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October 1, 2024
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:
FASB Update (an overview of selected accounting standards updates (ASUs) issued during the quarter)
Regulatory Update (an overview of selected updates, releases, rules and actions during the period that might impact financial information, operations and/or governance)
Other Developments (an overview of other developments, actions and projects of the FASB and/or other rulemaking organizations, as well as other financial reporting considerations)
On the Horizon (an overview of selected projects and exposure drafts of the FASB as well as activities of the EITF and the PCC)
Appendices
A – Important Implementation Dates:
B – Illustrative Disclosures for Recently Issued Accounting Pronouncements
C – Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) did not issue any Accounting Standards Updates (ASUs) or other significant guidance during the third quarter. A complete list of all ASUs issued or effective in 2024 is included in Appendix A.
On September 19, 2024, the U.S. House passed a legislative package that would create significant new materiality-based hurdles to Securities and Exchange Commission (SEC) disclosure rulemaking. H.R. 4790, the Prioritizing Economic Growth Over Woke Policies Act, passed the House on a near-party-line vote of 215 to 203. The House vote comes as GOP-led states, the oil-and-gas-industry, U.S. Chamber of Commerce, and others are suing to block the SEC’s risk disclosure rules in Release No. 33-11275, the Enhancement and Standardization of Climate-Related Disclosures for Investors, which mandates broad new public company climate risk and emissions reporting. Central to their argument against the rules is that the disclosures veer outside of strict financial materiality.
One provision of the bill would amend the Securities Act of 1933 and Securities Exchange Act of 1934 to require that, in a rulemaking regarding disclosure obligations of issuers, the SEC must expressly provide that an issuer is only required to disclose information in response to such disclosure obligations to the extent the issuer has determined that such information is material with respect to a voting or investment decision regarding the securities of such issuer. The text of the bill defines such information as material if there is a substantial likelihood that a reasonable investor would view the failure to disclose that information as having significantly altered the total mix of information made available to the investor. Another provision would require the SEC to list on its website “each mandate under the Federal securities laws and regulations that requires the disclosure of non-material information” along with an explanation of why it is required. The SEC would need to report to Congress every five years justifying each required disclosure on that list. The measure would also shield from private liability anyone failing to disclose non-material information. There are also measures in the bill that would set up a new Public Company Advisory Committee within the SEC, implement new restrictions on proxy firms, and make it easier for companies to exclude certain shareholder proposals, among other provisions.
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued two new rules in August aimed at preventing the misuse of the U.S. financial system for illicit activities, particularly in the residential real estate and investment advising sectors. The rules, part of the Biden-Harris administration’s broader strategy to combat corruption and illicit finance, are designed to enhance transparency and address vulnerabilities in the U.S. financial system.
The final residential real estate rule, set to take effect on December 1, 2025, requires reports and records on certain non-financed real estate transfers to legal entities and trusts. This rule doesn’t apply to transfers to individuals. The goal is to increase transparency and prevent illicit finance in the U.S. residential real estate sector, according to the main provisions. To do this, a “Real Estate Report” must be submitted for high-risk transactions, including details on the reporting person, property owner, beneficial owners, and transaction details. The reporting person can rely on information provided by others, as long as it is certified in writing.
The final investment adviser rule takes effect on January 1, 2026. It requires investment advisers to have programs to prevent money laundering and terrorism financing, report suspicious activities, and follow certain reporting and record-keeping rules. The goal is to stop bad actors from using investment advisers to launder money, finance terrorism, and engage in other illegal activities, according to the text of the provisions. The rule applies to certain investment advisers, including those registered with the SEC and those with offices outside the U.S. that operate in the U.S. or serve U.S. clients. It does not apply to state-registered advisers, foreign private advisers, or family offices. However, FinCEN will continue to monitor state-registered advisers for any signs of illicit finance activities and take steps to mitigate risks as needed, the department said.
The department identified investment advisers as a potential entry point for illicit proceeds associated with foreign corruption, fraud, and tax evasion, text of the rule states. Specifically, investment advisers have been linked to billions of dollars controlled by sanctioned entities, including Russian oligarchs, and have been used by foreign states to access technology and services with long-term national security implications. By addressing these risks, the rule might deter money laundering, terrorist financing, and other illicit financial activities through the investment adviser industry.
In an August brief, a coalition of 18 states (Arizona, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, Washington, and Wisconsin) and the District of Columbia supported the SEC against a consolidated challenge to the SEC’s climate rules at the 8th U.S. Circuit Court of Appeals. The states framed the regulations as the product of investor demand, and pushed back against assertions by industry groups and Republican lawmakers that the requirements represent a sharp departure from the commission’s existing disclosure regime. The SEC’s rules set out new disclosures on climate-related risks with a material impact on a registrant’s business and prescribe certain emissions reporting and attestation requirements for larger public companies, among other requirements.
