Accounting Update – New Standards and Other Significant Topics – 2021 Year-End

January 17, 2022 | Article

By Kellen Garrison, CPA

It’s important to maintain awareness of the new accounting standards affecting your entity during the year, but that importance is magnified when working on year-end financial close and year-end financial reporting.

The below summary discusses each of the Financial Accounting Standards Board Accounting Standards Updates (ASUs)issued in 2021 as well as the ASUs effective for December 31, 2021 financial statements.

Generally, FASB sets effective dates by segregating public business entities (PBE) from all other entities. Occasionally, FASB will additionally segregate smaller reporting companies (SRCs), not-for-profit entities (NFPs) that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or employee benefit plans that file or furnish financial statements with or to the SEC. The effective dates included below are the dates applicable to both PBE and non-PBE entities. However, the non-PBE effective dates are used in determining if they are applicable for 2021.

What ASUs were issued during 2021?

During 2021, the FASB issued 10 new ASUs. Fortunately for financial statement preparers, most of the 2021 ASUs provided additional flexibility to entities in applying accounting guidance or provided clarification for recording and disclosing certain transactions. The 2021 ASUs cover several different accounting topics from leases to stock compensation to revenue recognition.

Additionally, some of the 2021 ASUs were issued in response to the changing accounting landscape due to the COVID-19 pandemic. The 2021 ASUs have varying effective dates, with some effective immediately and all of them allowing for early adoption.

2021-10—Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance
U.S. GAAP has not historically had explicit guidance for the recognition, measurement, presentation and disclosure of government assistance by business entities. As many business entities received government assistance due to the COVID-19 pandemic, it became evident that there was a clear diversity in the accounting, presentation and disclosure of government assistance in business entity financial statements.
The amendments in this ASU require certain disclosures about transactions with governments that are accounted for by applying grant or contribution accounting models by analogy to other accounting guidance.

Take for example a business that accounts for government grants by applying Subtopic 958-605, Not-For-Profit Entities – Revenue Recognition or by applying IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. Disclosure requirements for these entities include (1) information about the nature of the transactions and the related accounting policy used to account for the transactions, (2) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item, and (3) significant terms and conditions of the transactions, including commitments and contingencies.

The amendments apply to business entities other than those that are within the scope of the following Topics:

Topic 958, Not-for-Profit Entities,
Topic 960, Plan Accounting – Defined Benefit Pension Plans,
Topic 962, Plan Accounting – Defined Contribution Pension Plans, or
Topic 965, Plan Accounting – Health and Welfare Benefit Plans
Effective date for all entities Fiscal years beginning after December 15, 2021
Early adoption Permitted
2021-09—Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities
As part of the FASB’s post-implementation review process for Topic 842, Leases, FASB received suggestions to amend the practical expedient to allow private entities additional flexibility in the use of a risk-free discount rate. Topic 842 provided private entities with several practical expedients including the ability for those entities to adopt an entity-wide accounting policy to use a risk-free rate as the discount rate in calculating lease value when the rate implicit in the lease was not readily determinable by the entity.

The amendments in this ASU provide additional flexibility to private entities by allowing them the ability to make the risk-free discount rate election at the individual asset class level instead of applying it to all the entity’s leases. In addition to expanding the flexibility of the risk-free rate option, the ASU re-emphasizes that entities are required to use the rate implicit in the lease when the implicit rate is readily determinable for any individual lease rather than using the risk-free rate, regardless of whether the entity has made the risk-free rate election.

If an entity makes the risk-free rate accounting policy election, the entity is required to disclose its election and the class(es) of underlying assets to which the election has been applied.
Effective date for PBEs N/A – Not available to PBEs
Effective date for non-PBEs Entities that have not previously adopted Topic 842 are required to use the transition guidance for Topic 842. Entities that previously adopted Topic 842 are required to use the modified retrospective basis by applying the amendment to leases that exist at the beginning of the fiscal year of adoption.
Early adoption Permitted
2021-08—Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
FASB issued ASU 2021-08 to address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606, Revenue from Contracts with Customers is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.

To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities acquired in a business combination. The amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

The amendments of this ASU should be applied prospectively to business combinations occurring on or after the effective date. There is additional adoption guidance for entities that adopt the amendments in an interim period.
Effective date for PBEs Fiscal years beginning after December 15, 2022
Effective date for all others Fiscal years beginning after December 15, 2023
Early adoption Permitted
2021-07—Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (a consensus of the Private Company Council)
The Private Company Council received feedback from private companies that determining the fair value of private company share-option awards at grant date or upon a modification to an award is often costly and complex due to challenges in estimating the current price input. In response to those concerns, ASU 2021-07 was issued and provides a practical expedient to nonpublic entities which allows them to determine the current price input of equity-classified share-based awards, that are issued to both employees and nonemployees, using the reasonable application of a reasonable valuation method. The practical expedient in this ASU is not available for liability-classified awards.

