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The Business Lawyer

Summer 2024 | Volume 79, Issue 3

Accounting Developments 2023

Accounting Developments 2023
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Abstract

In 2023, the Financial Accounting Standards Board (the “FASB”) issued nine Accounting Standards Updates (“ASUs”) to its Accounting Standards Codification (“ASC” or the “Codification”) compared with six ASUs in 2022. This section examines the nine ASUs.

Accounting Standards Updates

In 2023, the Financial Accounting Standards Board (the “FASB”) issued nine Accounting Standards Updates (“ASUs”) to its Accounting Standards Codification (“ASC” or the “Codification”) compared with six ASUs in 2022. The ASUs made improvements with respect to leases under common control arrangements, investments in tax credit structures, joint venture contributions, segment reporting, crypto assets, income taxes, and other Codification amendments in response to the SEC’s Disclosure Update and Simplification Initiative to give effect to SEC staff pronouncements. The following discussion summarizes the ASUs issued by the FASB in 2023.

1. Update 2023-1—Leases (Topic 842): Common Control Arrangements (“ASU 2023-1”)

On March 27, 2023, the FASB issued ASU 2023-1 in order to address leases under common control arrangements. ASU 2023-1 provides a practical expedient for certain entities to determine whether a lease exists by using the written terms and conditions of a common control leasing arrangement (and, if a lease exists, to use such terms and conditions to determine the classification of the lease). This practical expedient will apply for private companies, not-for-profit entities that are not conduit bond obligors, and employee benefit plans that do not file or furnish financial statements with the SEC.

Prior to the issuance of ASU 2023-1, all entities were required to classify the arrangement between entities under common control on the same basis as an arrangement between unrelated parties, which would require analysis of legally enforceable terms and conditions. It was difficult to determine the legally enforceable terms and conditions when the common owner could amend the terms and conditions at will or choose not to enforce them.

Additionally, ASU 2023-1 modifies the accounting for leasehold improvements for all entities for leases under common control, providing that, as long as the lessee maintains control of the leased assets, the improvements should be amortized over the economic life of the improvements. If the lessee no longer controls the use of the asset, then the asset should be accounted for as a transfer between the commonly controlled entities through an adjustment to equity.

Prior to the issuance of ASU 2023-1, leasehold improvements were all recognized by the lessee to be amortized over the shorter of the remaining lease term and the useful life of the improvements. A criticism of this universal treatment was that, for leases under common control, amortizing the leasehold improvements over a period shorter than the economic life of the asset might not accurately account for the economics of the transaction, especially for shorter-term leases.

The guidance for the foregoing amendments took effect on leases under common control arrangements for fiscal years beginning after December 15, 2023, including interim periods within such fiscal years. Early adoption was permitted for both interim and annual statements.

2. Update 2023-02—Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a Consensus of the Emerging Issues Task Force (“ASU 2023-02”)

On March 29, 2023, the Emerging Issues Task Force (“EITF”), a FASB advisory group, issued ASU 2023-02 to address accounting for investments in tax credit structures. ASU 2023-02 permits reporting entities to account for all tax equity investments using the proportional amortization method as long as certain requirements are met. Prior to the issuance of ASU 2023-02, the use of the proportional amortization method was limited to investments in low-income-housing tax credit structures. The cost or equity method was typically used for investments in other tax credit structures.

Under ASU 2023-02, the proportional amortization method may be used if: (i) the income tax credits allocable to the investor will probably be available; (ii) the investor is unable to exercise significant influence over the project’s operating and financial policies; (iii) substantially all of the projected benefits are from income tax credits and other income tax benefits; (iv) the investor’s projected yield is positive based on cash flows from the tax credits and other benefits; and (v) the investor’s liability is limited to its investment and the investor is a limited liability investor for both legal and tax purposes. ASU 2023-02 provides a list of disclosures that must be made when an entity has elected to use the proportional amortization method.

ASU 2023-02 applies to reports of public entities for fiscal years beginning after December 15, 2023, including interim periods within such fiscal years. For other entities, ASU 2023-02 will apply to their reports for fiscal years beginning after December 15, 2024, including interim periods within such years. Early adoption is permitted for all entities.

