After a period of relative inactivity, standard setters have issued four new standards. The Financial Accounting Standards Board (FASB) has issued Accounting Standard Update (ASU) 2023-03 through ASU 2023-06. However, three of the four ASUs pertain to SEC guidance contained in the Codification and there were no new standards issued by the Government Accounting Standards Board (GASB) this quarter. The latest issue of the Rundown features a summary of the new standards issued during the third quarter of 2023. For summaries of the standards issued continue reading. In addition, we’ve got a comprehensive listing of all standards newly effective for calendar year-end December 31, 2023, for public business entities, private entities and for December 31st year-end governments. Lastly, we’ve included some additional practice insights we’ve gained assisting clients with CECL implementation.
Third Quarter 2023 Newly Issued Standards
Amendments to SEC Paragraphs Pursuant to:
- Staff Accounting Bulletin No. 120
- Staff Announcement at the March 24, 2022 EITF Meeting
This Update amends certain Codification guidance specific to SEC filers. Although the ASU itself does not contain new guidance, many readers might have missed the underlying changes contained in the two releases that underpin the ASU. A summary of those changes follows:
Staff Accounting Bulletin No. 120
Staff Accounting Bulletin (SAB) 120 provided accounting and disclosure guidance for “spring-loaded awards.” Spring-loaded awards are share-based compensation awards granted shortly before an entity announces favorable information (e.g., better-than-expected earnings, a new customer contract, etc.). Share-based compensation awards are initially measured at their grant-date fair value. The most common valuation technique to estimate the grant-date fair value is the Black-Scholes-Merton (BSM) model. This option-pricing model requires various inputs, including the current fair value and expected volatility of the shares underlying the option.
According to SAB 120, entities should consider whether observable market prices (e.g., closing price per Yahoo Finance) need to be adjusted when inputting the current fair value and expected volatility (e.g., whether the observable market prices do not reflect certain material nonpublic information known to the entity but unavailable to the public). These adjustments require judgment and entities should consider, among other things, the following:
- If the share-based award is entered into in contemplation of, or shortly before, the entity plans to release material nonpublic information;
- If the planned release of material nonpublic information is expected to result in a material increase in the observable share price;
- If the share-based award is non-routine in nature (e.g., the entity historically issues awards in January, but is now issuing awards prior to a press release in June).
Without adjusting the current price and volatility inputs, an entity would understate the grant-date fair value of its share-based awards and related compensation expense.
Furthermore, the SEC expects entities to disclose, at a minimum, the following:
- How the entity determines the current price of shares underlying share options for purposes of determining the grant-date fair value
- The accounting policy related to how it determines when an adjustment to the closing price is required
- How it determines the amount of the adjustment
- Any significant assumptions used to determine the adjustment
- The characteristics of spring-loaded options if different from an entity’s normal share-based payments
Staff Announcement at the March 24, 2022 EITF Meeting
The SEC staff rescinded certain SEC guidance contained in the Codification as a result of ASU 2018-07 and ASU 2016-09.
Prior to ASU 2018-07, accounting for share-based payments to nonemployees was under ASC 505-50, Equity-based Payments to Nonemployees. After ASU 2018-07, accounting for share-based payments to nonemployees is under ASC 718, Compensation-Stock Compensation. As a practical matter, this meant:
- Under ASC 505-50, the measurement date of awards to nonemployees changed from the earlier of the “performance commitment date” or the date at which the counterparty performance was complete. The “performance commitment date” was defined as the date on which it became probable that the counterparty (nonemployee) would perform because of “sufficiently large disincentives for nonperformance.” Loss of an award was not considered a “sufficiently large disincentive” and as a result, many awards to nonemployees were not measured until the good was delivered or services were complete. Now, under ASC 718, the measurement date is the date on which there is a mutual understanding of the key terms of the award.
- Under ASC 505-50, performance-based awards to nonemployees used to be measured at their “lowest aggregate fair value.” This resulted in scenarios in which the lowest aggregate fair value was zero and no cost was recognized until the performance conditions were achieved, even if the performance conditions were probable of being met. Now, under ASC 718, an award should be measured at the grant date fair value and recognized if the performance conditions are probable of being met.
