- FASB accounting standards for 2023 included a number of updates related to leases, accounting for investments in tax credit structures, and new guidance on joint venture formations.
- One of the most significant accounting standards that will impact calendar year entities for 2023 is CECL.
- While many entities took advantage of early adopting the provisions of ASU 2023-01 concurrently with leasing standard for 2022, there are many others who issued their 2022 financial statements in 2023 before ASU 2023-01 was issued. These entities will have the option to adopt the ASU for their 2023 financial statements.
With year- end approaching quickly, it is time to ensure that your organization is ready for standards effective in 2023. The most significant of these for your organization is likely Financial Accounting Standards Board (FASB) Update ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, also known as the current expected credit loss model (CECL).
The Impact of CECL
CECL is expected to have the greatest impact on the financial statements of financial institutions. However, other entities must also be prepared for the changes expected with CECL.
The first step your organizations should take to prepare for the new standard is to identify the potentially impacted assets. Financial instruments include things like trade receivables, debt securities, loans, net investments in leases, off-balance-sheet credit exposures, and reinsurance receivables. Most entities have some of these instruments and will have to assess the impact of CECL on their accounting for credit losses on these instruments.
For entities with trade receivables from contracts with customers, you’ll need to evaluate your method in determining the allowance for credit losses (previously doubtful accounts) and determine the additional information you’ll need to consider under the new guidance.
In addition to the change in evaluating credit losses on financial instruments, there is also an update on accounting for available-for-sale debt securities. The previous model of considering impairment is amended to determine the potential credit loss on these securities and record an allowance as necessary.
Leases: Common Control Arrangements
Another ASU expected to have wide applicability is ASU 2023-01, Leases (Topic 842): Common Control Arrangements. This standard provides relief for certain aspects of lease accounting to private businesses and not-for-profit entities with common control lease arrangements. While many entities took advantage of this standard by early adopting, there are many others who issued their 2022 financial statements in 2023 before the standard was issued and will be able to apply it to their 2023 financial statements.
FASB issued the ASU due to feedback it received on the challenges that were being faced by stakeholders in applying the new lease standard to common control lease arrangements. The ASU addresses the two largest stakeholder concerns. First are the terms and conditions to be considered in evaluating common control leases. Second is the accounting for leasehold improvements in common control leases.
- How your leases may be impacted in common control arrangements.
New Accounting Standards Issued in 2023
The new credit loss standard and updates to the lease standard aren’t the only changes organizations should consider at year-end. FASB issued ASU 2023-02 in March which addresses the accounting for investments in certain tax credit structures.
Additionally, in August, the FASB issued ASU 2023-05 which provides guidance related to accounting for assets and liabilities in the formation of a joint venture. Below is the summary of standards issued during 2023 and those issued previously that are effective for December 31, 2023* 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 2023.
|2023-05—Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement|
|Summary: This standard addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. Previous GAAP excluded guidance related to this topic and as such there was diversity in practice in regard to accounting for these transactions/formations. Under the new guidance, a newly formed joint venture will initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combination guidance). This approach is generally consistent with other new basis of accounting models, such as fresh start reporting in accordance with Topic 852. The key points in this standard include: 1) A joint venture is the formation of a new entity without an accounting acquirer, 2) A joint venture measures its identifiable net assets and goodwill, if any, at the formation date, 3) Initial measurement of a joint ventures total net assets is equal to the fair value of 100% of the joint venture’s equity and 4) A joint venture provides relevant disclosures.
The amendments in this ASU will be applied on a prospective basis and affect all joint venture formations on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information.
|Effective date for PBEs||All joint venture formations with a formation date on or after January 1, 2025.|
|Effective date for non-PBEs||All joint venture formations with a formation date on or after January 1, 2025.|
|2023-04—Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121 (SEC Update)|
|Summary: The FASB issued this to incorporate the elements included in the issuance of SEC Staff Accounting Bulletin No. 121. Bulletin No. 121 addresses questions related to accounting for obligations to safeguard crypto-assets an entity holds for its platform users.|
|Effective date for PBEs||N/A - None|
|Effective date for non-PBEs||N/A- Not applicable to Non-PBEs|
|2023-03—Presentation of Financial Statements (Topic 205), Income Statement – Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation – Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulations S-X: Income or Loss Applicable to Common Stock (SEC Update)|
|Summary: The FASB issued this update which amends certain SEC paragraphs within the codification to conform to previously issued updates and announcements from the SEC. The changes do not provide any new guidance and as such, there is not any transition or effective date associated with this update.|
|Effective date for PBEs||N/A - None|
|Effective date for non-PBEs||N/A - None|
|2023-02—Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)|
Summary: FASB issued this ASU with the intent of improving the accounting and disclosures for investments in tax credit structures. The ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. In addition, LIHTC investments not accounted for using the proportional amortization method will no longer be permitted to use the delayed equity contribution guidance.
