This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On March 21st, 2024, The Financial Accounting Standards Board (FASB) released an Accounting Standards Update (ASU 2024-01) aimed at enhancing generally accepted accounting principles (GAAP) by providing additional guidance to assist entities in determining the appropriate accounting treatment for profits interest and similar awards within the scope of Topic 718, Compensation—Stock Compensation.
Many entities, particularly private companies, offer profits interest and similar awards to employees and other individuals to better align compensation with the company’s performance and grant recipients the opportunity to share in future profits and/or appreciation of equity in the company. Concerns were raised by the Private Company Council and other stakeholders regarding the varying practices in accounting for these awards, with some treating them as share-based payment arrangements under Topic 718 while others treat them as cash bonuses or profit-sharing arrangements under Topic 710, Compensation—General, or other relevant Topics.
To address this issue, the ASU includes an illustrative example intended to clarify how entities should determine whether profits interest awards should be accounted for in accordance with Topic 718. This example can be found here within the full ASU on page 6 under section 718-10-15-3.
The effective dates for the ASU differ based on entity type. Public business entities must apply the amendments for annual periods beginning after December 15, 2024, and for interim periods within those annual periods. For all other entities, including private companies, the amendments are effective for annual periods beginning after December 15, 2025, along with interim periods within those annual periods. Early adoption of the ASU is permitted.
Securities and Exchange Commission
On March 6th, 2024, the Securities and Exchange Commission approved new regulations aimed at improving and standardizing disclosures related to climate by publicly traded companies and in public offerings. These regulations come as a response to investors’ calls for more consistent and reliable information regarding the financial impacts of climate-related risks on a company’s operations and how these risks are managed. While addressing these concerns, SEC Chair Gary Gensler emphasized the importance of providing complete and truthful disclosure to investors, noting the evolution of disclosure requirements over the years.
The finalized rules mandate the disclosure of material climate risks by companies in both public offerings and SEC filings, ensuring investors receive consistent and useful information. Notably, the rules require climate risk disclosures to be included in annual reports and registration statements, enhancing their reliability compared to disclosures solely on company websites. Key requirements of the final rule include disclosing climate-related risks that have or could have a significant impact on the company’s business strategy, financial condition, and operations. Companies must detail any mitigation or adaptation activities undertaken, including associated expenditures and impacts on financial estimates. Additionally, the rules stipulate disclosures related to the oversight and management of climate risks by the board of directors and management, and information on climate-related targets or goals.
For certain filers, disclosure of Scope 1 and/or Scope 2 emissions is required, accompanied by a report that will eventually require reasonable assurance. Furthermore, companies must disclose costs, expenditures, and losses resulting from severe weather events and natural conditions, as well as those related to carbon offsets and renewable energy credits if used to achieve climate-related targets. Notably absent from the final rule are requirements to measure and disclose Scope 3 emissions, which was a heavily critiqued component of the initial proposal. The Commission considered extensive public feedback, including over 24,000 comment letters, before finalizing the rules. The adoption release will be published on SEC.gov and in the Federal Register, with the rules becoming effective 60 days after publication in the Federal Register. Compliance dates will vary based on filer status – large, accelerated filers must be compliant with initial requirements as early as fiscal years ending December 31, 2025.
American Institute of Certified Public Accountants
On March 7th, 2024, The American Institute of CPAs (AICPA) sent a letter to the U.S. Treasury and IRS that offered suggestions to refine regulations concerning gross proceeds and basis reporting by brokers, as well as determining the amount realized and basis for transactions involving digital assets. AICPA urged the Treasury and the IRS to clarify key terms and specific examples within the proposed regulations under section 6045 of the U.S. Code.
Key recommendations from AICPA included:
- Ensuring consistent usage of terms like “retailer” or “merchant” throughout the regulations.
- Providing clear definitions for crucial terms such as “digital representation of value,” “cryptographically secured distributed ledger,” and “any similar technology,” all of which contribute to the definition of a “digital asset.”
- Clarifying definitions and examples concerning the classification of an individual as a “broker” of digital assets.
- Modifying and clarifying the definition of a digital asset payment processor.
- Providing additional clarity in examples to accurately depict the intended rules and offer guidance for interpreting these intricate regulations.
- Addressing scenarios such as the transferor receiving “change” (typically known as UTXO) in the transfer of digital assets in specific examples.
Peter Mills, Senior Manager of AICPA Tax Policy & Advocacy, highlighted the necessity for updated IRS guidance and regulations to match the evolving landscape of digital asset issues. He emphasized the importance of clear guidance to assist taxpayers and tax professionals in meeting their reporting obligations. AICPA’s recommendations aim to ensure that the final regulations, upon issuance, are both comprehensible and beneficial.
Public Company Accounting Oversight Board
The PCAOB hosted a public virtual roundtable on March 6th, 2024, that reopened the public comment period regarding its proposal to amend auditing standards related to an auditor’s responsibility for considering a company’s Noncompliance with Laws and Regulations (NOCLAR). NOCLAR is a proposed auditing standard that aims to strengthen the standard to require auditors to identify, evaluate, and communicate instances of a company’s non-compliance with laws and regulations more proactively. The proposal would significantly revise and amend several current auditing standards to identify laws and regulations with which noncompliance could reasonably have a material effect on the financial statements, as part of a company audit.
The PCAOB issued the proposal on June 6, 2023, and initially accepted comments through Aug. 7, 2023. In a briefing paper published in advance of the virtual meeting, the PCAOB reported that it had received 140 comment letters and decided to reopen the comment period and hold the roundtable meeting in response to “significant public interest in the proposal, including requests from commenters for the board to engage in additional public outreach.”
According to the briefing paper, some commenters believed the proposal, as written, would “expand the scope of an integrated audit into areas outside the auditor’s expertise and into areas that management itself need not address in preparing the financial statements.” Many commenters also expressed cost concerns related to “the need for involvement of legal specialists and experts; the potential need for companies to allocate more internal resources to comply with the proposal; the potential for increased cost, time, and inefficiencies that could arise from duplicative compliance-related tasks; and the potential for increased costs of professional indemnity insurance for firms.”
The virtual meeting included panel discussions featuring a cross section of stakeholders talking about the proposal’s requirements relating to auditors’ identification of laws and regulations and assessment of those laws and regulations, as well as costs and benefits of the proposal. Interested parties had an opportunity to comment on the proposal before and after the meeting — the public comment period remained open until March 18, 2024.