- Under ASC 505-50, once the good or service was delivered by a nonemployee, the classification of the award was subject to general GAAP (e.g., ASC 480, 815, etc.). This resulted in the need to reassess classification of nonemployee awards upon vesting. Now, under ASC 718, classification does not need to be reassessed unless the award is modified.
Prior to ASU 2016-09, one of the requirements for an award to qualify for equity classification was that an entity could not partially settle the award in cash more than the employer’s minimum statutory withholding requirements. After ASU 2016-09, The threshold to qualify for equity classification permitted withholding up to the maximum statutory tax rates. The SEC staff’s view is that equity-classified share-based awards with employees are not subject to Accounting Series Release (ASR) No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks” solely due to a provision in the instrument designed to satisfy the employer’s statutory withholding requirements.
Effective Dates: The standard itself did not provide any new guidance so there is no transition or effective date associated with it.
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121
Staff Accounting Bulletin (SAB) 121 expressed the SEC staff’s views regarding the accounting for obligations to safeguard crypto-assets that an entity holds for its platform users as follows:
- As long as an entity is responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the SEC staff believes that an entity should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users and the liability should be measured at fair value at each reporting date. In addition, it would be appropriate for an entity to recognize an indemnification asset at the same time that it recognizes the safeguarding liability, also measured at fair value at each reporting date.
- The notes to the financial statements should include a clear disclosure of the nature and amount of crypto-assets that an entity is responsible for holding for its platform users, with separate disclosure for each significant crypto-asset, and the vulnerabilities the entity has due to any concentration in such activities. In addition, because the crypto-asset safeguarding liabilities and the corresponding assets are measured at fair value, the entity is required to include disclosures regarding fair value measurements. Furthermore, the accounting for the liabilities and corresponding assets should be described in the footnotes. When providing these disclosures, an entity should consider disclosure about who (e.g., the company, its agent, or another third party) holds the cryptographic key information, maintains the internal recordkeeping of those assets, and is obligated to secure the assets and protect them from loss or theft.
Effective Dates: The standard itself did not provide any new guidance so there is no transition or effective date associated with it.
Business Combinations— Joint Venture Formations (Subtopic 805-60)
The amendments in this Update address the accounting for contributions made to a joint venture (JV) upon formation in a JV’s separate financial statements. Prior to this ASU generally accepted accounting principles (GAAP) did not provide authoritative guidance on how a JV should recognize and initially measure assets contributed and liabilities assumed upon formation. As a result, there was diversity in practice. Some JVs initially measured the net assets contributed at fair value, while others initially measured the net assets contributed at the contributors’ carrying amounts. After this ASU, a JV should recognize and initially measure its assets and liabilities contributed to it at fair value, with exceptions to fair value measurements that are consistent with those in the business combinations guidance. The JV formation date is the date on which an entity initially meets the definition of a joint venture. The amendments require that a JV measure its total net assets upon formation as the fair value of 100% of the fair value of the JV’s equity, not the sum of the fair values of the individual assets and liabilities contributed. Thus, this could result in goodwill being recognized. The amendment also requires specific disclosures regarding the nature and financial effect of the joint venture’s formation. The amendments did not change the accounting by a joint venture for contributions received after its formation.
Effective Dates and Transition Method: Effective prospectively for all joint venture formations formed on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025, may elect to apply the amendments retrospectively. Early adoption is permitted, either prospectively or retrospectively, in any period for which financial statements have not yet been issued.
Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative
The amendments in this Update modify various SEC disclosure and presentation requirements as follows:
| Codification Subtopic | Amendments |
| 230-10 Statement of Cash Flows | If material cash flows associated with gains or losses from derivative instruments is presented in the statement of cash flows, then the filer should disclose their accounting policy for such instruments. |
| 250-10 Accounting Changes and Error Corrections | If there has been a change in a reporting entity, then the entity should disclose any material prior period adjustments and the effect of the adjustment on beginning retained earnings in the period the change has occurred, even if an interim period.
