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Bridging the GAAP: April 2023

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

FASB Standard Setter Updates

Financial Accounting Standards Board

FASB Issues New Guidance for Common Control Leases

On March 27, 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which requires all companies to amortize leasehold improvements associated with common control leases over the asset’s useful life to the common control group regardless of the lease term. It also allows private and certain not-for-profit entities to use the written terms and conditions of an agreement to account for common control leases without further assessing the legal enforceability of those terms.

The new guidance is effective for all entities in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance.

Expanded Use of Proportional Amortization Method

On March 29, 2023, the FASB issued an ASU No. 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which allows entities to apply the proportional amortization method to all tax equity investments that meet the conditions in ASC Topic 323-740. The ASU comes in response to stakeholders’ assertions that tax equity investors in economically similar investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits should have the same election as low-income-housing tax credit (LIHTC) investors to account for those investments using the proportional amortization method. In their view, the proportional amortization method provides investors, lenders, creditors, and other allocators of capital with a better understanding of the returns from such investments than the equity method or ASC Topic 321. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit). The guidance also clarifies the conditions to use the proportional amortization method and the application of the method. The ASU also eliminates certain guidance for LIHTC investments that aren’t accounted for using the proportional amortization method to align the accounting for these investments with that for investments in other types of tax credit equity structures that are not accounted for using the proportional amortization method.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

March 29, 2023 Meeting

Key items discussed by the FASB are summarized below:

1. Conceptual Framework: The Reporting Entity: The Board deliberated substantive issues that were identified by comment letter respondents to the Exposure Draft. The Board directed the staff to draft a final Chapter 2, The Reporting Entity, of Concepts Statement No. 8 for vote by written ballot.
2. Disaggregation—Income Statement Expenses: The Board continued its initial deliberations by discussing clarifications of the decisions at its January 11, 2023 meeting, interim reporting, application to private companies, transition, cost-benefit considerations, and comment period. The Board directed the staff to draft a proposed ASU for vote by written ballot.
3. Financial Instruments—Credit Losses (Topic 326)—Acquired Financial Assets: The Board directed the staff to draft a proposed ASU that would require a modified retrospective transition whereby an entity would apply the proposed guidance retrospectively to the date it adopted the credit losses guidance in ASU 2016-13.

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

April 5, 2023 Meeting

The Board discussed its project on Joint venture (JV) formations and directed the staff to draft a proposed ASU for vote by written ballot. Key provisions of the proposed ASU draft include the following:

1. JVs will be required to recognize and initially measure its assets and liabilities at fair value using a new basis of accounting upon formation.
2. JVs may apply the measurement period guidance in accordance with Subtopic 805-10 to the amounts recognized upon formation and, accordingly, require measurement period disclosures. Those disclosures would include the reasons why the initial accounting is incomplete and any adjustments made within the measurement period as a result of the initial accounting being incomplete.
3. The Board decided that the amendments will be effective for all JV formations with a formation date on or after January 1, 2025. The Board also decided that early adoption is permitted.
4. JVs formed after the effective date are required to apply the amendments prospectively. Additionally, the Board decided that a JV formed before the effective date can elect to apply the amendments retrospectively if it has sufficient information available to do so.

The Board also discussed its project on Accounting for and disclosure of software costs. The Board discussed two potential recognition and measurement models:

1. The initial development cost model (the “single model”) would require an entity to capitalize all direct software 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.
2. The “dual model” would require an entity to account for certain software costs as an expense as incurred model and other software costs under the initial development cost model.

The Board directed the staff to continue its research on the single model and provided direction for elements of that model. The Board decided not to research the dual model further.

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

Upcoming FASB Meetings

The FASB is tentatively scheduled to meet as follows:

For more information, see the FASB’s calendar.

COSO Standard Setter Updates

Committee of Sponsoring Organizations of the Treadway Commission

On March 30, 2023, the COSO issued supplemental guidance and insights to its 2013 Internal Control – Integrated Framework (the “COSO Framework”) in the areas of sustainability and ESG. The new report, Achieving Sound Internal Control over Sustainability Reporting (ICSR): Building Trust and Confidence in Sustainable Business Information through the COSO Internal Control-Integrated Framework, emphasizes the importance of collaboration across organizations and its partners with expertise in the many dimensions of ESG with people experienced in internal controls over financial reporting to develop systems of effective internal control.

The new guidance describes how the existing COSO Framework can help organizations create, develop, enhance, and assess the effectiveness of internal control over sustainability information, which can be more qualitative, longer-term, and judgment-based than traditional financial information. The guidance also includes points of focus along with practical insights and application of the guidance.

IASB Standard Setter Updates

International Accounting Standards Board

The IASB released a project summary and feedback statement for its project Disclosure Initiative – Targeted Standards-level Review of Disclosures, proposing guidance for itself to use when developing and drafting disclosure requirements in IFRS Standards. The project summary and feedback statement provides an overview of the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach, summarizes the feedback and sets out the IASB’s response to that feedback.

IFAC / IAASB Standard Setter Updates

International Federation of Accountants / International Auditing and Assurance Standards Board

The IFRIC Update summarizes the issues discussed at the IFRS Interpretations Committee’s March 2023 meeting.

ISSB Standard Setter Updates

International Sustainability Standards Board

On April 4, 2023, the ISSB announced that it will provide transition relief, requiring only climate-related disclosures in the first year of reporting under its two standards. The relief will enable companies to focus initial efforts on ensuring they meet investor information needs around climate change. The full package of reliefs means, for the first-year application of the ISSB Standards, entities will not need to:

• provide disclosures about sustainability-related risks and opportunities beyond climate-related information;
• provide annual sustainability-related disclosures at the same time as the related financial statements;
• provide comparative information;
• disclose Scope 3 greenhouse gas emissions; and
• use the Green House Gas Protocol to measure emissions, if they are currently using a different approach.

In May 2023, the ISSB expects to consult on its future priorities for standard-setting and will be seeking feedback on four projects—biodiversity, human capital, human rights and integration in reporting—to further understand standard-setting priorities.

TNFD Standard Setter Updates

Taskforce on Nature-related Financial Disclosures

The TNFD released its fourth draft of its risk management and disclosure framework for public comment. The framework addresses reporting and acting on evolving nature-related risks and opportunities and is based on the same four pillars as the Taskforce on Climate-related Financial Disclosures: Governance, Strategy, Risk Management, and Metrics and Targets. The European Sustainability Reporting Standards, among others, leverage TNFD concepts for purposes of reporting on biodiversity impacts.

Comments are due by June 1, 2023. The TNFD expects to issue its final framework in September 2023.

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