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Happy New Year! We hope you and your family were able to enjoy the holiday season. During the fourth quarter of 2023, we hosted a Risk Management, Compliance and Internal Audit Track Forum during which our financial services experts addressed risk management, compliance, information technology, fintech and internal audit topics to help your financial institution anticipate and respond to risks. We also hosted a Finance, Accounting, and Strategy Forum sharing insights on regulatory hot topics, the state of the economy, ESG regulations and disclosures and liquidity and how to handle today’s interest rate environment. Both forums were recorded, and you can them view using the links above.
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 fourth 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 fourth quarter. A complete list of all ASUs issued or effective in 2023 is included in Appendix A.
In November, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures, that improves disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. The ASU applies to all public entities with public reporting requirements that are required to report segment information in accordance with FASB Accounting Standards Codification (ASC) 280, Segment Reporting. The amendments in the ASU improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments:
All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023.
In December, the FASB published ASU 2023-08, Accounting for and Disclosure of Crypto Assets, intended to improve the accounting for and disclosure of certain crypto assets. The new standard responds to feedback from stakeholders of all backgrounds who indicated that improving the accounting for and disclosure of crypto assets should be a top priority. The amendments in the ASU 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 amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period.
The amendments in the ASU apply to all assets that meet all the following criteria:
The amendments in the ASU are effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance). If amendments are adopted in an interim period, they must be adopted as of the beginning of the fiscal year that includes that interim period.
In December, the FASB published ASU 2023-09, Improvements to Income Tax Disclosures, 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 ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures.
Effective Dates For public business entities, the ASU is effective for annual periods beginning after December 15, 2024. For other entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.
In October, the Federal Reserve issued its semiannual Financial Stability Report, an evaluation of the stability of the U.S. financial system by analyzing vulnerabilities related to valuation pressures, borrowing by businesses and households, financial-sector leverage and funding risks. The report highlighted inflationary pressures, potential large losses in the commercial and residential real-estate sectors, and overall banking sector stress as the areas of highest risks to U.S. financial stability.
The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System released a final rule to strengthen and modernize their regulations implementing the Community Reinvestment Act (CRA). The final rule makes the most significant changes to the agencies’ CRA regulations in more than 25 years. The key goals of the final rule include:
Most of the final rule’s new requirements are applicable beginning January 1, 2026. The remaining new requirements, including data reporting requirements, are applicable on January 1, 2027.
The OCC released its Fall 2023 Semiannual Risk Perspective which addresses key issues facing banks, focusing on those that pose threats to the safety and soundness of banks and compliance with applicable laws and regulations. The OCC reports banks’ financial condition remains sound noting recessionary pressures are easing. However, inflation remains elevated and a slowing labor market, declining savings, and higher interest rates could cause financial distress. The report focuses on the following risk themes:
On December 18, 2023, the FDIC issued an advisory to institutions with concentrations of commercial real estate (CRE) to remind them of the importance of strong capital, appropriate credit loss allowance levels, and robust credit risk-management practices. The advisory provides the following key risk management practices for institutions to consider in managing CRE loan concentrations in the current challenging economic environment:
The practices identified in the advisory are not new but are enhancements to the 2008 advisory: Managing Commercial Real Estate Concentrations in a Challenging Environment.
The Securities and Exchange Commission (SEC) has, once again, delayed its climate change disclosure rulemaking. Now the agency will consider finalizing its March 2022 proposal, Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, in the spring of 2024, according to an updated rulemaking agenda. The commission has delayed final action several times already, and the latest delay has been widely expected, given strong pushback by public companies against some of the more onerous proposed requirements, including scope 3 greenhouse gas (GHG) emission disclosures, 1%-materiality threshold for financial statement disclosures, and attestation of scope 1 and scope 2 GHG emissions for larger companies.
The climate change disclosure rule is probably the most closely watched and one of the most consequential projects that the SEC will undertake during Chair Gary Gensler’s tenure in part because it will test the boundaries of the securities laws and the commission’s authority. If adopted, it will represent a significant change for public companies. Many large companies today already provide voluntary sustainability reports. But the SEC’s proposal—with several extensive standardized and prescriptive requirements—is intended to provide investors with consistent, comparable, decision-useful information that is reliable.
