2022 accounting standards updates: What you need to know

The Financial Accounting Standards Board (FASB) issued only four accounting standards updates (ASUs) in 2022, but with the steady implementation of ASC 606, ASC 842 and ASU 2016-13 (related to current expected credit loss), this is a welcome break for all stakeholders.

Still, there is plenty of relevant and important content in the 2022 updates. The following is a detailed summary about the updates and their effective dates:

ASU 2022-01: Derivatives and Hedging (Topic 815)

Fair Value Hedging—Portfolio Layer Method

The FASB issued ASU 2022-01 in March 2022 to address questions raised on a whether a single hedged layer could be designated or whether an entity could designate multiple hedged layers. This was in addition to questions regarding the last-of-layer method that was added by the FASB in Update 2017-12 as well as how to account for and disclose hedge basis adjustments.

The FASB believes this amendment will align an entity’s financial reporting more closely to its risk management activities and provide more clarity and consistency in financial reporting outcomes. Hedge accounting is optional within generally accepted accounting principles (GAAP), so there would be no impact to entities that have not elected to apply it.

Summary of amendments in ASU 2022-01

• The scope of Topic 815 was amended to allow nonprepayable financial assets to be included in a closed portfolio, hedged using the portfolio layer method, essentially permitting an entity to apply the same portfolio hedging to both prepayable and nonprepayable financial assets.
• Expands to allow multiple hedged layers to be designated for a single closed portfolio to further align hedge accounting with risk management strategies. An entity is permitted to designate new hedging relationships associated with the closed portfolio any time after the closed portfolio is established and designated in a portfolio layer method hedge. This gives an entity the flexibility to achieve hedge accounting using different types of derivatives and layering techniques that best align with their individual circumstances.
• Specifies that an entity hedging multiple amounts in a closed portfolio with a single amortizing-notional swap is executing a single-layer hedge, not hedges of multiple layers.
• An entity needs to maintain basis adjustments in an existing hedge on a closed portfolio basis and is required to immediately recognize and present the basis adjustment in interest income. Disclosure is required for the amount and circumstances that led to the breach. If other areas of GAAP require the disaggregated disclosure of the amortized cost basis of assets included in the closed portfolio, further disclosure is required for the total amount of the basis adjustments in existing hedges as a reconciling amount.
• When determining credit losses, an entity is prohibited from considering basis adjustments in an existing hedge.

Transition requirements within ASU 2022-01

Upon adoption, an entity may designate multiple hedged layers of a single closed portfolio solely on a prospective basis. All entities are required to apply the amendments related to hedge basis adjustments under the portfolio layer method, except for those related to disclosures, on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date.

Entities have the option to apply the amendments related to disclosures on a prospective basis from the initial application date or on a retrospective basis to each prior period presented after the date of adoption of the amendments in ASU 2017-12.

An entity may reclassify debt securities classified in the held-to-maturity category at the date of adoption to the available-for-sale category only if the entity applies portfolio layer method hedging to one or more closed portfolios that include those debt securities. The decision about which securities to reclassify must be made within 30 days after the date of adoption, and the securities must be included in one or more closed portfolios that are designated in a portfolio layer method hedge within that 30-day period.

ASU 2022-02: Financial Instruments – Credit Losses (Topic 326)

Troubled Debt Restructurings and Vintage Disclosures

The FASB issued ASU 2022-02 in March 2022, which eliminates troubled debt restructurings (TDR) reporting guidance under ASC 310-40 for institutions that have adopted ASU 2016-13. The new ASU also amends the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination.

ASU 2022-03 – Fair Value Measurement (Topic 820)

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

This update issued in June 2022 affects all entities with investments in equity securities measured at fair value that are subject to a contractual sale restriction. The amendments in ASU 2022-03 do not change the principles of fair value measurement. Instead, the amendments help to clarify the principles used when measuring the fair value of an equity security subject to a contractual sale restriction, reduce the diversity in practice whereby some entities use a discount when measuring fair value while others do not, and increase the comparability of financial information.