The practical expedient lays out several characteristics of a reasonable application of a reasonable valuation method. The same characteristics are used in the Treasury Regulations (related to Section 409A of the U.S. Internal Revenue Code) to describe the reasonable application of a reasonable valuation method for income tax purposes. As a result, a reasonable valuation performed in accordance with the Treasury Regulations is an example of a way to achieve the practical expedient.

Nonpublic entities can elect the practical expedient on a measurement-date-by-measurement-date basis, meaning the practical expedient must be applied to all share-based awards that are within the scope of the practical expedient that have the same underlying share and the same measurement date.

The practical expedient is effective prospectively for all qualifying awards granted or modified on or after the date of adoption.
Effective date for PBEs N/A – Not available to PBEs
Effective date for non-PBEs Fiscal years beginning after December 15, 2021
Early adoption Early adoption is permitted for financial statements that have not yet been issued or made available for issuance as of October 25, 2021.
2021-06—Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants
FASB issued this ASU, which is only applicable to entities subject to U.S. Securities and Exchange Commission (SEC) regulations, to modify the SEC paragraphs of the Accounting Standards Codification for certain SEC Final Rule Releases.
2021-05—Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments
As part of the FASB’s post-implementation review process for Topic 842, Leases, FASB received feedback that the accounting for certain leases with variable lease payments did not follow the economics of the arrangements. The amendments in this ASU affect lessors which have lease contracts that have variable lease payments which are not dependent on a reference index or a rate and would have resulted in the recognition of a selling loss at commencement if classified as sales-type or direct financing.

Stakeholders noted that excluding variable consideration from calculating the net investment in the lease occasionally resulted in the calculated net investment in the lease being lower than the carrying amount of the underlying asset. When the net investment in lease was lower than the carrying amount of the underlying asset, the lessor was required to recognize a selling loss, which is referred to as a day-one loss.

After lessors adopt the amendments in this ASU, leases with variable lease payments that do not depend on a reference index or a rate are accounted for as an operating lease if two criteria are met. First, the lease would have been classified as a sales-type or direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3. Second, the lessor would have otherwise recognized a day-one loss. When lessor has a lease that is accounted for as an operating lease, they do not derecognize the underlying asset; as such, they do not recognize a selling profit or loss.

Entities that have adopted Topic 842 as of July 19, 2021 are allowed to apply the amendments in this ASU either retrospectively or prospectively.
Effective date for all entities Entities that have not adopted Topic 842, Leases, as of July 19, 2021 shall apply the transition guidance of Topic 842. Entities that have adopted Topic 842 as of July 19, 2021, shall apply the amendments in the ASU for fiscal years beginning after December 15, 2021.
Early adoption Permitted
2021-04—Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force
FASB issued this ASU to address diversity in how issuers accounted for modifications or exchanges of freestanding equity-classified written call options (e.g., warrants) that remain equity classified after modification or exchange. Prior to issuance of the ASU, some modifications or exchanges were being accounted for as adjustments to equity while others were being accounted for as an expense.

The ASU requires entities to treat a modification of the terms or conditions as an exchange of the original investment for a new investment. The modification or exchange is measured as the difference between the fair value immediately before and after the modification or exchange. Additionally, the ASU provides guidance on how to recognize the effect of the modification or exchange, which depends on substance of the transaction and is treated as if cash had been paid as consideration.

The amendments in the ASU do not apply to modifications or exchanges of financial instruments that are within the scope of other Topics (e.g., Topic 718 for stock compensation).
Effective date for all entities Fiscal years beginning after December 15, 2021
Early adoption Permitted
2021-03—Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
FASB received feedback from stakeholders that the cost and complexity of monitoring and evaluating triggering events throughout the reporting period outweighed the benefits to the financial statement users. The stakeholders noted these challenges were exacerbated by the COVID-19 pandemic, but the challenges were not exclusively related to COVID-19.

This ASU provides relief to private companies and not-for-profit entities within the scope of the update by establishing a new private company accounting alternative for goodwill impairment triggering event evaluation. Under the new accounting alternative, entities can perform an evaluation of goodwill impairment triggering events as of the end of the reporting period, rather than monitoring for goodwill triggering events throughout the reporting period.

