As you are likely painfully aware, the Financial Accounting Standards Board (FASB) has been very busy over the last several years. Financial statement preparers have been implementing many new standards, the two most notable being Revenue Recognition (ASC 606) and Leases (ASC 842).
So, what’s next? For those who like to stay informed on what the FASB is working on and the potential impacts on your financial statements in the future, here is a summary of the current projects on the FASB agenda:
Current Expected Credit Losses (CECL)
While this standard is effective now for interim statements issued in 2023 and for private companies with year-ends after December 15, 2023, the FASB continues to analyze the impact of CECL through its post-implementation project.
This standard comes from Accounting Standards Update (ASU) 2016-13 and introduces the CECL methodology for estimating allowances for credit losses. It’s intended purpose is to improve recognition and measurement of credit losses and reduce the number of impairment models used for financial assets.
Under the prior model (incurred loss model), companies could simply look at current conditions and historical loss experience to estimate their allowances for financial assets. Under CECL, companies must also factor in expected future losses. Thus, CECL is a more forward-looking allowance estimate.
CECL applies to any financial statements that have loans receivable, trade receivables, debt securities held to maturity, contract assets and other off-balance-sheet credit exposure, regardless of industry.
Accounting for and disclosure of crypto assets
The FASB intends to improve the accounting for and disclosure of certain crypto assets. Currently, most users with crypto assets are accounting for them similarly to indefinite-lived intangible assets.
In March 2023, the FASB published a proposed ASU which will provide investors greater transparency into the fair value of crypto assets held and changes in those holdings. This will provide investors with decision-useful information and reflect the underlying economics of those assets. After receiving comment letters, the FASB will redeliberate and potentially issue a new standard late in 2023.
Accounting for and disclosure of software costs
This project is in the early stages and intends to modernize the accounting for software costs and enhance the transparency about an entity’s software costs. This effort started in 2021 in response to feedback received in the June 2021 Invitation to Comment. In June 2022, the board discussed the pre-agenda research, including stakeholder feedback, and decided to add the project to its technical agenda.
During the April 2023 board meeting, the FASB directed the staff to pursue a new, single model that would apply to all software development costs, whether for internal-use software or software licensed to others. The single model would require an entity to capitalize all direct software development costs from the point at which it is probable that the software project will be completed and the software will be used to perform the function intended until the software is substantially complete and ready for its intended use.
Additionally, maintenance will continue to be expensed, but enhancements would be capitalized. Enhancements are considered to add significant new utility, significantly improve efficiency or significantly extend the useful life. There is no timeline for this standard but look for more information later in 2023 regarding an update.
Joint venture formations
During an April 2023 meeting, the board made several decisions regarding accounting for joint venture formations and has directed the staff to draft an ASU for vote by written ballot. Key concepts that the standard will address include formation date, initial recognition of assets and liabilities at fair value, recognizing goodwill, capitalizing contributed tangible and intangible research and development assets, determining what is part of the joint venture formation, scope exemptions and disclosures. The board is expected to issue a final ASU in 2023 that will be effective for joint venture formations with a formation date on or after January 1, 2025.
In May 2023, the board issued a proposed ASU intended to improve accounting for profits interest awards by adding examples into GAAP to help entities determine whether profits interests and similar awards should be accounted for as share-based payment arrangements within the scope of ASC 718. The board is accepting comment letters through July 10, 2023, at which time the board will redeliberate next steps.
Disaggregation of income statement expenses
Over the last several years, the board has heard from investors that they would like to see more detail of expenses on the financial statements. The board is currently working on an exposure draft, but it has gone on record saying that this standard would only be applicable to public business entities. Some notable areas that will require expansion in the new standard include employee compensation, depreciation, amortization and inventory expense.
Improvements to income tax disclosures
The objective of this project is to improve the transparency and decision-usefulness of income tax disclosures, most notably for companies that have multi-jurisdictional operations and related tax risks. Investors would like to:
- Understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuring risks and opportunities.
- Assess income tax information that affects cash flow forecasts and capital allocation decisions.
- Identify potential opportunities to increase future cash flows.
The board is currently reviewing comment letters received and will be redeliberating on this topic during the summer of 2023.
Other notable research projects
The board has identified several projects that are in the research phase, meaning that they are likely still at least a year away from issuing any sort of guidance on these topics. Still, it’s important to be aware of what they are deliberating on. These topics include:
- Accounting for and disclosure of intangibles
- Accounting for commodities
- Accounting for government grants
- Consolidation for business entities
- Definition of a derivative
- Financial key performance indicators for business entities
- Statement of cash flows
How Wipfli can help
Companies are always growing and evolving and it’s important to recognize that GAAP continues to change. Wipfli professionals can help you stay on top of the standards affecting your financial statements. We can help you navigate the complexities of GAAP compliance and ensure the accuracy of your statements.
Contact us for support with your accounting and auditing needs.
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