In the complex landscape of financial reporting, entities in the U.S. must navigate a unique set of standards and regulations. Our recent CPE seminar on financial reporting for private companies shed light on not only the governing bodies that create these unique reporting requirements, but also on anticipated future changes and potential areas of reporting relief related to topics such as revenue recognition, leases and current expected credit losses.
As a bit of a primer, it’s important to understand the governing bodies that impact a company’s reporting requirements.
The Financial Accounting Standards Board (FASB) plays a pivotal role in establishing accounting and financial reporting standards for entities, including private companies, that adhere to accounting principles generally accepted in the United States of America (GAAP). The oversight of the FASB is managed by the Financial Accounting Foundation (FAF), ensuring the standards set are robust and effective.
The Private Company Council (PCC), established in 2012, acts as the primary advisory body to the FASB on matters concerning private companies. The PCC's role is crucial, as it provides recommendations on whether GAAP should permit alternatives or exceptions specifically for private companies based on the Private Company Decision-Making Framework.
In general, the standard setting process involves extensive research and outreach to ensure financial reporting standards meet the needs of stakeholders and provide useful information to investors and other users of financial reports. This process does not end when a standard is issued, instead, it continues with a post-implementation review to assess the effectiveness of the standard and gather insights for future improvements.
The FASB has recently issued three standards that will impact many private companies: improvements to income tax disclosures, accounting for and disclosure of crypto assets, and application of profits interest and similar awards.
1. Improvements to Tax Disclosures
Effective for private entities for annual periods beginning after December 15, 2025, this new standard is a result of investor feedback, sharing with the FASB that existing disclosures weren’t providing enough information. Specifically, they wanted to better understand an entity’s exposure to changes in jurisdictional tax legislation and related risks and opportunities. They also wanted to be able to better assess income tax information that affects cash flows.
2. Accounting for and Disclosure of Crypto Assets
Effective for all entities for annual periods beginning after December 15, 2024, this new standard responds to a general lack of crypto-specific guidance, a current impairment model that doesn’t reflect the economics of the assets, and demand from users for more transparency in this area.
Early adoption should be considered as today’s model does not provide decision-makers useful information and is costly for most preparers.
3. Application of Profits Interest and Similar Awards
Effective for private entities for annual periods beginning after December 15, 2025, this new standard began as a PCC research project. Stakeholders wanted illustrative examples on how to apply the guidance in ASC 718, Compensation – Stock Compensation. The new standard provides those examples, helping financial statement preparers determine whether such awards should be accounted for in accordance with that topic.
>> Read “Accounting for Profits Interests: FASB Offers Clarity”
FASB Agenda
The FASB has a full agenda of topics to consider for potential future changes, but accounting for disclosures of software costs and government grants are two areas of significant note. Exposure drafts are expected to be issued on both of these topics yet in 2024.
As the FASB considers the topic of software, there is an extensive population of types of software it must consider, but, in general, they are categorized as either internal-use or external-use software. Currently, guidance for both of these types of software has very sequential phases that drive whether costs are expensed or capitalized. The linear nature of the guidance is difficult to apply to a process that isn’t sequential in actuality. Based on the results of feedback, the FASB is currently looking to enhance the current guidance through targeted improvements and enhanced disclosures.
Accounting for government grants is another hot topic, particularly as the pandemic placed this area in the spotlight. As there is no existing guidance on recognizing, measuring and presenting government grants for business entities, the FASB has decided to issue such guidance. The soon to be proposed guidance is expected to leverage guidance in the international standards, allowing some of its optionality with the goal to get more information into financial statements and then refine down the road, if necessary. This is expected to fill the void currently in GAAP around this area in the least disruptive manner, as many entities analogized to this guidance when accounting for government grants during and post-pandemic.
PCC & Potential Relief
The PCC has a responsibility to look for opportunities to reduce complexity and costs of preparing GAAP financial statements for private companies, when warranted under the Private Company Decision-Making Framework, and then to make such proposals to the FASB. Below are some of the PCC’s top priorities for 2024, many of which could provide much needed relief to private entities:
Understanding the roles of the FASB and PCC and the ongoing changes in accounting standards, private companies can better prepare their financial statements, ensuring compliance and enhancing the utility of their financial information for decision-makers.
Contact Jami Blake, Beth Reho or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.