If an entity elects to use the new accounting alternative, they should apply it on a prospective basis for fiscal years beginning after December 15, 2019, but they should not retroactively adopt the amendments in this update for interim financial statements already issued in the year of adoption.
Effective date for PBEs N/A – Not available to PBEs
Effective date for all others Fiscal years beginning after December 15, 2019
Early adoption Permitted for interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021.
2021-02—Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient
This ASU modifies the guidance applicable to franchisors under the revenue recognition standards by adding a practical expedient that allows non-PBE franchisors to account for pre-opening services provided to a franchisee as a distinct performance obligation that is separate from the franchise license. To qualify for the new practical expedient, the pre-opening services need to be consistent with the predefined list within the standards. The ASU also allows franchisors the ability to recognize the pre-opening services as a single performance obligation.
Effective date for PBEs N/A – Not available to PBEs
Effective date for all others If ASC 606 has not been adopted, entities will follow the ASC 606 transition guidance. If ASC 606 had previously been adopted, the ASU is effective for interim and annual periods beginning after December 15, 2020.
Early adoption Permitted but must be applied retrospectively to the date ASC 606 was adopted.
2021-01—Reference Rate Reform (Topic 848): Scope
In 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting to address the accounting implications of the phase-out of LIBOR and resulting reference rate reforms. FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions in Topic 848 related to contract modifications and hedge accounting apply to derivates that are affected by discounting transition. The clarifying guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.
Effective date for all entities From March 12, 2020 through December 31, 2022 (There are limited transactions which may extend beyond 2022.)

What's effective for non-public December 31, 2021 financial statements?

In addition to the ASUs that were issued during 2021, there are several ASUs issued in prior years that are effective for December 31, 2021 financial statements that entities will need to review to ensure that they have been properly accounted for and disclosed in their financial statements. The following ASUs are effective for December 31, 2021 financial statements (applicable to all entities, unless otherwise noted).

2021-03—Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
See above summary
2021-02—Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient
See above summary
2021-01—Reference Rate Reform (Topic 848): Scope
See above summary
2020-10—Codification Improvements
This ASU makes technical corrections to the codification through two sections. Section A was removed from the ASU and addressed in a separate ASU. Sections B and C are included in this ASU and are discussed below. Technical corrections include items such as “conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements.”

One section of the ASU updates the Disclosure Sections of certain topics where it was noted that the disclosure requirements or options to present information on the face of the financial statements or in the financial statement footnotes were not previously included in the Disclosures Sections. These changes are not expected to result to changes in current GAAP.

The ASU also makes other codification improvements including:

1. Removes the Master Glossary definition of “cash balance plan” and moves the fact pattern from that definition to other sections of Topic 715, Compensation.
2. Makes various minor wording updates throughout the codification.
3. Corrects various paragraph references throughout the codification.

The amendments in this ASU should be applied retrospectively to the beginning of the period that includes the adoption date.
Effective date for PBEs and conduit debt NFPs The amendments in Sections B and C of this ASU are effective for fiscal years beginning after December 15, 2020 (interim periods within those fiscal years)
Effective date for all others The amendments in Sections B and C of this ASU are effective for fiscal years beginning after December 15, 2021 (interim periods within fiscal years beginning after December 15, 2022)
Early adoption Permitted
2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (the following update is related to Reference Rate Reform): 2021-01—Reference Rate Reform (Topic 848): Scope
The LIBOR reference rate is being phased out which will require entities to update their contracts to a new reference rate. FASB issued this ASU to ease the transition to new reference rates by allowing several optional expedients which will reduce the cost and complexity of accounting for the change. The ASU affects all entities that have contracts, hedging relationships, or other transactions that reference LIBOR or another reference rate that is expected to be discontinued due to reference rate reform.
Effective date for all entities From March 12, 2020 through December 31, 2022 (There are limited transactions which may extend beyond 2022)
2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
This ASU clarifies certain accounting aspects related to credit losses (ASU 2016-13), hedging activities (ASU 2017-12), and financial instruments (ASU 2016-01). ASUs 2016-13 for credit losses and 2017-12 for hedging activities are discussed below.