The SEC has voluntarily stayed the rules in light of the consolidated lawsuits from the U.S. Chamber of Commerce, oil and gas industry, GOP-led states, and others. Those critics have attacked the disclosure requirements as not material; compelling corporate speech in violation of the First Amendment; and outside of the SEC’s statutory authority. They have leaned heavily on the “major questions doctrine” invoked in the Supreme Court’s 2022 ruling in West Virginia v. EPA, under which agencies need clear authorization from Congress in order to implement regulations with major economic or political significance.
However, the intervenor states argued the major questions doctrine has no place in this case, where the SEC is applying its long-established authority. They framed the concerns over the rules as a standard administrative law dispute not rising to the level of an extraordinary political or economic controversy. Further, should the major questions doctrine apply, the securities laws empower the SEC to implement disclosures necessary or appropriate in the public interest or to protect investors, which provides the necessary clear statement from Congress under West Virginia v. EPA, the states argued.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has enlisted financial institutions to help spread the word about its new beneficial ownership information (BOI) reporting rule for legal entities. FinCEN issued a notice explaining the differences between the beneficial ownership reporting rule in effect since January and a separate measure requiring banks to collect ownership information as part of their customer due diligence (CDD) obligations. Both rules attempt to combat the abuse of shell companies by illicit actors. The notice included a chart outlining how the rules differ. FinCEN also asked financial institutions to help clarity the reporting regime by sharing the notice with customers.
The BOI reporting requirement in effect since January, originated with the Corporate Transparency Act (CTA) and the Anti-Money Laundering Act of 2020. It requires certain entities, including many small businesses, to inform FinCEN about the individuals who ultimately own or control them. Separately, FinCEN's 2018 due diligence rule required many financial institutions to collect beneficial ownership information from certain customers seeking to open accounts. The notice issued by FinCEN on in July, seeks to clarify the two rules and alleviate confusion on the part of legal entities that feel they are making unnecessary, duplicate BOI disclosures. The two BOI reporting requirements are not identical. For example, financial institutions must collect social security numbers from beneficial owners, but social security numbers are not required to be reported to FinCEN. On the other hand, an individual filing a report to FinCEN must certify that the report is "true, correct and complete," while reports made to banks require no such certification.
In a proposal submitted to the FASB on September 10, 2024, accounting professors Daniel Tinkelman and Qianhua Ling from the City University of New York contend that the Last-In, First-Out (LIFO) inventory accounting method lacks representational faithfulness, transparency, and relevance in today’s market. The researchers point to a significant decline in LIFO adoption, with only 184 public companies currently using the method, down from over 1,300 in 1982. They propose three alternatives: disallowing LIFO for financial statement reporting, aligning U.S. standards with International Financial Reporting Standards (IFRS), or implementing enhanced disclosure requirements to boost transparency if LIFO is retained. The proposed disclosures would provide users with critical information, including the difference between the book value of LIFO inventories and their current value, the impact of LIFO liquidations on reported income, and deferred tax assets or liabilities arising from different uses of LIFO for books and taxes.
LIFO, which assumes that the most recently acquired items are sold first, can result in higher cost of goods sold (COGS) and lower taxable income during periods of rising prices, providing significant tax deferrals. However, it can also lead to inventory values on the balance sheet that are significantly lower than current costs, creating a “LIFO reserve.” Historically, LIFO has been a permissible inventory accounting method in the U.S. for decades, primarily because it was seen as a way to match recent costs against sales and avoid recognizing holding gains on inventory. However, its usage has significantly declined due to lower tax advantages, reduced inflation, and evolving accounting standards that emphasize representational faithfulness and comparability.
The International Accounting Standards Board (IASB) eliminated LIFO in 2003, citing its lack of representational faithfulness and the distortions it can cause in financial statements.
A former senior U.S. bank supervisor has highlighted the lack of transparency in banks’ reporting of credit risk transfer (CRT) transactions, citing significant concerns over the accuracy of regulatory capitalization ratios. Jill Cetina, currently an Executive Professor of Finance at Texas A&M University, has urged the FASB to ensure that CRT transactions are fully reflected in banks’ financial statements under U.S. GAAP. In a recent letter to the board, Cetina emphasized that the current regulatory framework does not require banks to disclose CRT transactions or their impact on regulatory capital ratios, creating substantial data gaps.
To make CRT transactions more transparent, Cetina has proposed several measures. First, she suggests that the FASB require banks to fully disclose CRT transactions in their financial statements, including the impact on regulatory capital ratios. Second, she recommends that bank management make representations and warranties about significant risk transfer when reporting their Common Equity Tier 1 (CET1) ratio, a key metric that measures a bank’s core equity capital compared to its risk-weighted assets (RWA). Finally, she proposes that the FASB review recent bank CRT transactions and associated financial reporting to ensure full reflection in financial statements.
