This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On November 26, 2024, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU), 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, to improve guidance on the reporting of induced conversions related to the settlement of convertible debt instruments. This update improves the relevance and consistency of the guidance in FASB Subtopic 470-20, clarifying the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion rather than a debt extinguishment. Prior to this update, the guidance on this topic was written for share-settled convertible debt instruments, which left questions on how to apply the existing induced conversion guidance to settlements of convertible debt instruments with cash conversion and other features. This update is effective for annual reporting periods beginning after December 15, 2025, including interim reporting periods within that time period (early adoption is permitted).
On December 3, 2024, the Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update (ASU) on Financial Instruments – Credit Losses (Topic 326). This update addresses the challenges regarding the measurement of credit losses for accounts receivable and contract assets for private companies and certain not-for-profit entities. Stakeholders have stated that estimating expected credit losses for current accounts receivable and contract assets is highly complex and requires significant effort. The proposed update would introduce a practical expedient and a related accounting policy election for private companies and certain not-for-profit entities, which would affect the application of Subtopic 326-20 to current accounts receivable and contract assets arising from transactions accounted for under Topic 606. This expedient will reduce complexity for preparers while providing investors with decision-useful information. The FASB is accepting public comments on the proposed ASU through January 17, 2025.
On December 18, 2024, the Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update (ASU) on Environmental Credits and Environmental Credit Obligations (Topic 818). This update provides recognition, measurement, presentation, and disclosure requirements for entities that purchase or hold environmental credits or have a regulatory compliance obligation that may be settled with environmental credits. Some examples of environmental credits that are subject to the amendments in the proposed update include: emissions allowances; Corporate Average Fuel Economy (CAFE) credits; renewable identification numbers; and renewable energy certificates. The requirements under this update are expected to provide investors with useful information by improving the understandability and comparability of accounting for environmental credits/credit obligations by reducing the diversity in practice. The FASB is accepting public comments on the proposed ASU through April 15, 2025.
Securities and Exchange Commission
On November 22, 2024, the Securities and Exchange Commission (SEC) issued a press release announcing their , ended September 30. In 2024, the SEC filed 583 enforcement actions, a 26% decrease from 2023. However, the agency secured a record $8.2 billion in financial remedies, which comprised of $6.1 billion in disgorgement and $2.1 billion in civil penalties. Over half of the financial remedies came from a major securities fraud case involving Terraform Labs and Do Kwon. Of the 583 enforcement actions filed by the SEC, . The SEC distributed $345 million to investors who were harmed by the actions of negligent entities and barred 124 individuals from being able to serve as directors or officers of public companies, which is the second-highest amount in a decade. The SEC also received 45,130 tips, complaints, and referrals, with $255 million being awarded to whistleblowers. The SEC emphasized its efforts to address emerging threats, such as AI-related misstatements and social media fraud, while encouraging a culture of compliance in order to promote trust in the capital markets.
On December 20, 2024, the Securities and Exchange Commission (SEC) adopted amendments to the Customer Protection Rule (Rule 15c3-3) to increase the frequency that broker-dealers perform computations of the net cash they owe to customers from weekly to daily. By reducing the timeframe between computations, broker-dealers will be able to dynamically match the net amount of cash owed to customers and with the amount on deposit in the broker-dealer’s customer and PAB reserve bank accounts. These amendments will provide protective measures of the Rule 15c3-3 reserve requirements to the cash that is deposited into the broker-dealer to reduce the risk that, if the broker-dealer fails financially, they will not be able to promptly return cash and securities to customers and PAB account holders through self-liquidation. Additionally, the SEC adopted amendments to the Broker-Dealer Net Capital Rule (Rule 15c3-3 and Rule 15c3-1) to reduce the required 3 percent buffer in the customer reserve bank account to 2 percent when performing the daily customer reserve computation. These amendments are required for broker-dealers with average total credits greater than or equal to $500 . These broker-dealers must begin performing the daily computations no later than December 31, 2025.
Public Company Accounting Oversight Board
On November 21, 2024, the Public Company Accounting Oversight Board (PCAOB) adopted a set of new requirements regarding public reporting of standardized firm and engagement metrics. This requires public accounting firms that audit one or more issuers of financial statements that qualify as an accelerated filer under SEC regulations to publicly report specified metrics relating to such audits and their audit practices. These metrics include but are not limited to: partner and manager involvement; workload; training hours; and industry experience. Additionally, the board adopted a set of amendments regarding the PCAOB framework for collecting information from audit firms. These amendments will modernize the PCAOB’s annual and special reporting requirements in order for public accounting firms to disclose more complete, standardized, and timely information. Several key areas are being modernized with these amendments, including financial information, governance information, network relationships, special reporting, cybersecurity, and updated description of quality control policies and procedures. These amendments are subject to approval by the Securities and Exchange Commission (SEC).
On December 9, 2024, the Public Company Accounting Oversight Board (PCAOB) outlined their priorities for 2025 inspections in a PCAOB staff report. The report notes which sectors and industries the PCAOB inspection staff will prioritize, specifically industries with specialized accounting and those that may be negatively impacted by volatility in the economic and geopolitical environment (i.e., industries that may have a higher going concern risk). The report also highlights the risks and other considerations auditors should consider when planning and performing their current and upcoming audits. Some of these focus areas include but are not limited to: audit areas with prior execution challenges, critical audit matters, and audit areas with increased use of technology and generative artificial intelligence. The report further includes a set of suggested questions that the audit committees of companies should consider in discussions with their independent auditors as they oversee upcoming audits.
American Institute of Certified Public Accountants
On December 9, 2024, the American Institute of Certified Public Accountants (AICPA) released a new guide titled “Accounting and Valuation Guide: Business Combinations,” that aims to demystify accounting and valuations in mergers and acquisitions and related transactions. This guide contains best practices for accounting and valuations of business combinations in accordance with ASC 805 and 820. Some of the areas the guide covers include: identifying business combinations transactions, identifying the acquirer, and measuring the consideration transferred. Additionally, this guide includes examples outlining the internal rate of return analysis, the valuation method selection process, and the application of the valuation method used to value an asset or liability. This guide will be useful to internal accounting departments of recently acquired companies (or those who recently acquired a company) and consultants who work on business combinations.
On December 20, 2024, the American Institute of Certified Public Accountants (AICPA) sent a comment letter to the Securities and Exchange Commission asking them not to approve the PCAOB’s final rules related to firm and engagement metrics and reporting. The AICPA believes that these PCAOB rules, recently adopted on November 24, 2024, will create significant challenges for accounting firms and will not improve oversight and audit quality. These rules mandate the disclosure of performance metrics for audits of large, accelerated filers and expand the operational and financial condition reporting by registered accounting firms. The AICPA believes this will drive small and medium-size firms out of the public company auditing practice, which would result in fewer firms performing audits for smaller and medium sized companies that are seeking to access U.S. capital markets. Further, smaller companies will suffer from higher costs to meet these necessary audit requirements to enter the market. Instead, the AICPA urges the SEC to pursue approaches that better balance transparency, cost, the needs of audit committees, and ways to improve the quality of audit services.