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In this edition of the quarterly communication, we have provided information about financial reporting and accounting issues – some of which are currently being evaluated by regulatory agencies and not resolved at this time. We have also compiled a list of items for consideration in your financial reporting and disclosures for the third quarter and a summary of recently issued accounting pronouncements (see Appendices for summary of recently issued accounting pronouncements and the related effective dates).
This quarterly update is organized as follows:
The following selected Accounting Standards Updates (ASUs) were issued by the Financial Accounting Standards Board (FASB) during the third quarter. A complete list of all ASUs issued or effective in 2023 is included in Appendix A.
In August, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which is intended to provide investors more information in a joint venture’s separate financial statements and reduce diversity in practice in this area of financial reporting.
The ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification (ASC) Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the ASC that applies to the formation accounting by a joint venture in its separate financial statements, specifically the joint venture’s recognition and initial measurement of net assets, including businesses contributed to it. Stakeholders noted that the lack of guidance has resulted in diversity in practice in how contributions to a joint venture upon formation are accounted for by the joint venture. The amendments in this ASU provide information to a joint venture’s investors and reduce diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance).
The amendments in this ASU are effective prospectively for all joint ventures with a formation date on or after January 1, 2025, and early adoption is permitted. Additionally, a joint venture that was formed before the effective date of the ASU may elect to apply the amendments retrospectively if it has sufficient information.
New cybersecurity rules from the Securities and Exchange Commission (SEC) take effect on December 15, 2023. The SEC’s cybersecurity rules, adopted in July 2023, require publicly listed companies to comply with numerous incident reporting and governance disclosure requirements. The rules join a host of other cybersecurity rules and standards from various government agencies and regulatory bodies. The new rules introduce mandatory cyber incident reporting requirements for all public companies. Domestic issuers must disclose material cybersecurity incidents in Form 8-K filings. Private foreign issuers must submit Form 6-K filings to disclose material cyber incidents.
The new rules state that issuers must disclose cybersecurity incidents that are determined to be material by the company. This requirement is similar to the materiality standard for other 8-K disclosures under U.S. securities laws. Issuers must disclose the material impact of the incident on the company’s financial condition and operations. Disclosures must be filed within four business days after a company determines that it has experienced a material cyber incident.
Public companies will be required to disclose risk management and governance information in relation to cybersecurity, including board proficiency and oversight of cybersecurity risks, in their annual Form 10-K filings. These disclosure requirements will apply to fiscal years ending on or after December 15, 2023.
Although the rules primarily target publicly listed companies, other private and smaller companies should familiarize, prepare and monitor their operations for their security. Most public companies are reliant on many smaller third-party software and supply chain companies, and a cyberattack at any point along that chain could have a material impact. Therefore, such companies should also familiarize themselves with the new regulations.
The SEC’s Division of Corporation Finance (CorpFin) published a staff guide to help smaller public companies to comply with new cybersecurity rules adopted in July. CorpFin published Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure: A Small Entity Compliance Guide on the day the rulemaking release became effective—September 5, 2023. The new rules apply to domestic companies, foreign private issuers and business development companies.
The guide explains what is required by the rule as well as what it does not require. In particular, the rule does not require the company to disclose specific or technical information about its planned response to the incident or its cybersecurity systems, related networks and devices, or potential system vulnerabilities in such detail that would impede its response or remediation of the incident. Moreover, CorpFin stressed that Form 8-K filing is required not when the company discovers a cyber incident but when it determines that the incident was material. The materiality determination should be made without unreasonable delay. The guide explains that it is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision, or if it would have significantly altered the total mix of information made available. In terms of annual disclosure of risk management, strategy and governance related to cybersecurity, the release includes a non-exclusive list of disclosure items companies should provide based on their facts and circumstances.
The SEC provides a phase-in compliance date and depends on the type of disclosure or categories of companies. For annual disclosures, all companies, including smaller reporting companies (SRCs) must provide the disclosures beginning with their annual reports for fiscal years ending on or after December 15, 2023. For material cybersecurity incident reporting companies except for SRCs must begin complying by December 18, 2023. SRCs have an additional 180 days or by June 15, 2024.