However, others argue that CRTs are a legitimate risk-management tool, and any additional transparency disclosures should be governed by global banking standards, not U.S. accounting rules. Some suggest that any disclosures for commercial transparency regarding the use of CRTs should come from the Basel Committee on Banking Supervision (BCBS) through Basel III+ rules (a set of global regulatory standards for banking), and not the U.S.-based FASB.
The following selected FASB exposure drafts and projects are outstanding as of September 30, 2024.
In December 2023, the FASB issued a proposed ASU, Induced Conversions of Convertible Debt Instruments. Under current GAAP, the guidance on induced conversions applies only to conversions that include the issuance of all equity securities issuable pursuant to the conversion privileges provided in the terms of the debt at issuance. Current GAAP does not address how this criterion should be applied to the settlement of a convertible debt instrument that does not require the issuance of equity securities upon conversion (for example, a convertible debt instrument with a cash conversion feature). Current GAAP also does not address how the incorporation, elimination, or modification of a volume-weighted average price (VWAP) formula interacts with this criterion, including when such changes could result in the holder receiving less cash or fewer shares than if the debt instrument had been settled in accordance with the conversion privileges provided in the terms of the instrument (prior to any changes to induce conversion). Stakeholders also have noted that, under current GAAP, it is not clear whether the guidance on induced conversions can be applied to the settlement of a convertible debt instrument that is not currently convertible.
The amendments in this proposed ASU would clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. Under the proposed amendments, to account for a settlement of a convertible debt instrument as an induced conversion, an inducement offer would be required to provide the debt holder with, at a minimum, the consideration (in form and amount) issuable under the conversion privileges provided in the terms of the instrument. An entity would assess whether this criterion is satisfied as of the date the inducement offer is accepted by the holder. If, when applying this criterion, the convertible debt instrument had been modified (without being deemed substantially different) within the one-year period leading up to the offer acceptance date, then an entity would compare the terms provided in the inducement offer with the terms that existed one year before the offer acceptance date. The proposed amendments would not change the other existing criteria that are required to be satisfied to account for a settlement transaction as an induced conversion.
The amendments in this proposed ASU also would make additional clarifications to assist stakeholders in applying the proposed guidance. Under the proposed amendments, the incorporation, elimination, or modification of a VWAP formula would not automatically cause a settlement to be accounted for as an extinguishment; an entity would instead assess whether the form and amount of conversion consideration are preserved (that is, provided for in the inducement offer) using the fair value of an entity’s shares as of the offer acceptance date.
The amendments in this proposed ASU also would clarify that the induced conversion guidance can be applied to a convertible debt instrument that is not currently convertible so long as it had a substantive conversion feature as of its issuance date and is within scope of the guidance in Subtopic 470-20.
In July 2023, the FASB issued a proposed ASU intended to provide investors with more decision-useful information about a public business entity’s expenses. The proposed ASU would require public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. It would provide investors with more detailed information about the types of expenses, including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income statement expense captions such as cost of sales; selling, general and administrative; and research and development.
The amendments in the proposed ASU do not change or remove existing expense disclosure requirements and do not change requirements for presentation of expenses on the face of the income statement. They would require public companies to include certain existing disclosures in the same tabular format disclosure as the other disaggregation requirements set forth in the proposed ASU.
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 September 2023, the GASB issued a proposal that would establish requirements for certain types of capital assets to be disclosed separately for purposes of note disclosures. The Exposure Draft, Disclosure and Classification of Certain Capital Assets, also establishes requirements for certain capital assets to be classified as “held for sale.”
Recent GASB pronouncements like Statements 87, Leases, and 96, Subscription-Based Information Technology Arrangements, created certain types of capital assets, which are described as “right-to-use” assets. In light of the recognition of those new types of assets, the Board decided to consider the effectiveness of existing classifications. Based on input from financial statement users during the research phase of the project, GASB is proposing that certain types of assets be disclosed separately in the note disclosures about capital assets. This would allow users to make informed decisions about these and to evaluate accountability.
The Exposure Draft addresses four types of capital assets that would be disclosed separately in the notes:
Capital assets held for sale is a new classification proposed in this Exposure Draft. Under the proposal, a capital asset would be classified as held for sale if: (a) the government has decided to sell the asset, and (b) it is probable the sale will be finalized within a year of the financial statement date. Capital assets classified as held for sale would be evaluated each reporting period.
The Emerging Issues Task Force (EIFT) did not meet during the third quarter. The next scheduled meeting is Monday, October 28.
The Private Company Council (PCC) met on Tuesday, September 24, 2024. Below is a summary of topics discussed by PCC and FASB members at the meeting:
The next PCC meeting is scheduled for Monday, December 16, and Tuesday, December 17, 2024.
The following table contains significant implementation dates and deadlines for standards issued by the FASB and others.
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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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 September 30, 2024, the FASB has issued the following Accounting Standard Updates during the year.
FASB has issued the following Accounting Standard Updates during the year.
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.
