 and 2 are already effective; the Level 3 disclosures are effective for years beginning after December 15, 2010 (i.e., calendar year 2011).

For financial institutions and other lenders, there are two changes of note. More disclosures are required by ASU 2010-20 for the credit quality of loans and the allowance for loan loss, including a breakdown of the loan portfolio, level of impaired loans and related allowance account by portfolio segment and class of loan. This is already effective for public entities and effective for years ending after December 15, 2011 for nonpublic entities. Note this covers any entity with financing receivables, not just traditional financial institutions. Guidance about troubled debt restructurings is found in ASU 2011-12. This guidance is to assist creditors in determining whether a loan modification is a troubled debt restructuring. For public entities the guidance is already in effect. For nonpublic entities the guidance is effective for periods ending after December 15, 2012.

There were several amendments relating to healthcare providers. For years beginning after December 15, 2010 charity care disclosures should be based on the direct and indirect costs of providing the charity care (ASU 2010-23). ASU 2010-24 clarifies that a health care provider should not net insurance recoveries against a related claim liability and the claim liability should be determined without considering any insurance recoveries. This is effective for years beginning after December 15, 2010. FASB also issued ASU 2011-07 that requires health care entities which recognize significant amounts of patient service revenue when services are rendered, even though they don’t assess the patient’s ability to pay, to present the provision for bad debts as a reduction of patient service revenue; this should be retrospective for all years presented. For nonpublic entities, this is effective for years ending after December 15, 2012. Early application is permitted for each of these amendments.