The amendments in this ASU must be applied on either a modified retrospective or a retrospective basis, except for LIHTC investments not accounted for using the proportional amortization method which have modified transition methods.
|Effective date for PBEs||Fiscal years beginning after December 15, 2023 (interim periods within those fiscal years)|
|Effective date for non-PBEs||Fiscal years beginning after December 15, 2024 (interim periods within those fiscal years)|
|2023-01—Leases (Topic 842): Common Control Arrangements|
Summary: FASB issued this ASU to provide relief to related party lease arrangements between entities under common control.
Issue #1: The ASU provides private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease, allowing for broad flexibility in the formality of what constitutes written terms and conditions.
Issue #2: The ASU requires all entities, including public companies, to amortize leasehold improvements associated with common control leases over the useful life to the common control group.
|Effective date for all entities||Fiscal years beginning after December 15, 2023 (interim periods within those fiscal years)|
What's Effective for Non-Public December 31, 2023 Financial Statements?
The following ASUs are effective for December 31, 2023 financial statements (applicable to all entities, unless otherwise noted).
|2022-04—Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations|
Summary: This ASU enhances the transparency of supplier finance programs by requiring disclosures related to the programs. A supplier finance program is an arrangement that allows a buyer to offer its suppliers access to payment in advance of the invoice due date. This access to early payment is generally provided by a third-party based on the invoices that the buy confirms are valid. These programs are becoming increasingly popular as they provide suppliers with cash flows more quickly than waiting for the invoice due date.
Disclosure requirements under the ASU include:
The amendments in this ASU should be applied retrospectively, except for the amendment on roll forward information, which should be applied prospectively.
|Effective date for all entities||Fiscal years beginning after December 15, 2022 (interim periods within those fiscal years, except the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023)|
|2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures|
Summary: Since FASB issued Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) it has been conducting post-implementation review activities to gain insights from stakeholders and, when necessary, consider if further updates are needed. As part of its post-implementation review of credit losses, FASB has issued this ASU. The ASU addresses troubled debt restructurings by creditors (TDRs) and vintage disclosures of gross write offs.
TDRs – Stakeholders questioned the relevancy of the TDR designation and the usefulness of the related disclosures. This ASU eliminates the accounting guidance for TDRs for creditors who have adopted CECL and requires that those entities evaluate whether the modification represents a new loan or a continuation of an existing loan. Additionally, the ASU enhances certain disclosure requirements.
Vintage Disclosures – Investors noted the amount of gross write off information by year of origination was an essential input to their analysis. This ASU adds a requirement that public business entities disclosure current-period gross write offs by year of origination for financing receivables and net investments in leases.
The amendments in this ASU should be applied prospectively. For the recognition and measurement of TDRs, entities have the option to apply a modified retrospective application.
|Effective date for entities that previously adopted ASU 2016-13 (generally PBEs)||Fiscal years beginning after December 15, 2022 (including interim periods within those fiscal years)|
|Effective date for entities that have not yet adopted ASU 2016-13 (generally non-PBEs)||Follows the effective date for ASU 2016-13|
|Early adoption||Permitted for entities that had adopted ASU 2016-13|
|2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (the following updates are related to Reference Rate Reform)
2022-06—Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848; 2021-01—Reference Rate Reform (Topic 848): Scope
|Summary: 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, 2024|
|2020-03—Codification Improvements to Financial Instruments|
|Summary: FASB issued this ASU to make targeted improvements to the accounting standards for various financial instrument topics. The targeted improvements (1) clarify that all entities are required to provide certain fair value option disclosures, (2) clarify that certain nonfinancial items can apply the portfolio exception under Topic 820, Fair Value Measurement, (3) clarify that certain disclosures in Topic 320, Investments – Debt and Equity Securities, also apply to Topic 942, Financial Services – Depository and Lending, (4) improve the understandability of the guidance by cross-referencing paragraphs within Topic 470, Debt, (5) improve the understandability of the guidance by cross-referencing paragraphs within Topic 820, Fair Value Measurement, (6) clarify that the contractual terms of net investment in a lease under Topic 842, Leases, should be the same as the term used to measure expected credit losses under Topic 326, Financial Instruments – Credit Losses, and (7) clarify that an allowance for credit losses should be recorded when an entity regains control of a financial asset sold.|
|Effective date||Items 1, 2, 4, and 5 – Fiscal years beginning after December 15, 2019
Item 3 – Fiscal years beginning after December 15, 2019
Items 6 and 7 – Adopt along with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). If ASU 2016-13 has already been adopted, fiscal years beginning after December 15, 2019.
|Early adoption||Permitted for items 1, 2, 4, and 5|
|2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates|
|Summary: This ASU simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment testing. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. Under the new guidance, entities will perform their annual, or interim, impairment test by comparing the fair value of a reporting unit with its carrying amount. The ASU also aligns the impairment assessment for reporting units with a zero or negative carrying amount with the impairment assessment for all other reporting units.|
|Effective date||Fiscal years beginning after December 15, 2022|
|2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (the following updates are related to Credit Losses)
2019-11—Codification Improvements to Topic 326, Financial Instruments—Credit Losses; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates; 2019-05—Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; 2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses
|Summary: This ASU is a comprehensive change to the accounting for credit losses. The ASU requires entities to measure all expected credits losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU updates the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.|
|Effective date||Fiscal years beginning after December 15, 2022|