A change in a reporting entity is a change that results in financial statements that, in effect, are those of a different reporting entity and is limited mainly to:
Neither a business combination accounted for under ASC 805 nor the consolidation of a variable interest entity (VIE) pursuant to ASC 810 is considered a change in reporting entity. |
| 260-10 Earnings Per Share | If an entity reports diluted earnings-per-share (EPS), then for each dilutive security the entity should disclose the methods used to compute the effect on dilutive EPS, including during interim periods. |
| 440-10 Commitments | Requires disclosure of assets mortgaged, pledged, or otherwise subject to lien and the obligations collateralized. |
| 470-10 Debt | Requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings. |
| 505-10 Equity | Requires entities that issue preferred stock to disclose involuntary liquidation preferences if other than par or stated value. |
The amendments also include certain industry-specific disclosure requirements for entities that engage in: Transfers and servicing, oil and gas extractions, investment companies, and real estate investment trusts (REITs).
Effective Dates and Transition Method: Effective prospectively on the date each individual amendment is effectively removed from Regulation S-X or Regulation S-K. If by June 30, 2027, the SEC has not removed the respective requirement from Regulation S-X or Regulation S-K, then the respective amendment will not become effective.
List of Newly Effective Standards
Calendar Year-End Public Companies
The following ASUs are effective for public companies for calendar year 2023:
- ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
- ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
- ASU 2018-12: Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
- ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses
- ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
- ASU 2019-05: Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief
- ASU 2019-09: Financial Services—Insurance (Topic 944): Effective Date
- ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses
- ASU 2020-03: Codification Improvements to Financial Instruments
- ASU 2020-11: Financial Services—Insurance (Topic 944): Effective Date and Early Application
- ASU 2021-01: Reference Rate Reform (Topic 848): Scope
- ASU 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
- ASU 2022-01: Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method
- ASU 2022-02: Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
- ASU 2022-04: Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations
- ASU 2022-05: Financial Services—Insurance (Topic 944): Transition for Sold Contracts
- ASU 2022-06: Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
Calendar Year-End Private Companies
The following ASUs are effective for private companies for calendar year 2023:
- ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
- ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
- ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses
- ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
- ASU 2019-05: Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief
- ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses
- ASU 2020-03: Codification Improvements to Financial Instruments
- ASU 2021-01: Reference Rate Reform (Topic 848): Scope
- ASU 2022-02: Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
- ASU 2022-04: Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations
- ASU 2022-06: Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
Calendar Year-End Governmental Entities
The following GASB standards are effective for governmental entities with December 31st year ends:
- GASB Statement 96: Subscription-Based Information Technology Arrangements
- GASB Statement 94: Public-Private and Public-Public Partnerships and Availability Payment Arrangements
Practice Insight for CECL Adoption
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(Current Expected Credit Loss or CECL)
For private entities and SRCs, prior to the adoption of CECL, impairment of financial instruments was recognized once a loss became probable (i.e., “incurred credit losses”). For example, a loan receivable becomes significantly overdue. CECL eliminates the probable recognition threshold and requires an estimate of the expected losses over the life of the financial instrument to be recorded at the time the instrument is initially recorded. CECL also states that an entity shall not rely solely on the past to estimate losses. An entity shall consider if historical information should be adjusted to reflect current conditions and forward-looking data such as expected GDP, unemployment rates, property values, commodity values or other factors that are associated with credit losses for that type of financial instrument. In addition, CECL requires an entity to evaluate financial assets that share similar risks on a collective basis, rather than individually.
PRACTICE INSIGHTS:
Don’t forget to compute the impact on beginning retained earnings
CECL is effective for non-public business entities (including SRCs) for fiscal years beginning after December 15, 2022, using a modified retrospective approach. For calendar year-end entities, this means:
- They will need to compute their allowance (e.g., Trade AR allowance) under CECL’s expected credit loss model at year-end 2023 and at year-end 2022.
- If material, the change to the December 31, 2022 allowance should be recognized through a cumulative effect adjustment to retained earnings.
This transition approach means assessing the current conditions and reasonable and supportable forecasts for two periods in the year of adoption, not just one.