3. Update 2023-03—Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505) and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock (“ASU 2023-03”)

On July 19, 2023, the FASB issued ASU 2023-3 to amend certain provisions in the Codification to give effect to certain SEC staff pronouncements. Specifically, ASU 2023-03 amends Topic 220 and Subtopic 480-10 to reflect Staff Accounting Bulletin No. 120 regarding the estimation of the fair value of share-based payment transactions. Additionally, ASU 2023-03 amends ASC 480 and ASC 505 to reflect the March 24, 2022 SEC Staff Announcement at the EITF meeting. Finally, ASU 2023-03 amends Topic 220 to reflect SEC Staff Accounting Bulletin Topic 6.B, “Accounting Series Release No. 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 became effective immediately upon issuance.

4. Update 2023-04—Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121 (“ASU 2023-04”)

On August 3, 2023, the FASB issued ASU 2023-04, which amends Topic 405 to give effect to SEC Staff Accounting Bulletin No. 121 on safeguarding crypto assets. ASU 2023-04 became effective immediately upon issuance.

5. Update 2023-05—Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement (“ASU 2023-05”)

On August 23, 2023, the FASB issued ASU 2023-05 to address the accounting for contributions to a joint venture at formation. Prior to the issuance of ASU 2023-05, contributions to joint ventures at formation could be accounted for using the carrying amounts of the venturer who contributed those assets or using the fair market value of the contributed assets. ASU 2023-05 is intended to: (i) improve the quality of information in joint venture financial statements for investors and (ii) reduce diversity in practice. This amendment seeks to accomplish those goals by requiring a joint venture to apply a new basis of accounting upon formation.

ASU 2023-05 adds new Subtopic 805-60 that sets forth “guidance on the accounting and reporting for the formation of a joint venture … in a joint venture’s separate financial statements.” Under the new guidance, the formation of a joint venture must be treated as the formation of a new reporting entity without an accounting acquirer. As of the date on which an entity meets the definition of a joint venture, the entity is required to measure its identifiable net assets and goodwill. This initial measurement of the entity’s total net assets must be equal to the fair value of 100 percent of the entity’s equity. The entity must also provide relevant disclosures to explain the nature and financial effect of the joint venture formation.

The amendments under this update apply to all joint venture formations with a formation date on or after January 1, 2025. Joint ventures formed prior to this date are permitted, but not required, to apply the amendments retrospectively, and early adoption is permitted for any period in which financial statements have not yet been issued.

6. Update 2023-06—Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”)

On October 9, 2023, the FASB issued ASU 2023-06 to modify the disclosure or presentation requirements in various subtopics of the Codification in response to the SEC’s August 2018 issuance of revised disclosure requirements. The amendments in this update are intended to “align the requirements in the Codification with the SEC’s regulations” and to facilitate comparisons between entities subject to SEC disclosure with those that are not.

ASU 2023-06 implements fourteen of the twenty-seven disclosures referred to the FASB by the SEC in its 2018 rulemaking. The portions of the Codification modified as a result of the amendments include industry-specific subtopics, such as 932-235, 946-20, and 974-10, which address Extractive Activities, Financial Services Investment Companies, and Real Estate Investment Trusts, respectively, as well as subtopics with more general application, such as 230-10 regarding the statement of cash flows and 250-10 regarding accounting changes and error corrections.

For entities already subject to the SEC’s disclosure requirements or entities required to provide financial statements to the SEC in connection with the issuance and sale of securities, the effective date for each amendment is the effective date of the SEC’s removal of the corresponding disclosure from Regulation S-X or Regulation S-K, with early adoption prohibited. For all other entities, the amendments will be effective two years later.

7. Update 2023-07—Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”)

On November 27, 2023, the FASB issued ASU 2023-07 “to improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses.” The amendments in this update revise the segment reporting standard to require disclosure to investors of information regarding the chief operating decision maker (“CODM”), including segment-level metrics regularly used by the CODM.

