Accounting Standard Updates — What’s on the Horizon?
In the past few years, the Financial Accounting Standards Board (FASB) has released a few key updates to US generally accepted accounting principles (GAAP). Although some of these updates have been in the works for years — like the lease accounting standard under ASC 842 — entities are still getting used to the new reporting requirements and tweaking their financials to be fully compliant. We’ve compiled a list of accounting standard updates that have recently gone into effect or will go into effect in 2024. Is your business ready?
Troubled Debt Restructurings (ASU 2022-02)
Beginning in 2023, the accounting for troubled debt restructurings (TDRs) changed.
When creditors make loan concessions for borrowers who are experiencing severe financial difficulties (i.e., TDRs), they have to determine whether that concession should be accounted for as a new financing receivable or as a [much simpler] debt modification. Under prior rules, this determination was made by following the guidance under ASC 310-40, but beginning in 2023, ASC 310-20 applies.
What does this mean?
Under ASC 310-20 (specifically, ASC 310-20-35-9 through 35-11), a debt modification will only be considered a new financing receivable if the restructured terms are at least as favorable to the creditor as they would be in agreements with other customers who have similar collection risks. By their very nature, TDRs are less favorable to the creditor than what they would offer on the open market. This means that under ASC 310-20, TDRs are almost always going to be classified as debt modifications, which simplifies reporting requirements for creditors.
Disclosure of Supplier Finance Program Obligations (ASU 2022-04)
Supplier finance programs (SFPs) are arrangements where a buyer makes a purchase on credit from a supplier but initiates payments to those suppliers using an intermediary. These “finance provider” intermediaries are becoming more and more common, and the SEC believes that SFPs may allow entities to hide short-term debt and distort cash flows.
ASU 2022-04 does not require buyers to change how they calculate purchases made using SFPs, but beginning in 2023, buyers must provide additional information about those programs in the disclosures to their financial statements.
Accounting for Convertible Instruments (ASU 2020-06)
In August 2020, the FASB issued ASU 2020-06 to help simplify the accounting for convertible instruments. These new guidelines went into effect in 2022 for most public entities and will go into effect in 2024 for all others.
Under current GAAP guidance, the FASB provides five distinct methods for reporting convertible instruments. Beginning in 2024, the FASB has removed two of these five methods: (1) the cash conversion feature method and (2) the beneficial conversion feature method. By removing these two reporting methods, the ASU simplifies the process, allowing even more convertible debt instruments to be reported as a single liability or a single equity instrument. Under prior guidance, these features were required to be reported separately from the rest of the contract.
In exchange for more simplified reporting, the ASU requires entities with convertible instruments to provide additional information in the disclosures so that users of the financial statements can determine how these instruments will affect future cash flows.
Accounting for Contract Assets and Liabilities in Business Combinations (ASU 2021-08)
When an entity acquires another business, they often take over that entity’s in-process contracts. Generally, the acquiring entity will book a contract asset for the portions that are completed, and a contract liability for obligations still to come. ASU 2021-08 dictates that these contract assets and contract liabilities should be accounted for under ASC 606.
ASC 606, which you may think of as the “new revenue recognition model,” provides a five-step model for how businesses should recognize revenues from contracts with customers. These five steps are:
- Identify the contract.
- Identify the separate performance obligations.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when each performance obligation is satisfied.
ASU 2021-08 makes it easier for acquiring entities to measure and recognize these contract assets and liabilities under ASC 606. It offers two of the following practical expedients:
- The acquiring entity can aggregate the effects of all contract modifications that occurred before the business combination when:
- Identifying the satisfied and unsatisfied performance obligations;
- Determining the transaction price; and/or
- Allocating the transaction price.
- When allocating the transaction price, an acquiring entity can choose to determine the standalone selling price of each performance obligation at the acquisition date rather than at the contract’s inception
These two options become available for public entities in 2023 and for all other entities in 2024.
Current Expected Credit Losses (CECL) (ASU 2016-13)
The FASB released ASU 2016-13 in an effort to reduce the complexity of US GAAP when reporting credit impairments of debt instruments.
Under the prior impairment model, you should only recognize credit losses when a probable loss has been incurred. Under the new CECL model, you should begin recognizing credit losses over the life of the contractual term based on expected credit losses. Although this generally accelerates loss recognition — which is often a good thing — the new expectations require more upfront leg work. To estimate credit losses, you’ll need to consider current conditions, your historical experience, the types and quality of receivables you have, and so much more. The reporting changes were so extensive that the implementation deadline for public entities was delayed three times. But in 2023, both public and private entities should be compliant with this new recognition model.
For more information about Accounting Standard Updates, reach out to us today.
Kelli is a Vice President in the Assurance Services Group and is a key member of the firm’s not-for-profit core group. She oversees the firm’s quality control procedures. In addition, she is involved with researching technical accounting issues.