What the FASB is working on this summer
The Financial Accounting Standards Board (FASB) is currently looking at two key topics related to private companies and one for not-for-profits. Here is a summary of what the FASB is currently working on:
Private Company Council (PCC) activities
The PCC works closely with the FASB to identify and help develop issues related to privately held companies. The PCC meets formally each quarter and has been busy working on several topics, but two are notable:.
- A practical expedient to measure grant-date fair value of equity-classified share-based awards: The main issue raised is determining the current price of an entity’s underlying share when valuing traditional stock options is the most difficult input to option pricing models for private companies. The proposed solution involves providing a practical expedient in determining the current price of an entity’s underlying share by aligning the measurement methodology with IRC Section 409A. The proposal was issued in August of 2020 and the board is currently evaluating comment letter received.
- Profits interests and their interrelationship with partnership accounting: While profits interests are economically similar to stock options or stock appreciation rights, they vary in each partnership and typically provide an interest in a partnership’s future profits and are often compensation for services. Profits interests are not currently defined in GAAP, and thus the PCC is working on providing guidance for accounting for profits interests.
Not-for-profit entities are currently understanding and implementing the key aspects of ASU 2020-07 (Sept 2020), Not-for-Profit Entities (Topic 958), Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. This ASU is intended to increase transparency about contributed nonfinancial assets received by not-for-profits, including transparency on how those assets are used and how they are valued.
The ASU is effective for annual periods beginning after June 15, 2021; however, retrospective application is required, so if entities present comparative financial statements for a June 30, 2022 year-end, they will have to apply the concepts of this standard to the June 30, 2021 presentation. The FASB has a recorded webinar that discusses this standard in detail and it can be accessed here.
Upcoming effective dates of other standards
Some standards, such as revenue, are probably in full force; however, there are many other key standards coming soon. Here is a summary of current and upcoming effective dates of key standards:
*or FYs beginning in that calendar year
Note: Public NFPs are those with publicly-traded debt (conduit or direct)
The effective dates for all ASUs can be found on the FASB website here.
Current agenda items
The FASB typically groups projects into two categories, “broad” and “narrow.” Broad topics typically are projects that they are taking on and anticipate taking a longer period of time to complete, whereas narrow projects are more specific and commonly convert to new accounting standards in a shorter period of time.
Currently the FASB has one broad topic on its agenda — identifiable intangible assets and subsequent account for goodwill — that we will be watching it closely in the future. The topic is also on the agenda of the International Accounting Standards Board (IASB), and the FASB is working closely with the IASB and will likely align US GAAP with international standards.
Also, from time to time, the FASB will remove projects from their agenda based on research and comments. Recently, the FASB decided to remove two projects: simplifying the balance sheet classification of debt and consolidation of a not-for-profit by a for-profit sponsor. In both cases, the FASB came to the conclusion that the existing GAAP and guidance is considered adequate for these topics.
Narrow topics on the agenda include:
- Discount rate for leases that are not public business entities
- Recognition and measurement of revenue contracts with customers topic 805
- Disclosure requirements surrounding inventory, income taxes, and interim reporting
- Disclosures by business entities about government assistance
- Disclosure of supplier finance programs involving trade payables
- Post-implementation review projects for Credit Losses, Leases, and Revenue Recognition (more to come on these later in this article)
A full technical agenda can be found here.
Current issues in financial reporting related to COVID-19
The FASB continues to add to and update its webpage focused on the FASB Response to COVID-19. Topics and resources include staff Q&A documents, educational papers, board meeting recaps, media advisories and links to the technical inquiry service and to the implementation portal. Specifically, the FASB has addressed these issues:
- Triggering Event Evaluation Alternative (see Wipfli’s previous article here)
- Debt modifications, specifically borrower considerations
- Impact of COVID-19 on leases
- SBA Paycheck Protection Program Accounting (see Wipfli’s previous article here)
- Higher education and healthcare provider emergency relief funds (see Wipfli’s previous article this article if you may have received these funds and are in need of a single audit)
Agenda consultation research project
The FASB is going through a process to develop a guide for adding items to the agenda topic. In a nutshell, the FASB does not want to continue to have meeting and evaluate potential changes to GAAP “just because.” Going forward, the FASB will have a formal evaluation process for determining if an item qualifies to be added to the agenda. The process will involve evaluating the topic on three main criteria:
- There is an identifiable and sufficiently pervasive need to improve GAAP
- There are technically feasible solutions, and the perceived benefits of those solutions are likely to justify the expected costs of change
- The issue has an identifiable scope
To demonstrate a “pervasive need,” the FASB has identified three primary factors:
- To supply investors (providers of capital) with better, more useful information that will directly influence their decisions and behavior
- To remove unnecessary cost and complexity from the system
- To maintain and improve the codification
This research to support this project has been going on for almost a year, and FASB staff has performed outreach of over 200 FASB stakeholders to date, including advisory groups, multiple investor groups, and multiple external preparer/practitioner groups. The common themes that these groups expressed were around reducing unnecessary complexity in the standards while providing greater disaggregation of financial statement information to readers.
Recently, the FASB formally adopted a Post-Implementation Review (PIR) process for certain standards. This process is to determine whether an important standard achieves its state objective in a cost-effective manner. Fourteen PIRs have been completed to date. The PIRs that are currently in process are Topic 606 (Revenue), Topic 842 (Leases), and Topic 326 (Credit Leases).
For more information on these and other topics, please contact your Wipfli relationship executive.