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Bridging the GAAP: February 2023

Centri’s Bridging the GAAP newsletter highlights this month’s news, developments and emerging issues in the accounting and financial reporting world.

Standard Setter Updates

FASB, PCAOB, IASB, IFAC/IAASB

FASB – Accounting for and Disclosure of Crypto Assets

February 1, 2023 Meeting – The FASB discussed clarifications to the scope, transition, costs and benefits of the decisions reached, and the comment period for its Accounting for and Disclosure of Crypto Assets project. The Board decided to clarify that the scope of this project would exclude crypto assets created or issued by the reporting entity or their related parties. The Board also observed that the scope criteria would exclude assets commonly referred to as “wrapped tokens” and that the Board’s basis for conclusions should clearly emphasize that point. The Board decided to not modify the scope criteria to specify that the distributed ledger or blockchain must be public. The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. Additionally, the Board decided to expose the proposed Update for public comment for 75 days.

The Board discussed various issues identified as part of its Hedge accounting: Phase 2 research project and tentatively decided to add to the scope of its Codification Improvements: Hedge Accounting project two issues related to the effect of the LIBOR cessation.

For more information, see the FASB’s Tentative Board Decisions.

FASB – Leases: Common Control Arrangements

February 15, 2023 Meeting – The FASB redeliberated the proposed Accounting Standards Update, Leases (Topic 842): Common Control Arrangements, and made the following decisions:

• Issue #1: For arrangements between entities under common control, the FASB affirmed its decision to provide entities within the scope of paragraph 842-10-65-1(b) (i.e., entities that are not public business entities, not-for-profit bond obligors, or employee benefit plans that file or furnish financial statements with or to the SEC) with a practical expedient to use written terms and conditions for:
• Determining whether a lease exists and, if so,
• The classification and accounting for that lease.

The practical expedient may be applied on an arrangement-by-arrangement basis.

The Board decided that an entity adopting the practical expedient concurrently with its adoption of Topic 842 is required to adopt the practical expedient using the same transition method elected to adopt Topic 842. For all other entities, the Board decided that the practical expedient may be adopted either:

• Prospectively to all leases that commence on or after the date of adoption of the final Accounting Standards Update
• Retrospectively to the beginning of the earliest period presented in accordance with Topic 842 for all arrangements that exist at the date of adoption of the final Update. The amendments would not be applicable for arrangements no longer in place at the date of adoption of the final Update.
• Issue #2: The Board decided that, for all entities, leasehold improvements associated with common control leases are required to be:
• Amortized by the lessee over the useful life of the leasehold improvements to the common control group as long as the lessee controls the use of the underlying asset through a lease. If the lessor obtained the underlying asset through a lease with another entity not within the same common control group, the amortization period may not exceed the lease term associated with the lessor’s lease with the other entity.
  • Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities), if, and when, the lessee no longer controls the use of the underlying asset.

The Board affirmed its decision that those leasehold improvements are subject to the impairment guidance in paragraph 360-10-40-4.

The Board decided that an entity adopting the amendments concurrently with its adoption of Topic 842 may follow the same transition method elected to adopt Topic 842 or another acceptable prospective transition as outlined.

The Board decided that the amendments will be effective for all entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal periods. The Board also decided that early adoption is permitted.

For more information, see the FASB’s Tentative Board Decisions. To learn how Centri can help, read our article on ASC Topic 842.

Public Company Accounting Oversight Board

The PCAOB recently issued its Spotlight, Additional Insights on the Remediation Process, that discusses how the inspection staff evaluates a firm’s remedial efforts to address PCAOB criticisms of its system of quality control. Key factors are repeat or persistent quality control deficiencies, the importance of root cause analysis, subsequent inspection results and the timing of remediation.

International Accounting Standards Board

In December 2021, the Organization for Economic Co-operation and Development (OECD) published its Pillar Two model rules (refer to “Other Updates” for further discussion). In January 2023, the IASB released its Exposure Draft, International Tax Reform – Pillar Two Model Rules, with proposed amendments to IAS 12. The proposed amendments look to provide temporary relief from accounting for deferred taxes arising from the imminent implementation of the Pillar Two model rules, responding to stakeholders’ concerns about the potential implications of these rules for the accounting for income tax in financial statements. Comments on the Exposure Draft are due by March 10, 2023.

International Federation of Accountants / International Auditing and Assurance Standards Board (IFAC / IAASB)

On January 24, 2023, the IAASB released its Exposure Draft for a group audit-specific section of the proposed auditing standard for less complex entities. The proposed section, Part 10, Audits of Group Financial Statements, is intended to form part of the proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE) when finalized. Comments are due by May 2, 2023.

