Implementation of Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
FASB Accounting Standards Update (ASU) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” becomes effective for fiscal years beginning after December 15, 2022. This means it applies to calendar years ending in 2023 and fiscal years ending in 2024.
The scope of Topic 326 covers various transactions, including receivables from contracts recognized under FASB ASC Topic 606, such as tuition, program income, and membership dues. However, contributions/pledges receivable and most grants receivable following the contribution model for revenue recognition are not within the standard’s scope. To assess the impact of this standard, follow these steps:
- Evaluate Applicability: Review your organization’s revenue streams and balance sheets for trade receivables recognized under Topic 606 and any loan or debt instruments not valued at fair value.
- Determine CECL Allowance Method: Once it’s determined that accounts fall under Topic 326, establish a method for determining the CECL (Current Expected Credit Loss) allowance related to the receivable. While Topic 326 doesn’t prescribe a specific methodology, any forecasts must be reasonable and supportable. The organization should define “reasonable” and “supportable” within its policy, which should be discussed with the governance body, such as the board of directors.
- Pool Similar Assets: Consider grouping similar assets before analysis and document the similarities in nature.
- Document Data Accumulation: The organization’s policy and methodology should document how data is accumulated and its source. This data serves as support for the allowance and will be subject to audit. It will also be used in the disclosures for the credit loss allowance.
FASB Accounting Rules Issues for Leases Between Related Entities With a Common Owner
In March 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-01, focusing on Leases (Topic 842) and addressing Common Control Arrangements under Topic 842. Key points of the new standard include:
- Clarification on lease determination and accounting for leasehold improvements.
- Requirement for verbal leases to be documented in writing to qualify for lease accounting rules.
- If common control arrangements are determined to be leases, they should be classified and accounted for on the same basis as arrangements with unrelated parties.
- Practical expedient provided to private companies and not-for-profit entities, allowing them to use the written terms and conditions of a common control arrangement to determine lease classification and accounting, without needing to assess enforceability.
- Requirement for leasehold improvements to be amortized over their useful life, irrespective of lease term, for public and not-for-profit entities. When control of the underlying asset ceases, the transfer of these improvements must be accounted for through equity or net asset, remaining subject to impairment requirements.
The amendments are effective for fiscal years beginning after Dec. 15, 2023
Summary of Crypto Assets Standard
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, that is intended to improve the accounting for and disclosure of crypto assets. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted.
Definition and Scope:
- Crypto assets are defined as intangible assets that are fungible, secure via cryptography, created or reside on a distributed ledger or blockchain, and do not provide enforceable rights to or claims on underlying goods, services, or other assets. This definition excludes assets created by the reporting entity or its related parties.
- Prior to ASU No. 2023-08, crypto assets were treated as indefinite-lived intangible assets, with gains only recognized upon realization.
- The new standard mandates that all entities holding crypto assets must measure them at fair value rather than historical cost or impairment.
- Gains and losses on crypto assets are to be recognized in net income (or change in net assets for nonprofits) separate from other intangible assets.
Disclosure Requirements:
- Entities must disclose significant crypto asset holdings and any restrictions on these assets.
- They must provide a reconciliation of activity during the reporting period and the method used for determining the cost basis of crypto assets.
Impact on Cash Flow Classification:
- Crypto assets received as noncash consideration or as contributions that are nearly immediately converted to cash are classified as operating cash flows.
- Contributions designated for long-term or capital purposes are classified as financing activities.
Navigating Annual Report Requirements
If your organization produces an annual report, there are additional procedures that your auditors would need to undertake concerning the information contained within it. Statement on Auditing Standards (SAS) No. 137 outlines the auditor’s obligations regarding an organization’s annual report, detailing performance, documentation, and reporting requirements. The primary duty of the auditor under this standard is to assess whether there is a significant inconsistency between the information presented in the annual report and the audited financial statements, and to remain vigilant for any indications of a material misstatement.
So, what exactly constitutes an annual report? According to SAS No. 137, it’s defined as “a document, or combination of documents, typically prepared annually by management or those overseeing governance, in accordance with applicable laws, regulations, or customary practices. Its purpose is to furnish owners or similar stakeholders with information about the entity’s operations, financial results, and financial position as outlined in the financial statements.”
An annual report typically includes financial statements and the auditor’s report, along with details about the entity’s developments, future outlook, risks and uncertainties, statements from the governing body, and reports on governance matters. This definition also encompasses annual reports of governments and charitable organizations that are made available to the public.
What should you expect in terms of your responsibilities? Management holds the responsibility to ensure that the information in the annual report aligns with and is consistent with the financial statements. Your organization will need to provide the annual report, along with reconciliations to the financial statements, to the auditors for review in a timely manner before its issuance. If your organization releases an annual report, it’s crucial to liaise with your audit team early on to discuss planned timing and issuance, allowing ample time for audit procedures before the final report is produced. This proactive communication ensures a smoother audit process and timely delivery of the annual report.
More from This Series
Part II: Tax and IRS Update | Summer 2024
Part III: Government Auditing Standards Update | Summer 2024
Part IV: Expert Insights | Summer 2024