The amended segment reporting standards require, in addition to other requirements, that companies:

  • Disclose, on an annual and interim basis, significant segment expenses that are both regularly provided to the CODM and taken into account in calculating a reported measure of segment profit or loss for such reportable segment;
  • Disclose, on an annual and interim basis, an amount for “other segment items” by reportable segment and a qualitative description of its composition, where “other segment items” are those adjustments between segment revenue and a reported measure of segment profit or loss for that segment that are not otherwise disclosed as a significant segment expense under the preceding bullet point;
  • Disclose the title and position of the individual, or the name of the group or committee, identified as the CODM and provide an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources;
  • Provide “all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods”; and
  • Provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280 even if there is only one reportable segment.

The ASU 2023-07 amendments cover segment reporting for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption of ASU 2023-07 amendments is permitted.

8. Update 2023-08—Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”)

On December 13, 2023, the FASB issued ASU 2023-08 in response to stakeholder feedback to improve the accounting for, and disclosure of, crypto assets. Previously, there was no accounting standard specifically dealing with crypto assets, such as Bitcoin. In most cases, such assets were accounted for as indefinite-lived intangible assets using a historical-cost-less-impairment accounting model, under which only the decreases but not increases in the value of crypto assets are reflected in the financial statements, until the assets are sold. The update provides that crypto assets shall be accounted for based on changes in the fair value of the assets.

ASU 2023-08 adds Subtopic 350-60 to the Codification. The subtopic applies to subsequent measurement, presentation, and disclosure of crypto assets, but not to initial measurement, recognition, and derecognition of such assets, which are accounted for in accordance with other generally accepted accounting principles. The guidance applies to assets that: (i) meet the definition of “intangible assets” in the Codification; (ii) do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets; (iii) are created or reside on a distributed ledger based on blockchain or similar technology; (iv) are secured through cryptography; (v) are fungible; and (vi) are not created or issued by the reporting entity or its related parties. For each reporting period, crypto assets shall be measured at fair value in the statement of financial position, and gains and losses from the remeasurement of crypto assets shall be included in net income. The crypto assets shall be presented separately from other intangible assets in the respective financial statements. The subtopic also provides that, for interim and annual reporting periods, an entity shall disclose the following for each significant crypto asset holding: (i) name of the crypto asset; (ii) cost basis; (iii) fair value; and (iv) number of units held. The entity shall disclose aggregated cost bases and fair values for crypto asset holdings that are not individually significant. The entity must provide annually a reconciliation of activity from the opening to the closing balances of crypto assets.

The amendments under this update cover crypto-assets disclosures of all entities for fiscal years beginning after December 15, 2024, including interim periods within those years, with a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which the reporting entity adopts the amendments.

9. Update 2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”)

On December 14, 2023, the FASB issued ASU 2023-09 to enhance financial statement disclosures regarding income tax information. The FASB had previously considered changes to the disclosure requirements for income taxes on several occasions but had elected not to adopt any amendments to existing standards. In 2023, however, the FASB adopted ASU 2023-09 in response to continuing investor requests for more detailed income tax information that would better enable them to assess an entity’s global tax risk.

ASU 2023-09’s amendments to existing standards relate principally to rate reconciliations and income taxes paid. The objective of the amended rate reconciliation requirement is to enable users to understand the nature and magnitude of factors contributing to the difference between the reporting entity’s effective tax rate and its statutory tax rate. For each annual reporting period, a public business entity shall disclose a tabular reconciliation, using both percentages and reporting currency amounts that: (i) disclose specific categories in the rate reconciliation (including, among others, state and local tax and foreign tax effects), and (ii) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory tax rate). In certain circumstances, the additional information shall be disaggregated by jurisdiction. Entities other than public business entities are required to provide certain qualitative information but are not required to provide a numerical reconciliation. ASU 2023-09 also requires entities to disclose annually the following information about income taxes paid: (i) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes, and (ii) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid.

The amendments in ASU 2023-09 will cover income tax disclosures of public business entities for fiscal years beginning after December 15, 2024, and, for non-public business entities, for fiscal years beginning after December 15, 2025. Early adoption of the ASU 2023-09 amendments is permitted for financial statements that have not yet been issued; the amendments shall be applied prospectively to financial statements for fiscal years after the effective date and may be applied retrospectively to each period presented in the financial statements.