On September 14, 2023, Representative Nydia Velázquez of New York reintroduced a measure that would require public companies to disclose median annual compensation increases for their executive officers and rank-and-file workers along with a ratio comparing the two. H.R. 5519, the Greater Accountability in Pay Act, expands off of the SEC’s pay ratio disclosure rules implemented under the Dodd-Frank Act. Emerging Growth Companies (EGCs) would be exempt from the bill’s requirements.
In 2015, the SEC finalized Release No. 33-9877, Pay Ratio Disclosure, requiring issuers to disclose a ratio comparing the total compensation of the CEO to that of the median employee. The disclosures have since then been used to highlight outsized CEO-to-worker pay disparities, most recently at Big Three automakers in the midst of a strike by United Auto Workers (UAW).
On September 11, 2023, two Senate Democrats, reintroduced legislation to mandate sweeping new public company workforce disclosures. The legislation comes as the SEC prepares to launch its own human capital management disclosure rulemaking. Senator Mark Warner of Virginia originally introduced the Workforce Investment Disclosure Act in February 2020. He introduced the latest version (S. 2751) alongside Senate Banking Committee Chairman Sherrod Brown of Ohio. Representative Sylvia Garcia, a Texas Democrat, introduced the House version (H.R. 4578) in July.
The measure would amend the Securities Exchange Act of 1934 to direct the SEC to issue rules requiring annual disclosure of granular information on workforce demographics, turnover rates and other hiring and promotion data, diversity, skills and capabilities, health and safety, compensation and incentives, and recruiting. Among other disclosures, public companies would be required to provide data on benefits such as paid leave, health care and childcare, the frequency, severity, and lost time due to injuries, illness, and fatalities, and data on diversity – including racial, ethnic and gender composition – for both senior executives and individuals in the workforce. The SEC under the bill would be allowed to exempt Emerging Growth Companies (EGCs) from any of the disclosures.
The construction sector is pressing the FASB to clarify revenue recognition guidance for contracts with conditional retainage provisions that are overbilled. Conditional retainage refers to a form of security in the construction sector whereby a customer withholds a portion of the payment billed by the contractor until a project is completed or certain milestones are met.
The guidance under Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers introduced new provisions around conditional retainage, requiring it to be added to the contract asset or neted against the contract liability on a contract-by-contract basis. Many users of construction company financial statements like to see the under and over billing shown separately, grossed up to the actual numbers as they were presented under previous revenue recognition guidance, so they can use those specific items for certain types of analysis that they do.
The main issue around the construction sector’s concerns is not that overbillings and conditional retainage cannot be shown separately on the balance sheet, but that there can only be one contract asset or one contract liability per job. For example, if a project is overbilled by $100k and there is conditional retainage on this specific project in the amount of $150k then the two are neted, which would result in a zero contract liability but a $50k contract asset related to conditional retainage. In essence, the issue in ASC 606 is that conditional retainage is not technically billed on the project because it is not due and payable until the passage of time.
The Governmental Accounting Standards Board (GASB) has issued implementation guidance in the form of questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements. Implementation Guide No. 2023-1, Implementation Guidance Update—2023, contains new questions and answers that address application of GASB standards on leases, subscription-based information technology arrangements, and accounting changes. The guide also includes amendments to previously issued implementation guidance on leases. The GASB periodically issues new and updated guidance to assist state and local governments in applying generally accepted accounting principles (GAAP) to specific facts and circumstances that they encounter. The GASB develops the guidance based on:
Senior accountants at four of the nation’s top banking regulatory agencies told the FASB they do not support the proposed changes for reporting purchased financial assets—provisions that would narrowly amend credit loss accounting rules banks recently adopted. According to an August joint comment letter to the FASB from chief accountants at the Board of Governors of the Federal Reserve System (the Fed), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC), the proposed ASU, Financial Instruments—Credit Losses (Topic 326): Purchased Financial Assets, which was issued in June, comes too soon after new credit loss rules took effect and will introduce accounting results that are concerning. The proposal would expand the purchased credit deteriorated (PCD) accounting model to substantially all purchased financial assets, eliminating the immediate recognition of credit loss expense at acquisition and obscuring those expenses as a reduction of interest income (yield) over the lives of the loans, the agencies said. This would cause businesses to write off a purchased financial asset before the expected credit loss is fully expensed and incentivize them to buy financial assets instead of originating them to avoid immediate recognition of credit loss expense. In turn, this would result in different financial reporting outcomes despite the financial assets being economically similar.