Other Standard Setter Updates

The OECD Inclusive Framework on Base Erosion and Profit Shifting addresses the tax challenges arising from the digitalization of the global economy and aims to address the issue of determining that profits are taxed where economic activities take place and value is created.

To that end, the OECD released Pillar Two Global Anti-Base Erosion (GloBE) model rules for a global minimum tax that is intended to apply to multinational enterprises (MNEs) with revenue greater than EUR 750 million in their consolidated financial statements. The GloBE rules must be implemented by individual jurisdictions before they can take effect and therefore require local legislation to be enacted. OECD member countries are expected to enact GloBE rules in 2023 with an effective date of January 1, 2024.

On December 31, 2022, South Korea became the first country to enact legislation to implement a global minimum tax to align with the GloBE rules. The law will be effective for fiscal years beginning on or after January 1, 2024.

At the FASB meeting on February 1, 2023, the staff responded to a technical inquiry about whether an entity should record deferred taxes for the GloBE minimum tax by recognizing GloBE-specific deferred taxes or remeasuring existing deferred taxes at the GloBE minimum tax rate. The staff stated it believes the GloBE minimum tax, as illustrated in the inquiry, is an alternative minimum tax as discussed in ASC 740. Accordingly, deferred tax assets and liabilities would not be recognized or adjusted for the estimated future effects of the minimum tax. The FASB staff believes ASC 740-10-30-10 and 30-12 and ASC 740-10-55-31 and 55-32 support this conclusion. The GloBE minimum tax should be viewed as a separate but parallel tax system that is imposed to make sure certain taxpayers pay at least a minimum amount of income tax.

MNEs need to monitor the developments related to the enactment of the GloBE rules in all of the jurisdictions where they operate either through wholly- or partially-owned subsidiaries, joint ventures, passthrough entities or permanent establishments. As individual countries will need to enact tax laws to implement the GloBE rules, entities will need to evaluate provisions of laws enacted in each jurisdiction to determine whether they are consistent with the OECD’s model rules in order to apply the accounting indicated by the view of the FASB staff.

A summary of the FASB staff’s discussion can be found here.

Upcoming FASB Meetings

The FASB is tentatively scheduled to meet as follows:

For more information, see the FASB’s calendar.

Regulatory Updates

Security and Exchange Commission

Guidance on Clawbacks of Incentive-Based Compensation

In October 2022, the SEC adopted the final “clawback rule” mandated by the Dodd-Frank Act requiring public companies to establish and enforce policies to recover excess incentive compensation from executive officers if amounts were based on material misstatements in financial reports. The rule directs national securities exchanges and associations to establish listing standards requiring listed companies to claw back incentive-based compensation received by current and former executives during the three years preceding an accounting restatement. The listing standards have to be effective by November 28, 2023, and registrants have to adopt clawback polices within 60 days of the applicable listing standard’s effective date. On January 27, 2023, the SEC staff published updates to its compliance and disclosure interpretations (C&DIs) of its Exchange Act Rules, related to the incentive-based compensation clawback rule to:

• Clarify that until registrants are required to have a compensation recovery policy under the applicable exchange listing standard, registrants are not expected to comply with the rule’s disclosure requirements, including the use of the new check boxes added to the cover pages of the Forms 10-K, 20‑F and 40-F;
• Emphasize that the rule is intended to apply broadly to incentive-based compensation and registrants are expected to claw back amounts contributed to any sort of plan (other than a tax-qualified retirement plan) and any related accrued earnings based on erroneously awarded incentive-based compensation; and
• Explain which persons are considered named executive officers for purposes of clawback disclosures in the Forms 20-F and 40-F.

Updates to the SEC’s Financial Reporting Manual

The SEC’s Division of Corporation Finance (DCF) updated its Financial Reporting Manual to, among other things:

• Incorporate amendments to Rules 3-10 and 3-16 and new rules 13-01 and 13-02 of Regulation S-X, including related interpretive guidance;
• Add guidance to clarify the transition for Accounting Standards Update 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, upon filing a registration statement in the year of adoption;
• Update the emerging growth company revenue threshold to reflect the latest inflation adjustment; and
• Remove outdated information (e.g., guidance on the adoption of ASC 606) and update contact information to facilitate communications with the DCF’s Office of the Chief Accountant.

Rikki Williams

Senior Director | CPA

Rikki is a Senior Director at Centri Business Consulting. He has more than 16 years of public and private accounting experience. View Rikki Williams's Full Bio