This year will be easier for reporting companies than prior years because the FASB scaled back somewhat on major standard-setting initiatives, accountants said.
“There aren’t any major standards becoming effective this year comparable to revenue recognition, leases, or credit losses – except perhaps for smaller reporting companies in the insurance industry that need to adopt new guidance for long-dated insurance contracts,” Scott Ehrlich, president of Mind the GAAP, LLC, said on January 9, 2024. “I think this reprieve was by design – the FASB recognized that there have been some major GAAP changes in recent years and have somewhat scaled back on their major standard setting activities.”
For public companies, the biggest change for 2024 will come at the end of the year when they need to disclose more segment information, said Ehrlich. For private companies, “there’s not really much new to worry about in 2024,” he said. “Still, private companies may want to use this opportunity to start preparing for some of the big changes coming in 2025 and beyond, including the accounting for joint venture formations and more granular disclosures around cash taxes paid by jurisdiction.”
Others also flagged insurance rules as ones that will heat up heavily later in the year, observing that the accounting landscape feels similar to last year’s but could change. “2023 and 2024 feels about the same and so you feel like you’ve got a fair comparable,” Jim Cox, CFO of Clearwater Analytics, said on January 8. “From a macro perspective it comes down to the fed and the budget and then the third thing is the election,” he said. “It feels really early to be talking about an election event but that colors the whole view when you think about 2024.”
Cox’s remarks were in the context of addressing this year’s working environment for businesses and organizations such as the FASB.
Established in 1973, the FASB develops US Generally Accepted Accounting Principles (GAAP) for state and local governments under the governance of the Financial Accounting Foundation, an independent, private-sector, not-for-profit organization trustee body. Four standards that the board published over the past two years take effect on January 1, 2024, including changes to segment disclosures that calendar year-end filers have to adopt:
- Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, requires public companies to provide more transparency in both quarterly and annual reports about the expenses they incur from revenue generating business units. Public companies, for example, must disclose any significant expense that is regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
- ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements, which provides a practical expedient for private companies and not-for-profit entities that are not conduit bond obligors to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease. The standard also provides new guidance for reporting leasehold improvements associated with common control leases.
- ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), expands the accounting method that was specifically developed for reporting low-income housing tax credit (LIHTC) investments to include more federal and state tax credit investment programs. Specifically, the standard enables other tax credit programs beyond LIHTC investments to qualify for using the proportional amortization method, a simple model that allows the initial cost of the investment to be spread out in proportion to the tax credits and other tax benefits allocated to an investor.
- ASU No. 2022-03, Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies how to measure equity securities that are subject to a contractual sale restriction.
2 Narrow Standards Coming in First Quarter
Separately, by the end of March, the FASB plans to issue narrow ASUs on profits interest awards, and to amend the codification to remove conceptual references, according to its technical agenda, published on January 8. The agenda timeline is not set in stone and so issuance dates can change due to technical matters.
The profits interest standard comes from Proposed ASU No. 2023-ED300, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest Awards, which was issued in May 2023 to provide an example in GAAP. The board subsequently voted last year to finalize the guidance with certain revisions.
Profits interest awards are popular with some companies because they enable a business to boost compensation for employees and other service providers in a way that aligns with the performance of the business. This in turn gives employees and others an extra incentive toward helping the business to achieve certain operating targets that are tied to profits. But GAAP was lacking in this area and there was some confusion about how to interpret certain guidance.
The standard will introduce an illustrative example and several fact patterns to show how a company should apply the guidance in paragraph 718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic 718, Compensation—Stock Compensation. The example is aimed at reducing complexity and existing confusion about how to report the awards.
The rules will take effect for public companies for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years; and for privately held companies for fiscal years beginning after December 15, 2025, and interim periods within those fiscal years. Early adoption will be permitted.
Removing Concepts from Codification
The other ASU will finalize Section A of Proposed ASU No. 2019-800, Codification Improvements, to remove instances where concepts statements are referenced in the codification.
The changes will take effect for public companies for fiscal periods including interim periods within the fiscal periods beginning after December 15, 2024. For private companies and other entities, the guidance will take effect for fiscal periods including interim periods within those fiscal periods beginning after December 15, 2025. Early adoption will be permitted. (See FASB Votes to Finalize Proposal to Remove Concepts Statement References from GAAP Codification in the October 5, 2023, edition of Accounting & Compliance Alert.)
The conceptual framework is a nonauthoritative guide the board uses to develop GAAP but the guide is not GAAP.
This article originally appeared in the January 10, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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