The agencies are concerned that the gross-up accounting approach provides incentives to overstate expected credit losses at acquisition followed in later periods by overstatement of earnings when grossed-up allowances are reversed with a credit to provision expense (i.e., a negative provision).
The agencies said that because private banks just adopted the current expected credit losses (CECL) standard, implementing the proposal would create significant complexities and burden, including costs, for financial and regulatory reporting borne by financial institutions, especially smaller, less-complex institutions.
The following selected FASB exposure drafts and projects are outstanding as of September 30, 2023.
In May, the FASB issued a proposed ASU that is intended to improve generally accepted accounting principles by adding illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as a share-based payment arrangement within the scope of ASC 718, Compensation—Stock Compensation.
Certain entities, typically private companies, provide employees and other service providers with profits interest and similar awards to align compensation with the company’s operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The Private Company Council (PCC) and other stakeholders have highlighted existing diversity in practice in accounting for these awards as a share-based payment arrangement under ASC 718 or similar to a cash bonus or profit-sharing arrangement (ASC 710, Compensation—General, or other Topics). As certain public business entities also may be required to account for profits interest awards, the PCC recommended that the Board add a project that would provide illustrative guidance for all reporting entities that account for profits interest and similar awards.
In March 2023, the FASB published a proposed ASU that addresses requests for improved income tax disclosures from investors, lenders, creditors, and other allocators of capital (collectively, “investors”) that use the financial statements to make capital allocation decisions. The FASB’s proposed enhancements to income tax disclosures, primarily related to the rate reconciliation and income taxes paid information, are intended to help investors better assess how an entity’s worldwide operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.
During the FASB’s 2021 agenda consultation process and other stakeholder outreach, investors expressed concerns that existing income tax disclosures do not provide sufficient information to understand the tax provision for an entity that operates in multiple jurisdictions. Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities. While investors said they generally find these disclosures helpful, they suggested possible enhancements to better (1) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (2) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (3) identify potential opportunities to increase future cash flows.
The amendments in this proposed ASU would address investor requests for more transparency about income tax information, including jurisdictional information, by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction.
In March 2023, the FASB published a proposed ASU intended to improve the accounting for and disclosure of certain crypto assets. During the FASB’s recent agenda consultation process, stakeholders from all professional backgrounds identified digital assets as a top priority area for the Board to address. The FASB heard feedback that the accounting for crypto assets as indefinite-lived intangible assets, which is a cost-less-impairment model, does not provide investors with decision-useful information or reflect the underlying economics of those assets.
The amendments in this proposed ASU would improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The proposed amendments also would improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, restrictions, and changes in those holdings.
The amendments in this proposed ASU would apply to all entities holding crypto assets that meet all the following criteria:
In October 2022, the FASB issued a proposed ASU that would improve the disclosures about a public entity’s reportable segments and address requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses.
Investors and other allocators of capital have observed that segment information is critically important in understanding a public entity’s different business activities. That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows. In addition, investors have observed that although information about a segment’s revenue and measure of profit or loss is disclosed in an entity’s financial statements, there generally is limited information disclosed about a segment’s expenses.
The amendments in the proposed ASU respond to feedback received from investors and other allocators and would improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments in the proposed ASU would:
Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss
The amendments in the proposed ASU would apply to all public entities that are required to report segment information in accordance with ASC 280.