This rulemaking has been especially controversial as many critics—mainly business organizations and Republicans—question whether the agency even has the authority to prescribe extensive rules that they view are intended to manage the economy and businesses.
The SEC Division of Corporation Finance (CorpFin) has once again updated Compliance & Disclosure Interpretations (C&DIs) for Regulation S-K to further provide the staff’s interpretations of pay versus performance rules. CorpFin first provided C&DIs on the rules in February, then followed up with additional interpretations—mainly on GAAP questions—in late September to help reporting companies to implement Release No. 34-95607, Pay Versus Performance, which was adopted in August 2022. Companies began complying with the requirements for fiscal years ending on or after December 16, 2022.
The SEC added new Item 402(v) to Reg S-K, requiring companies to disclose in a table that includes the measure of total compensation and a measure reflecting “executive compensation actually paid” for the principal executive officer. The same information should be presented as an average for the other named executive officers (NEOs).
The latest update, published on November 21, 2023, answers 10 questions about peer group in Compensation Discussion & Analysis (CD&A), stock and option awards, and disclosures by companies that lose smaller reporting company (SRC) or emerging growth company (EGC) status. Depending on the rules, SRCs and EGCs get exemptions or get to comply with scaled or phased-in requirements.
There has been some confusion about what the new FASB standard on segment reporting would mean in relation to a company’s ability to use non-GAAP metrics in financial statement notes. And the SEC is reminding public companies about current non-GAAP requirements while urging companies to consult with the commission before putting additional unofficial measures in the financial statement notes for segment reporting.
In November, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures, that is intended to provide additional information about a public company’s significant segment expenses and more timely and detailed segment reporting to investors. Among other things, a company is required to disclose 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 additional measures of segment profit or loss are permitted but not required by the new ASU. Accordingly, the SEC rules consider such additional measures of segment profit or loss as non-GAAP financial measures subject to the non-GAAP guidance.
ASU 2023-07 includes the following related to potential use of non-GAAP measures:
“If the chief operating decision maker uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) shall be that which management believes is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in a public entity’s consolidated financial statements.”
Accordingly, a company would be fully compliant with US GAAP and the new ASU if it presented the one required segment measure of profit or loss—the one most consistent with US GAAP—and not other additional measures. However, because ASU 2023-07 permits the additional measures in the financial statement notes with no requirement that they be calculated consistent with US GAAP, the SEC expects that some companies may disclose non-GAAP measures of segment profit or loss in their audited financial statements. Regulation G requires companies to present with equal or greater prominence the most directly comparable financial measure from U.S. GAAP. Companies must also reconcile the differences between the non-GAAP financial measure with the most directly comparable financial measurement from GAAP. The companies must also disclose why they believe the non-GAAP measures provide useful information to investors about their financial conditions and results of operations.
The SEC Chief Accountant, Paul Munter, is urging companies to exercise the same level of due professional care with the statement of cash flows as they do for other financial statements. His remarks come as some companies and auditors may have not been applying the same rigor and skepticism in preparing or auditing the statement of cash flows, even though it is a primary financial statement. This has consistently been a leading area of financial statement restatements. The SEC staff have found that a significant majority of these restatements represent prior period errors corrected in the current period comparative financial statements—or “little r” restatements. This indicates that issuers are routinely making a determination that errors in the statement of cash flows do not constitute a material error in prior periods. Regulators have also observed material weakness in internal control over financial reporting (ICFR) around the preparation and presentation of the statement of cash flows.
It is unclear how widespread the problems are, but Munter has stated that, at least anecdotally, there is some evidence that not all companies have the same rigorous processes and financial controls as they do around the other financial statements. And that kind of anecdotal evidence is worrisome because that might imply that in the minds of some issuers and some auditors, the cash flow statement is of lesser importance.
The PCAOB staff issued its annual spotlight which highlights observations and takeaways from conversations with audit committee chairs. This spotlight summarizes conversations with over 200 audit committee chairs during 2022 and focuses on topics such as staffing turnover among CPAs, COVID-19 impact and working remotely, communications with their auditors, critical audit matters, and information from outside of the financial statements, including non-GAAP measures and ESG reporting.
