Companies will operate under clearer accounting guidance within the next two years, as the Financial Accounting Standards Board (FASB) on December 17, 2025, issued a new accounting standard that clarifies diluted earnings per share (EPS) calculations during losses and includes numerous other technical improvements to Generally Accepted Accounting Principles (GAAP).
The board released Accounting Standards Update (ASU) No. 2025-12, Codification Improvements, which addresses 33 specific issues within the FASB Accounting Standards Codification®. This comprehensive effort aims to enhance clarity, correct errors, and generally improve the application of GAAP, making financial reporting more straightforward for a wide range of entities.
The board emphasized that these improvements are generally technical in nature, designed to clarify and correct rather than overhaul fundamental accounting principles.
Key Changes Highlighted:
The update makes a standout clarification in how companies calculate diluted earnings per share (EPS) when experiencing losses. Previously, diversity existed in how entities calculated diluted EPS when a loss from continuing operations was present and a contract might be settled in stock or cash. The new guidance clarifies that companies must evaluate the combined effect of adjustments to both the numerator and the denominator to determine if potential common shares have a dilutive effect on EPS, even during a loss. This amendment seeks to resolve inconsistencies and provide a more robust method for reporting EPS under such circumstances.
“The FASB’s Evergreen Codification Improvements are clarifications rather than new requirements, meant to clean up and simplify U.S. GAAP without changing the underlying accounting models,” said Bob Michaels, Technical Accounting Lead at CrossCountry Consulting. “The current package includes roughly thirty-plus targeted clarifications that tighten definitions, examples, and cross-references, including clearer guidance in certain targeted areas like diluted EPS when a company reports a loss from continuing operations and transfers of receivables under ASC 606. These refinements reduce ambiguity and improve comparability.”
Beyond the EPS clarification, the ASU introduces a host of other beneficial adjustments, including:
- Removal of Obsolete Terminology: The Master Glossary term “Amortized Cost” has been removed, streamlining definitions within the Codification.
- Improved Presentation Clarity: Amendments clarify comparative financial statement presentation requirements and correct an arithmetic error in a comprehensive income example, ensuring more accurate and consistent financial reporting.
- Refined Disclosure Requirements: The update clarifies disclosure requirements for lease receivables arising from sales-type or direct financing leases, reducing potential confusion for entities with complex lease structures.
- Technical Corrections Across Diverse Topics: The ASU includes numerous technical fixes, such as clarifying interest income calculation for beneficial interests, updating references for environmental remediation costs, refining treasury stock retirement methods, and correcting an error in a repurchase agreement illustrative example.
- Not-for-Profit (NFP) Specific Adjustments: Several amendments are tailored for not-for-profit entities, including clarifications on consolidation guidance, updates to investment accounting references, and removal of outdated terminology in income statement guidance.
No Significant Impact; Effective Date:
These amendments affect all reporting entities subject to the specific accounting guidance being modified. Michaels noted, “Most respondents to the exposure draft supported the objective and agreed the changes should not materially affect amounts reported or impose significant cost. Several letters also asked for additional clarity on diluted EPS mechanics in loss periods to avoid diversity in practice.” The FASB emphasizes that these changes are largely incremental and are not expected to have a significant impact on current accounting practices or impose substantial costs for most organizations.
The amendments are effective for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods. Entities may adopt these amendments prospectively or retrospectively, with early adoption and transition methods permitted on an issue-by-issue basis—except for the diluted EPS clarification, which must be applied retrospectively. The accounting standard also requires transition disclosures per ASC 250.
The FASB routinely undertakes such “Codification Improvements” to ensure GAAP remains relevant, clear, and easy to apply. This latest update, adopted by a unanimous vote of the seven members of the FASB, is part of the Board’s ongoing commitment to fostering high-quality financial reporting standards. The improvements will also be reflected in the proposed 2026 GAAP Financial Reporting Taxonomy. As Michaels concluded, “It continues to show that even with these improvements, there is still room to further refine the Codification as FASB continues its evergreen process.”
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