This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On September 25th, 2024, the Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815) – Hedge Accounting Improvements. The proposed updates would allow entities to aggregate hedged risks in a cash flow hedge based on “similar risk exposure” rather than “shared risk exposure.” This change would require companies to assess risk similarity both at the inception of the hedge and on an ongoing basis. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting Hedging Activities, that targeted improvements to simplify the application of hedge accounting guidance in order to better portray economic results of risk management activities in financial reporting. The changes in the proposed ASU would enable entities to apply the hedge accounting changes in ASU 2017-12 to a larger number of highly effective economic hedges. The public comment period ends on November 25th, 2024; stakeholders are encouraged to provide feedback to the FASB on this proposed ASU.
On September 30th, 2024, the FASB published a proposed ASU regarding Stock Compensation and Revenue from Contracts with Customers, Topics 718 and 606, respectively. This update would provide clarifications to share-based consideration payable to customers in conjunction with selling goods or services. These proposed changes would improve financial reporting results by requiring revenue estimates to more closely reflect a company’s expectations, and it would also affect the timing of revenue recognition for companies that offer to pay share-based consideration to a customer as incentive to purchase goods and services from the company. The implementation of this proposed ASU will result in more consistency in reporting, more uniform revenue recognition, and clearer guidance on determining the fair value of share-based awards. The public comment period ends on November 14th, 2024; while this is a relatively short window, stakeholders are still encouraged to provide feedback to the FASB on this proposed ASU.
On October 29th, 2024, the FASB published a proposed ASU regarding Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). When software accounting guidance was first integrated, companies developed software that followed a prescriptive and sequential development method, which has since become antiquated. This proposed ASU would remove all references to the prescriptive and sequential software development method, and would require a company to start capitalizing software costs when both: (a) management has authorized funding, and (b) the project is probably to be completed and the software will be used to perform its intended function. This will offer companies clear guidance on when to capitalize expense costs related to cloud computing arrangements. The public comment period ends on January 25th, 2025; stakeholders are encouraged to provide feedback to the FASB on this proposed ASU.
Securities and Exchange Commission & Public Company Accounting Oversight Board
On September 9th, 2024, the SEC approved the Public Company Accounting Oversight Board’s (PCAOB) new quality control standards titled QC 1000, A Firm’s System of Quality Control. These standards were created to ensure that all registered public accounting firms design and maintain a quality control system that mitigates specific risks to the business and protects the firm. Under this new standard, any registered firm that conducts business under the standards of the PCAOB will be subject to yearly inspections of their respective quality control system, as well as inspections of their submissions to the PCAOB which must be reviewed by “key firm personnel.” It should be noted the standard does not clearly identify who is considered key firm personnel. QC 1000 also states that any firms that publish more than 100 audit reports in a single year will be mandated to create and report to an External Quality Control Function (EQCF) comprised of at least one individual who can perform an unbiased assessment of the firm’s quality control procedures.
QC 1000, along with AS 1000, AS 1105, AS 2301, and Rule 3502, will go into effect on December 15th, 2025. AS 1000, General Responsibilities of the Auditor in Conducting an Audit, was adopted to enhance and clarify the interim standards that were provided by the AICPA upon the creation of the PCAOB to streamline the responsibilities of auditors. We highlighted AS 1000 and QC 1000 during our May 2024 edition of the Financial Reporting Update, where we covered the pivotal advancement these updates will have on the auditing industry.
American Institute of Certified Public Accountants
On September 23rd, 2024, the AICPA is seeking comment on a new exposure draft that aims to amend the standard related to financial statement preparation, which will clarify that a CPA does not have to apply AR-C Section 70, Preparation of Financial Statements, when financial statements are prepared as a byproduct of a client advisory services engagement. With this update, although accountants are not precluded from applying AR-C Section 70, they may perform the engagement in accordance with CS Section 100, Consulting Services: Definitions and Standards. This will allow companies to simplify the process when financial statements are prepared as part of a broader client advisory service engagement, which could save money on costs associated with meeting the more stringent requirements of AR-C Section 70. The AICPA’s Accounting and Review Services Committee (ARSC) determined that there is no perceivable harm to users of the financial statements if the full engagement is performed with CS Section 100. The public comment period on this proposal ends on December 20th, 2024.