By Jaclyn Veno, CPA, Galasso Learning Solutions LLC
This article originally appeared in the Winter 2024 issue of the South Carolina CPA Report
The issuance of new ASUs by the FASB is part of what makes the accounting profession so exciting! These ASUs are responsive to stakeholder feedback that the FASB has received over the years and ensure the Accounting Standards Codification stays relevant with an ever-changing world. In 2023, there were various ASUs that became effective and have impacted public, private, and not-for-profit entities.
The first ASU effective this year is ASU 2022-04: Liabilities—Supplier Finance Programs (Subtopic 405-50) – Disclosure of Supplier Finance Program Obligations. ASU 2022-04 was issued in September 2022, because there were no explicit disclosure requirements in GAAP specific to those transactions. Additionally, a buyer party may present obligations covered by those programs in the same balance sheet line item as accounts payable or in another balance sheet line item depending on the facts of circumstances of the arrangement. Since stakeholders were requesting further guidance for these types of arrangements, as they have grown in popularity, the updates from ASU 2022-04 provide disclosure requirements for supplier finance obligations. It is effective for both public and private entities.
Perhaps the most notable ASU effective this year is ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. Although it was issued in June 2016, it was delayed multiple times. A significant change from ASU 2016-13 is that it moves away from an old incurred loss model to an expected credit loss model (CECL) for assets within scope, such as:
- Financial assets measured at amortized cost basis;
- Net investments in leases recognized by a lessor;
- Off-balance-sheet credit exposures not accounted for as insurance; and
- Available for sale debt securities.
Instead of delaying recognition until it is probable a loss has been incurred, CECL now requires a more forward-looking approach relevant to assessing the collectability of cash flows, such as considering information about past events, historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. ASU 2016-13 is effective for private companies and not-for-profit organizations.
Additionally, ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment was issued in January 2017. The primary update from this ASU is that it removes Step 2 from the goodwill impairment model. To simplify the subsequent measurement of goodwill, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In essence, entities can stop their evaluation at Step 1. Additionally, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for private companies and not-for-profit organizations.
ASU 2022-02: Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures was issued in March 2022. ASU 2022-02 removes troubled debt restructuring accounting as a result of the new CECL model. However, ASU 2022-02 also enhances disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 is effective for private companies and not-for-profit organizations.
In addition, ASU 2018-12: Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts was issued in August 2018. ASU 2018-12 updates accounting guidance for long duration (e.g., life insurance) contracts, and is effective for public business entities.
ASU 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers was issued in October 2021. It addresses diversity in practice related to recognition of an acquired contract liability, as well as payment terms and their effect on subsequent revenue recognized by the acquirer. The main update from ASU 2021-08 is that it requires the use of Topic 606 for contract assets & liabilities in business combinations. ASU 2021-08 is effective for public business entities.
Lastly, ASU 2022-01: Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method was issued in March 2022, and it expands the use of the last of layer method that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. Then, ASU 2022-01 renames the last-of-layer method to the portfolio layer method. ASU 2022 is effective for public business entities.
In summary, there are various ASUs effective this year. It is exciting to see how these are going to impact the accounting profession, as well as clients.