In June 2022, the FASB published an Invitation to Comment (ITC), Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles. The ITC gives stakeholders the opportunity to provide feedback on whether IAS 20 represents a workable solution for improving GAAP in the U.S. financial reporting environment for business entities as it relates to the accounting for government grants.
In 2021, the FASB issued the Invitation to Comment, Agenda Consultation, which gave all stakeholders the opportunity to provide input on what the Board’s future priorities should be. The 2021 ITC asked stakeholders to weigh in on a broad range of issues, including whether the FASB should pursue a project on the recognition and measurement of government grants—and, if so, whether it should leverage an existing grant or contribution model or develop a new accounting model. Approximately three-quarters of stakeholders who provided specific feedback on that question, including investors, practitioners, preparers, and state certified public accounting societies, preferred that the FASB leverage International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
In response to this feedback, the FASB added a project, Accounting for Government Grants, Invitation to Comment, to the research agenda. Published as part of that research project, the government grants ITC solicits additional feedback from stakeholders on relevant requirements in IAS 20 and includes specific questions for investors about the importance and utility of government grants information to their analysis of a company’s financial performance.
In May 2022, the FASB added a project to its technical agenda on the recognition, measurement, presentation and disclosure of environmental credits that are legally enforceable and tradeable, following a review of the staff’s initial research on accounting for environmental credits, including feedback that there is diversity in practice in this area. The project will address the accounting by participants in compliance and voluntary programs, as well as by creators of environmental credits. In addition, the FASB added a project on consolidation for business entities to its research agenda after removing its project on consolidation reorganization and targeted improvements from the technical agenda. The new project will explore whether a single consolidation model could be developed for business entities. In response to feedback received on the FASB’s Invitation to Comment, Agenda Consultation, the FASB also added a project on financial key performance indicators to the research agenda to explore standardizing the definitions of financial key performance indicators.
In February 2023, the Governmental Accounting Standards Board (GASB) issued proposed implementation guidance that is intended to clarify, explain, or elaborate on existing guidance on subscription-based information technology arrangements (SBITAs). The Exposure Draft, Additional Proposal for Implementation Guidance Update—2023, addresses the single issue of whether a cloud computing arrangement meets the definition of a SBITA as defined in GASB Statement 96, Subscription-Based Information Technology Arrangements. If cleared as final implementation guidance, the question and answer in this supplemental Exposure Draft will be added to previously exposed questions and answers to result in a final Implementation Guide, Implementation Guidance Update—2023.
In July 2021, the GASB issued a proposed Concepts Statement to guide the Board when establishing note disclosure requirements for state and local governments. The document is part of the GASB’s response to the results of its research reexamining existing note disclosure requirements. The proposed concepts primarily are intended to provide the GASB with criteria to consistently evaluate notes to financial statements in the standards-setting process. They also may help stakeholders to understand the fundamental concepts underlying future GASB pronouncements.
The Revised Exposure Draft (RED), Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements, proposes concepts such as:
A key element of the proposed Concepts Statement is the concept of essentiality. The RED would establish that notes to financial statements are essential to making economic, social, or political decisions or assessing accountability. The RED also identifies the characteristics that indicate information is essential to users:
The GASB issued an Exposure Draft (ED) on this topic in early 2020. The Board has issued this RED to incorporate feedback received from stakeholders on the previous ED and to seek feedback on the resulting proposed revisions, which the Board believes will improve the final concepts.
The Emerging Issues Task Force (EIFT) met on September 14, 2023, and deliberated the following topic:
The Private Company Council (PCC) met on Thursday, June 22, and Friday, June 23, 2023. Below is a summary of topics addressed by the PCC at the meeting:
The PCC met on Tuesday, September 12, 2023. Below is a summary of topics discussed by PCC and FASB members at the meeting:
The following table contains significant implementation dates and deadlines for standards issued by the FASB and others.
Selected Implementation Dates (FASB/EITF/PCC)
For the Quarter Ended September 30, 2023
The illustrative disclosures below are presented in plain English. Please review each disclosure for its applicability to your organization and the need for disclosure in your organization’s financial statements.
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
