New Proposed ASU on Reclassifications of AOCI
On August 16, the Board issued a proposed ASU, which addresses the manner in which companies are to present the effects of reclassifications out of accumulated OCI. This proposed update was necessitated last December when the Board issued ASU 2011-12, which deferred the effective date for the reclassification adjustments requirement in ASU 2011-05. (For a quick refresher, see an earlier post here, some of which is reproduced below).
The Board was sufficiently convinced by constituent feedback on ASU 2011-05 that the costs to preparers of detailing the effects of AOCI reclassifications can sometimes exceed the benefits. In particular, when a reclassification goes from AOCI to the balance sheet, the capitalized amount losses all ties to AOCI and companies would need to significantly revise their information systems in order to continue tracking those numbers.
This problem is articulated in a comment letter from Gregg Nelson, a VP from IBM, as follows:
“… certain pension-related costs reclassified out of OCI are included in cost pools and subsequently capitalized as inventory or PP&E. These amounts immediately lose their nature, and the OCI portion related to capitalization is not tracked. Thus, when inventory is subsequently sold or PP&E is depreciated, a portion of the cost of sales / depreciation would include amounts previously reclassified from OCI. We are uncertain whether the intent of ASU 2011-05 … was for entities to track such amounts. If this is a requirement, we would certainly question the usefulness of this information and the cost/benefit of identifying and tracking this information. This capability does not exist in our financial systems today.”
Accordingly, the proposed ASU would require a company to provide a tabular disclosure of the effect of items reclassified from AOCI to net income line items only when the item is reclassified to net income in its entirety. For other items that are not reclassified to net income in their entirety, the new tabular disclosure would require only a cross-reference to other disclosures currently required under U.S. GAAP related to those items. The comment period is open until October 15.