The FASB has outlined a packed agenda for the second half of the year, with plans to issue two new accounting standards updates, a final concepts statement, and seven proposals for public comment.
These efforts come at a critical time, as investors and analysts seek greater transparency and clarity in financial reporting to navigate the challenges ahead. With uncertainty on the rise amid interest rate and other market fears, the changes to accounting rules aim to provide more accurate and consistent information to inform investment decisions.
US GAAP can impact stock prices by affecting the reported earnings, investor confidence, comparability, and transparency of a company’s financial reporting. However, the exact impact can vary depending on the specific rule change and the circumstances of each company.
Notably, the FASB’s timelines are subject to change as the board continues to refine its priorities, add new projects, and issue a highly anticipated agenda consultation document that will shape the board’s focus for the next two to five years.
Clarifying Convertible Debt Instruments in Third Quarter
One of the two final standards to be issued this year focuses on induced conversions of convertible debt instruments, according to the board’s technical agenda, updated on June 26, 2024. Convertible debt instruments are financial instruments that can be converted into equity (such as stocks) under certain conditions. Induced conversions refer to situations where a company settles these convertible debt instruments early, and the accounting treatment for these transactions needs to be clarified.
The FASB is expected to vote in July to finalize Proposed Accounting Standards Update(ASU) No. 2023-ED600, Debt–Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments and issue it before October. This update aims to ensure consistency and transparency in financial reporting by providing clear guidelines on how to handle early settlements of convertible debt that don’t follow the original terms.
Improving Expense Reporting in Fourth Quarter
The second final standard, disaggregation of income statement expenses, is one investors pressed for but will come in narrower than some like. The new rules, which have been in development since 2017, will require companies to break out certain expense items, such as employee compensation and purchases of inventory, in footnotes to their income statements.
The guidance will build on Proposed ASU No. 2023-ED500, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which was exposed last year. The final accounting standard will not sufficiently change the proposal to warrant re-exposure, but certain clarifications and refinements will be made.
In terms of impact, the rules are expected to provide investors with better insights into cost structures and future cash flows of public companies.
The standard will be issued in the fourth quarter by the end of December, but will take effect starting from fiscal years beginning after December 15, 2026, with an option for early adoption.
Guiding Principles for Financial Reporting–Soon
In addition to these rules, the FASB will soon issue a conceptual framework chapter on measurement in financial reporting, which was proposed last year. This internal board guide will outline the principles and guidelines for how transactions and events affecting an entity should be quantified. Once the chapter is issued, the conceptual framework will be complete.
The Seven Proposals Cover a Range of Topics
In total, the board has 13 projects in progress, including three that are still being discussed: statement of cash flows targeted improvements; codification improvements; and Proposed ASU No. 2023-ED400, Financial Instruments—Credit Losses (Topic 326): Purchased Financial Assets.
The seven proposals to be issued for public comment will be issued in the third quarter, covering a range of topics:
- accounting guidelines for internal-use software;
- a new standard for environmental credit programs to enhance recognition, measurement, and disclosure;
- rules for businesses to account for government grants they receive;
- to clarify rules for share-based payments given to customers;
- changes to derivative rules under Topic 815, Derivatives and Hedging, expanding exceptions and simplifying assessments to focus on fair value at contract start;
- improvements to hedge accounting guidance under Topic 815 to clarify and simplify rules for specific hedging scenarios, including forecasted interest payments and cash flow hedge; and
- changes to improve interim financial reporting guidelines
This article originally appeared in the July 5, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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