The significant updates related to financial instruments (ASU 2016-01) clarify (1) that non-public business entities are exempt from fair value disclosure requirements for financial instruments not measured at fair value on the balance sheet (i.e. held-to-maturity debt securities measured on an amortized cost basis), (2) the measurement alternative for equity securities without readily determinable fair values is a nonrecurring measurement and requires the applicable disclosures, (3) that equity securities without readily determinable fair values are subject to the measurement alternative at historical exchange rates and the rate used should be the acquisition date unless there is a more recent fair value measurement date.
Effective date for all entities The updates related to financial instruments are effective for fiscal years beginning after December 15, 2019. The updates related to credit losses and hedging activities are closely related to the adoption dates for those ASUs.
2019-02—Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials (a consensus of the Emerging Issues Task Force)
This ASU addresses the changing production and distribution models in the entertainment industry by eliminating diversity in the accounting requirements for content production. The ASU aligns the accounting for TV series production costs with film production costs. The ASU also updates impairment, write-off and monetization strategy considerations.
Effective date for PBEs Fiscal years beginning after December 15, 2019
Effective date for all others Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-18—Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
This ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard and provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants.
Effective date for PBEs Fiscal years beginning after December 15, 2019
Effective date for all others Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-17—Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
The guidance in this ASU supersedes the private company alternative for common control leasing arrangements and expands it to all qualifying common control arrangements. A private company can make an accounting policy election to not apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met. A private company electing the alternative is required to provide detailed disclosures about its involvement with, and exposure to, the legal entity under common control. This ASU also amends guidance relating to whether a decision-making fee is a variable interest, and it requires organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety.
Effective date for PBEs and employee benefit plans Fiscal years beginning after December 15, 2019
Effective date for all others Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-16—Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
LIBOR has historically been one of the most widely used reference rates. Due to fraud and collusion concerns, LIBOR is being phased-out. With the phase-out of LIBOR, some countries are adopting their own reference rate replacements and in the United States the Federal Reserve Bank selected the Secured Overnight Financing Rate or SOFR as its preferred replacement reference rate. In ASU 2018-16, FASB added the Overnight Index Swap rate which is based on the SOFR as an allowable benchmark for hedge accounting purposes.
Effective date for PBEs Effective concurrently with ASU 2017-12 (see below). If entities have already adopted ASU 2017-12, the effective date is years beginning after December 15, 2018.
Effective date for all others Effective concurrently with ASU 2017-12 (see below). If entities have already adopted ASU 2017-12, the effective date is years beginning after December 15, 2019.
Early adoption Permitted if ASU 2017-12 has been adopted
2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
This ASU provides guidance for the accounting of implementation costs related to a hosting arrangement that is a service contract and aligns the accounting with the accounting for implementation costs incurred to develop or obtain internal use software that is not a service contract.
Effective date for PBEs Fiscal years beginning after December 15, 2019
Effective date for all others Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-14—Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU is part of the disclosure framework project and is aimed at improving employer pension disclosures. The ASU removes several required disclosure items, adds disclosures related to the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and adds disclosures of the reasons for significant gains and losses related to changes in the benefit obligation. The ASU also clarifies certain items that are required to be disclosed for the projected benefit obligation and the accumulated benefit obligation.
Effective date for PBEs Fiscal years ending after December 15, 2020
Effective date for all others Fiscal years ending after December 15, 2021
Early adoption Permitted
2017-12—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (the following updates are related to Derivatives and Hedging): 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates; 2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; 2018-16—Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
This ASU makes several updates to the accounting for hedging activities with the intention of simplifying and better aligning the accounting of hedging relationships to better align them with entities’ risk management activities.
Effective date for PBEs Fiscal years beginning after December 15, 2018
Effective date for all others Fiscal years beginning after December 15, 2020
Early adoption Permitted
2016-02—Leases (Topic 842) (the following are updates related to Leases) 2021-09—Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities; 2021-05—Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments; 2020-05—Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates; 2019-01—Leases (Topic 842): Codification Improvements; 2018-20—Leases (Topic 842): Narrow-Scope Improvements for Lessors; 2018-11—Leases (Topic 842): Targeted Improvements; 2018-10—Codification Improvements to Topic 842, Leases; 2018-01—Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
This ASU is a comprehensive change to the accounting for leases. The ASU results in two types of leases, financing and operating. Financing lease accounting will be similar to capital lease accounting under prior guidance. Entities will see a significant change related to operating lease accounting since under prior guidance operating leases were “off-balance sheet”. Under the new guidance, entities will record a right-to-use (ROU) asset on the balance sheet.
Effective date for PBEs Fiscal years beginning after December 15, 2018
Effective date for conduit debt NFPs Fiscal years beginning after December 15, 2019 (if they have not yet issued financial statements, or made available for issuance, reflecting the adoption of Leases)
Effective date for all others Fiscal years beginning after December 15, 2021
Early adoption Permitted

Do you know which accounting standards to apply to your entity? Figuring out what affect your organization can be complicated.

Stay current on your favorite topics

SUBSCRIBE

Learn More

See what more we can bring to organizations just like yours.

Construction & Real Estate Manufacturing Wholesale Distribution

Take a deeper dive into this Insight’s subject matter.

Audit & Assurance