Bridging the GAAP: September 2023

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

The Pitfalls of “Hide-to-Maturity” Accounting

Centri’s Jaime Krug, Chief Quality Officer, and Rikki Williams, Director of Quality, are featured in a PICPA article: The Pitfalls of “Hide-to-Maturity” Accounting. The article discusses the debate over the accounting treatment of financial instruments, especially after Silicon Valley Bank’s (SVB) collapse in March 2023.

FASB Standard Setter Updates

Financial Accounting Standards Board

2023 Investor Outreach Report

The FASB issued its 2023 Investor Outreach Report. The report details the FASB’s investor outreach efforts, which included more than 400 investor interactions over the year ended June 30, 2023.

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.

New Chapter of Conceptual Framework on Recognition and Derecognition Issued

The FASB issued a new chapter (Chapter 5) of its Concepts Statement No. 8, Conceptual Framework for Financial Reporting, that provides recognition and derecognition criteria and guidance on when an item should be incorporated into and removed from financial statements. A financial statement item is to be recognized if it: (1) meets the definition of a financial statement element; (2) is measurable; and (3) can be depicted and measured with faithful representation. Derecognition occurs if any one of the recognition criteria is no longer met. The new chapter, like others in the Framework, includes concepts the Board uses to develop standards; there is no immediate change to GAAP.

August 30, 2023 Meeting

The FASB discussed its project on Improvements to income tax disclosures and directed the staff to draft an ASU. The Board decided that all entities should apply the amendments on a prospective basis, with a retrospective option.

The Board decided that the amendments will be effective for public business entities for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. The Board decided that the amendments will be effective for entities other than public business entities for fiscal years beginning after December 15, 2025, and interim periods within fiscal years beginning after December 15, 2026. The Board also decided that early adoption will be permitted.

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

September 6, 2023 Meeting

The FASB discussed its project on accounting for and disclosure of crypto assets and directed the staff to draft an ASU. The Board affirmed the proposed transition requirements, which would require that an entity make a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual period in which the guidance is adopted.

The Board decided that the final ASU should be effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years, for all entities. The Board also affirmed the proposed requirement to permit early adoption.

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

September 12, 2023 PCC Meeting

Members of the Private Company Council (PCC) and the FASB discussed the FASB’s projects on accounting for and disclosure of crypto assets and Improvements to income tax disclosures. They also discussed stock compensation disclosures, implementation issues related to leases and provided a summary of a meeting with the AICPA Private Companies Practice Section Technical Issues Committee.

For more information, see the PCC meeting materials.

September 14, 2023 EITF Meeting

The Emerging Issues Task Force (EITF) reached a tentative consensus on interpretive guidance to distinguish between induced conversions and extinguishments of certain convertible debt instruments with cash conversion features. Aimed to help reduce diversity in practice, the tentative consensus is subject to ratification by the FASB at a future board meeting. If ratified, the FASB would issue an exposure draft for public comment.

IASB Standard Setter Updates

International Accounting Standards Board

Amendments to IAS 21

The IASB issued amendments to IAS 21, The Effects of Changes in Foreign Exchange Rates, to provide accounting requirements when a foreign currency cannot be exchanged into another currency. The requirements include applying a consistent method in determining whether a currency is exchangeable and if so, an appropriate exchange rate. It also provides related disclosures.

The amendments are effective for years beginning on or after January 1, 2025 with early application permitted.

Improvements to IFRS Accounting Standards

The IASB has published its Exposure Draft, Annual Improvements to IFRS Accounting Standards – Volume 11. It contains proposed amendments to five standards as result of the IASB’s annual improvements project. These proposed amendments include clarifications, simplifications, corrections or changes to improve consistency in IFRS 1, First-time Adoption of International Financial Reporting Standards; IFRS 7, Financial Instruments: Disclosures and Guidance on implementing IFRS 7; IFRS 9, Financial Instruments; IFRS 10, Consolidated Financial Statements; and IAS 7, Statement of Cash Flows.

Comments are requested by December 11, 2023.

IFAC/IAASB Standard Setter Updates

International Federation of Accountants/International Auditing and Assurance Standards Board

Proposed Standard on Sustainability Assurance

The IAASB issued an Exposure Draft, Explanatory Memorandum and Frequently Asked Questions on its proposed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. ISSA 5000 serves as a comprehensive, stand-alone standard suitable for any sustainability assurance engagements. It will apply to sustainability information reported across any sustainability topic and prepared under multiple frameworks, including the recently released IFRS Sustainability Disclosure Standards S1 and S2.

Comments are due by December 1, 2023.

SEC Regulatory Updates

Security and Exchange Commission

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 related 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.

Guidance on Rule 10b5-1 Insider Trading Plans and Related Disclosures

The SEC staff published compliance and disclosure interpretations (C&DIs) related to amendments to Rule 10b5-1 insider trading plans and related disclosures. The C&DIs clarify the scope of trading arrangements subject to certain of the disclosure rules, the requirements to disclose trading plan terminations, the trading cooling-off period imposed by the amendments and the availability of the Rule 10b5-1 affirmative defense to certain 401(k) plan participants, among other matters.

Refer to the published C&DIs on Regulation S-K, Exchange Act Rules and Exchange Act Section 16 and Related Rules and Forms for more information.

California Legislature Regulatory Updates

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.