The Rundown: Third Quarter 2024 Guide

Newsletter

October 30, 2024

The Financial Accounting Standards Board (FASB) did not issue any new Accounting Standard Updates (ASUs) in the third quarter of 2024; however, we are expecting a number to be issued in the fourth quarter. The Government Accounting Standards Board (GASB) issued one new GASB Statement in the third quarter of 2024. The latest issue of the Rundown features a summary of the new standard issued. In addition, we share some recent practice insights that could save you from a restatement. These include insights over CECL presentation and disclosure misses, VIEs and the PCC VIE alternative, and equity method goodwill and basis differences. For summaries of standards issued in previous periods view our previous rundowns here. In addition, we’ve got a comprehensive listing of all standards newly effective for calendar year-end December 31, 2024 broken down by public business entities, private entities and for June 30^th and December 31^st year-end governments. Lastly, we have a list of those standards you should consider early adopting.

Third Quarter 2024 Newly Issued Standards

GASB Statement No. 104

Disclosure of Certain Capital Assets

Statement 104 requires the following types of capital assets to be disclosed separately in the capital asset footnote required by Statement 34:

Lease assets recognized under Statement 87 Leases
Intangible right-to-use assets recognized under Statement 94 Public-Private and Public-Public Partnerships and Availability Payment Arrangements
Subscription assets recognized under Statement No. 96, Subscription-Based Information Technology Arrangements

In addition, intangible assets other than the three types above should be disclosed separately by major class.

Statement 104 also requires additional disclosures for capital assets held for sale. A capital asset is considered held for sale if:

(a) the government has decided to pursue sale; and

(b) it’s probable that the sale will be finalized within one year of the financial statement date.

Statement 104 requires disclosure of:

(1) the ending balance of assets held for sale; and

(2) the carrying amount of debt for which the assets held for sale are pledged as collateral

The requirements of GASB 104 are effective for fiscal years beginning after June 15, 2025. Early adoption is encouraged.

Recent Practice Insights

CECL Update: Presentation and Disclosure

The Current Expected Credit Loss (CECL) standard was effective for private entities’ December 31, 2023 year-end financials. Throughout 2024 we’ve noticed that most entities were aware of the new requirements to estimate credit losses before amounts become past due and to consider not only historical information but also current conditions and “reasonable and supportable” forecasts when estimating their allowance. However, we’ve noted that many entities are not aware of the presentation and disclosure requirements. As a reminder, as it relates to trade receivables:

On the balance sheet, the allowance for credit losses shall be presented separately.
The footnotes shall include a roll forward of the allowance account, for example, beginning allowance, additions, write-offs, recoveries, and ending allowance.
The footnotes should, at a minimum, include a description of the entity’s allowance methodology that encompasses the phrases, “past events,” “current conditions” and “reasonable and supportable forecasts.”
ASC 326 requires an entity to provide information that allows users to understand the method and key assumptions used to develop their allowance estimate. For example, for trade receivables, an entity might disclose that they determine their allowance based on aging.

In addition, for those entities with financial assets within the scope of CECL besides trade receivables (e.g., long-term notes receivable) should carefully review the disclosure requirements. For example, we’ve seen many entities miss disclosing:

Their policy elections over accrued interest (e.g., whether to record an allowance or not).
Financial assets disaggregated by credit quality information. The objective is to provide the user with enough information so that the user can understand the credit risk inherent in the current portfolio and how that risk has changed over time. Common examples of this include disclosing balance by aging category or by internal risk score. If disaggregating by internal-risk score, then the entity must provide qualitative information about how those risk scores relate to likelihood of loss.
Public business entities (PBEs) are required to further disaggregate financial assets by year of origination (i.e. “vintage”) in addition to by credit quality information.
Those assets whose allowance is determined based on the fair value of their collateral (“collateral-dependent financial assets”).

*We’ve also noted a misunderstanding of the collateral-dependent financial asset measurement approach. It is not a free choice and can only be used if certain criteria are met (e.g., the borrower is experiencing financial difficulty and repayment is expected to be derived through the collateral).

If you have any questions about the application of CECL, including its presentation and disclosure requirements, please contact Cherry Bekaert and let us be Your Guide Forward.

Common Control, Variable Interest Entities (VIEs), and the Private Company Council (PCC) Alternative

Most private entities are aware of the PCC alternative, created by ASU 2018-17, that permits private entities to not apply VIE guidance to certain common control arrangements. However, many do not fully understand that this alternative is not a free choice. First, common control is not the same as common ownership. In order to apply the PCC alternative the two entities, the “reporting entity” (the entity assessing whether to consolidate) and the “legal entity” (the potential VIE that might be consolidated), must be under common control. Common ownership exists when two or more entities have the same shareholders but no one shareholder controls all the entities, whereas common control can be established by having a common single owner (e.g., a parent). Common control can also be established by having a group of common owners that control more than 50% of both entities; however, that group must:

Be immediate family members; or
Have contemporaneously written evidence of an agreement to vote in concert.

