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Bridging The GAAP: 2023 Year in Review

This special edition of Centri’s Bridging the GAAP newsletter highlights the year in review for the accounting and financial reporting world. 

FASB Standard Setter Updates

Financial Accounting Standards Board

FASB Issues ASU 2023-05

To reduce diversity in practice and provide decision-useful information to a joint venture’s investors, the FASB issued final guidance in Accounting Standards Update (ASU) No. 2023-05, which requires certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most of their assets and liabilities at fair value. The guidance is largely consistent with accounting for business combinations, although there are some specific exceptions. The ASU does not amend the definition of a joint venture or change the accounting by the investors in the joint venture.

ISSB Standard Setter Updates

International Sustainability Standards Board

On June 26, 2023, the ISSB issued its first two IFRS Sustainability Disclosure Standards: (1) IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and (2) IFRS S2 Climate-related Disclosures. IFRS S1 sets out general requirements for the content and presentation of an entity’s sustainability-related financial disclosures, while IFRS S2 requires an entity to provide information about its exposure to climate-related risks and opportunities. The standards are effective for annual reporting periods beginning on or after January 1, 2024. However, they would need to be adopted by authorities in local jurisdictions before compliance would be mandatory in any jurisdiction.

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.

SEC Regulatory Updates

Security and Exchange Commission

SEC Cybersecurity Rules

On June 26, 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The SEC also adopted rules requiring foreign private issuers to make comparable disclosures. The new rules:

• Require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident’s nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant;
• Add Regulation S-K Item 106, which will require registrants to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, as well as the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents; and
• Require comparable disclosures by foreign private issuers on Form 6-K for material cybersecurity incidents and on Form 20-F for cybersecurity risk management, strategy, and governance.

The Form 10-K and Form 20-F disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023. The Form 8-K and Form 6-K disclosures will be due beginning December 18, 2023. Smaller reporting companies will have an additional 180 days before they must begin providing the Form 8-K disclosure. 

Approved Listing Standards for Clawback Policies

The SEC approved listing standards proposed by the New York Stock Exchange (NYSE) and Nasdaq that require listed companies to recover or “claw back” incentive-based compensation erroneously received by current and former executive officers in the event of a required accounting restatement. The NYSE and Nasdaq were required to establish these listing standards under the SEC’s clawback rules adopted in October 2022. The standards became effective on October 2, 2023, and registrants listed on those exchanges were required to adopt compliant clawback policies by December 1, 2023.

Adoption of New Private Fund Advisor Rules

The SEC adopted new rules under the Investment Advisers Act of 1940 that require SEC-registered private fund advisers (other than as it relates to securitized asset funds) to:

• Provide investors with quarterly statements detailing information regarding private fund performance, fees and expenses;
• Obtain an annual audit for each advised private fund and distribute audited financial statements to current investors within 120 days of each fund’s fiscal year end; and
• Obtain a fairness or valuation opinion in connection with an adviser-led secondary transaction.

The new rules also prohibit all private fund advisers from:

• Engaging in certain activities and practices, unless disclosures are made to investors, and, in some cases, investor consent is received; and
• Providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment, unless disclosed to current and prospective investors.

The rules require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing beginning 60 days after publication in the Federal Register.

The quarterly statement and audit rules will be required 18 months from the date of publication in the Federal Register. The adviser-led secondaries, restricted activities and preferential treatment rules will require compliance 12 months after the date of publication in the Federal Register for advisers with $1.5 billion or more in private funds assets under management and 18 months for advisers with less than $1.5 billion in private funds assets.

New Guidance on Pay vs. Performance Published

Pay versus performance (PvP) rules require disclosure of the relationship between executive compensation and financial performance for the five most recently completed fiscal years in proxy and information statements that are required to include executive compensation disclosures. The SEC published new compliance and disclosure interpretations (C&DIs) on the PvP rules to clarify the following, among other things:

• For purposes of the PvP disclosures, market conditions should be considered in determining whether the vesting conditions of share-based awards have been met (i.e., registrants must include in executive compensation actually paid any change in fair value of awards subject to market conditions until the market conditions are satisfied.)
• To calculate executive compensation actually paid, registrants may use a different valuation technique than the one they used to determine the grant‑date fair value of share-based payments in their US GAAP financial statements, if the other technique provides a better estimate of fair value after the grant date and is permitted under US GAAP.

Amendments to Beneficial Ownership Reporting

The SEC adopted amendments to beneficial ownership reporting requirements for investors that own more than 5% of a covered class of equity securities. The amendments:

• Shorten reporting timelines for investors required to file on Schedule 13D such that initial reporting of the acquisition of a beneficial ownership will now be required in 5 business days (shortened from the current requirement of 10 calendar days), with any material changes to that ownership to be reported through an amendment within 2 business days of the material change; and
• Change the filing timelines for qualified institutional investors and other exempt investors eligible to use Schedule 13G.

The new requirements for Schedule 13D will become effective 90 days after the final rules are published in the Federal Register. Compliance with the new Schedule 13G timelines will be required beginning on September 30, 2024.

CL Regulatory Updates

California Legislature

The California Legislature approved two climate disclosure bills which will set the stage for climate reporting in the United States. If the bills are not vetoed by California Governor Gavin Newsom prior to October 14, 2023, they will become law and over 10,000 US companies, including both public and private companies as well as subsidiaries of non-US headquartered companies, would be subject to climate disclosure requirements in the near term, with reporting beginning in 2026 on 2025 information. The California State Senate (California Senate) Climate Accountability Package includes bills that would require (1) greenhouse gas (GHG) emissions reporting in compliance with the Greenhouse Gas Protocol (GHG Protocol) and (2) climate-related financial risk reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Both the GHG Protocol and TCFD requirements should be familiar to companies given their reference in the Securities and Exchange Commission’s climate disclosure proposal, the European Sustainability Reporting Standards (ESRS), and IFRS Sustainability Disclosure Standards. The number of entities in scope of these bills, however, would go well beyond that of the SEC’s climate disclosure proposal because the requirements would apply to both public and private companies that meet certain revenue thresholds and that are “doing business” in California.

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