Under FASB ASC 820, consideration should be made as to the characteristics of an asset or liability, including a restriction on the sale of the asset or liability, when measuring the fair value of an asset or liability if a market participant would also take those characteristics into account. FASB ASC 820 was not clear as to what the unit of account was when measuring the fair value of an equity security of this type.

This ASU includes a clarification for the contractual restriction on the sale of an equity security, stating the contractual restriction is not considered part of the unit of account of the equity security. The contractual restriction is a characteristic of the entity holding the equity security, not the equity security itself, and should not be considered in measuring fair value of the equity security. This ASU also prohibits an entity from recognizing a contractual sale restriction as a separate unit of account.

There are also three new, required disclosures specific to equity securities subject to contractual sale restrictions in ASU 2022-03:

1. Balance sheet presentation of the fair value of equity securities subject to contractual sale restrictions
2. Disclosure of the nature and remaining duration of the restriction(s)
3. Disclosure of the circumstances that could cause a lapse in the restriction(s)

Transition requirements within ASU 2022-03

For all entities (excluding investment companies defined under Topic 946), the amendments should be applied prospectively. Any adjustments, as a result of adopting the amendments, should be recognized in earnings and disclosed on the adoption date.

An entity that qualifies as an investment company under Topic 946 would apply the amendments to an investment in an equity security subject to a contractual sale restriction that is executed or modified on or after the date of adoption. If an investment company has an equity security subject to a contractual sale restriction that was executed before the date of adoption, the investment company should continue to use the accounting policy applied before the adoption of the amendments to account for the equity security until the contractual restrictions expire or are modified. If an investment company was measuring the equity security by incorporating the effects of the restriction, it would continue to apply that accounting policy until the expiration or modification of the contractual restriction.

ASU 2022-04 – Liabilities – Supplier Finance Programs (Subtopic 405-50)

Disclosure of Supplier Finance Program Obligations

Supplier finance programs can take different forms depending on the arrangement. Often a buyer needs to purchase goods or services from a supplier on credit. To settle the liability to the supplier, a buyer may enter an arrangement with a finance provider or intermediary which provides a supplier with an option to receive payment before the invoice due date at a discounted amount or on the invoice due date for the full amount of the invoice. The supplier is paid by the finance provider or intermediary on the basis that the buyer has confirmed the invoice(s) are valid.

Currently, there are no explicit requirements under GAAP related to the transparancy of buyers’ use of supplier finance programs. The amendments of ASU 2022-04 aim to provide a financial statement user with additional qualitative and quantitative information regarding a buyers’ use of supplier finance programs. The amendments in this update do not impact the recognition, measurementor financial statement presentation of obligations covered by supplier finance programs. The amendments in this update also only apply to buyers.

Under the amendments of ASU 2022-04, all buyers with supplier finance programs related to the purchase of goods or services will need to disclose sufficient qualitative and quantitative information about its supplier finance program(s), allowing a financial statement user to understand:

• The program’s nature.
• Activity during the period.
• Changes from period to period.
• Potential magnitude.

For each annual reporting period, the buyer should disclose:

• Key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.
• For invoices the buyer has confirmed as valid to the finance provider or intermediary:
  • The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount).
  • A description of where those obligations are presented in the balance sheet.
  • A roll forward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.

For each interim reporting period, the buyer should disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider/intermediary as of the end of the interim period.

Transition requirements within ASU 2022-04

The amendments should be applied retrospectively to each period in which a balance sheet is presented, excluding the amendment on roll forward information which is applied prospectively.

During the fiscal year of adoption, the information on the key terms of the programs and the balance sheet presentation of the program obligations, which are annual disclosure requirements, should be disclosed in each interim period.

How Wipfli can help

If you have questions about these FASB ASU updates, Wipfli specialists are available to provide guidance. Contact us to connect.

Learn more about our audit and accounting services that keep your business in compliance and build confidence with clients and customers.

Sign up to receive additional content in your inbox, or continue reading on:

• Summarizing all 10 of the FASB’s 2021 Accounting Standards Updates
• ASC 842: Accounting for operating leases at transition
• What is a lease concession and how do I account for it?
• ASU 2021-07: Understanding new stock compensation standards