We noted some entities misunderstand the difference between common control and common ownership and misapply the PCC VIE alternative causing restatements or considerable headache. VIE guidance is some of the most complicated and subjective guidance out there. If you find yourself having to apply VIE guidance and feel lost or overwhelmed, Cherry Bekaert has experience necessary and can help be Your Guide Forward.

Equity Method Goodwill and Basis Differences

Most entities understand the basics of equity method accounting. Whenever an investor entity has “significant influence” (generally 20% or more voting interest) over an investee, then the investor entity accounts for the investment under the equity method. This generally means that the investor records its share of the investee’s profits or losses. However, many entities do not understand common exceptions to this. For example, an investor should apply the acquisition method principles of ASC 805 Business Combinations when they make their equity method investment. This often creates goodwill and basis differences.

A four-step process should be performed:

Step 1) Investor determines the cost of its equity method investment.

Step 2) Investor allocates its cost to its share of the investee’s assets and liabilities, which may include assets and liabilities not recognized by the investee (just like in a business combination under ASC 805).

Step 3) Investor determines whether equity method goodwill exists.

Step 4) The investor identifies its basis differences. These are the differences between what the investor allocated in steps 2 and 3 and what’s recorded on the investee’s books.

Importantly, these basis differences noted in step 4 are used to record additional amortization and depreciation each period. For example, if an investor paid $10M for a 25% share of an investee’s net assets (i.e. implies fair value of investee is $40M) but the book value of the investee’s net assets was only $30M, then there is a $10M basis difference. If all of the basis difference was attributed to an intangible asset that is amortized over 10 years, then each year the investor would record it’s shares of the investee’s profit and loss and an additional $1M of amortization expense. The additional amortization expense is recorded in the same line item as the equity method investment account. For example:

Income Statement	Income/Loss in Equity Method Investee	$1,000,000
Balance Sheet	Equity Method Investment	$1,000,000

Naturally this might raise the question, “Should an investor obtain a valuation when it purchases an equity method investment?” The answer unfortunately is classically, “It depends.” A good first step is to compare the price paid by the investor to the proportional carrying value on the investee’s books. If the investor paid significantly more, then there is likely a basis difference. The next question is how should that basis difference be allocated? First it should be allocated to the identifiable assets and liabilities (just like an ASC 805 business combination). This requires two things: i) identifying any intangible assets that are unrecorded on the investee’s books; and 2) knowing the fair value of the recorded and unrecorded assets and liabilities on the investee’s books. Estimating fair values will likely be straightforward for some of the investee’s assets and liabilities (e.g., working capital accounts, Level 1 securities, etc.) but could be complex for others (e.g., long-lived assets and intangibles). Identifying any unrecorded intangibles and measuring the fair value of more complex items may require the investor to engage a third-party specialist.

Importantly, for private entities that have elected the PCC goodwill alternative, they can elect not to separately allocate the transaction price to certain intangible assets, such as customer-related intangible assets that cannot be sold or licensed and instead only recognize (and amortize) equity method goodwill.

One might ask, “What if I don’t have enough information to identify any unrecognized intangible or goodwill?” The investor should attempt to obtain this information from the equity method investee. Afterall, the investor supposedly has “significant influence” over the equity method investee. If, after diligently attempting to obtain the necessary information, the investor cannot obtain the necessary information, then that calls into question whether the investor truly has significant influence and should be applying the equity method approach.

There are many nuances to applying the equity method investment approach including impairment and its interaction with basis differences, changes in ownership, what happens when continued losses result in the equity method investment account having a zero carrying value, intra-entity profits, etc. Cherry Bekaert has experience necessary and can help be Your Guide Forward.

List of Newly Effective Standards

Calendar Year-end Public Companies

The following ASUs are effective for public companies for calendar year 2024:

Calendar Year-end Private Companies

The following ASUs are effective for private companies for calendar year 2024:

Governmental Entities

As a reminder, the following GASB is effective for governmental entities for the June 30, 2024 year-ends:

GASB Statement No. 100: Accounting Changes and Error Corrections—an amendment of GASB Statement No. 62

In addition to GASB statement No. 100, the following GASB is also effective for governmental entities for the upcoming December 31, 2024 year-ends:

GASB Statement No. 101: Compensated Absences

Standards Not Yet Effective***, But That You Should Consider Early Adopting

*Effective for SRCs. Previously effective for all other public entities.
**Amendment on rollforward information is effective for fiscal years beginning after December 15, 2023.
***Not yet effective for private entities

Connect With Us