The PCAOB adopted a new standard to modernize the auditor’s confirmation process. The new confirmation standard aims to better respond to the current technological environment by addressing the use of electronic confirmations in audits. In addition, the new standard does not consider negative confirmations alone as sufficient audit evidence. Requirements related to accounts receivable confirmations are largely similar to the requirements under the old standard. The new standard also emphasizes the auditor’s responsibility to maintain control over the confirmation process and identifies situations in which alternative procedures should be performed. The new standard is effective for financial statement audits for fiscal years ending on or after June 15, 2025.
The FASB will roll out a new process next year that will leverage the work of the Emerging Issues Task Force (EITF), a special panel that addresses technical accounting issues that come from applying U.S. GAAP. The EITF will have control of its own agenda and deliberate issues, but the output of an EITF consensus will simply be a recommendation to the FASB in the form of an agenda request with a proposed solution.
The EITF, which was formed in 1984, has evolved over time. There was a period—decades ago—when the EITF controlled its own agenda, dealing in some cases with 30 to 40 issues a year. The task force’s decisions took effect right after it held meetings but over time that process changed and the group’s process became part of the FASB’s full process.
Today, the EITF has a limited mandate though broader than board advisory bodies. It is composed of 12 members and is chaired by the FASB Technical Director. The Task force can only address projects the FASB puts on its agenda, typically technical matters that accountants find confusing and therefore have created diversity in practice.
The U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) has alerted firms to a pattern of continuing fraud schemes that exploit a COVID-19 relief program known as the Employee Retention Credit, or ERC. The alert includes red flag indicators to help firms detect transactions linked to ERC fraud.
The Employee Retention Credit was authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a tax credit to encourage businesses to keep employees on payroll during the COVID-19 pandemic. The Internal Revenue Services (IRS) Criminal Investigations (CI) unit identified the persistent ERC fraud schemes, which have so far triggered 323 investigations involving more than $2.8 billion in potentially fraudulent claims throughout tax years 2020, 2021, 2022, and 2023, the alert said.
FinCEN issued this alert in partnership with IRS CI to remind financial institutions that it is critical that they remain vigilant in identifying and reporting related suspicious activity and to protect businesses from being taken advantage of by fraudsters. ERC fraud has been so widespread that in September 2023, the IRS announced a moratorium—through at least year’s end—on processing new ERC claims to get a handle on the illicit activity.
While there are numerous variations of ERC fraud, the basic approach is to use shell companies, or existing but ineligible businesses, to file fraudulent ERC claims. In some cases, criminals have used the proceeds to pay for lavish purchases and personal expenses, the alert said. So-called “promoters” may occasionally also submit claims on behalf of businesses without their knowledge or using stolen information. Such ERC mills may also steal taxpayers’ personal information from an ERC claim to use in other identity theft schemes, the alert said.
Based on FinCEN’s analysis of suspicious activity reports (SARs), other Bank Secrecy Act filings, open-source reporting, and information provided by law enforcement partners, the Treasury bureau developed a list of 10 red flags that may indicate ERC fraud activity:
In November, the FASB voted to add a rulemaking project to its agenda to reorganize the statement of cash flows to address items that are core to the operations of banks and other financial institutions, agreeing to keep the project narrow. The effort will revise ASC 230, Statement of Cash Flows, so that it does a better job of telling a bank’s story, according to the discussions.
At the crux of the matter—financial statement preparers and investors have said that many of the activities that are classified as “investing” or ”financing” for a nonfinancial institution are viewed as “operating activities” for a financial institution, such as accepting deposits and making loans. This in turn reduces the usefulness of the statement to users of the information who study financial institutions. In general, the planned changes would fix those issues in a manner that is operable at low cost, staff said.
Specifically, the project will revise ASC 230 to:
The following selected FASB exposure drafts and projects are outstanding as of December 31, 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 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.
Projects on Environmental Credits, Consolidation, and KPIs 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.
The Emerging Issues Task Force (EIFT) did not meet during the fourth quarter. The next EITF meeting has not been scheduled.
The Private Company Council (PCC) met on December 14 and 15, 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.
For the Quarter Ended December 31, 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.
Click here to view disclosures
NOTE: The disclosures in the previous appendix are not intended to be all inclusive. All pronouncements issued during the period should be evaluated to determine whether they are applicable to your Company. Through December 31, 2023, the FASB has issued the following Accounting Standard Updates during the year.
