Tag: fasb
FASB adopts new ASU requiring disaggregation of expenses
Currently, companies typically include in their income statements expense captions for selling, general and administrative expenses, cost of services and other cost of revenues, and cost of tangible goods sold. But, as reported by Bloomberg, there has been a push for disaggregation of expenses on the income statement since at least 2016. As this piece in Bloomberg explained, investors complained that “companies lump expenses into catch-all financial statement categories like ‘selling, general, and administrative,’ without explaining the biggest cost drivers inside them.” But in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It was quite a lengthy pause, but, in February 2022—hearing the call again from investors and others in response to the FASB’s 2021 Invitation to Comment—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.” And, in 2023, FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. (See this PubCo post and this PubCo post.) As reported, businesses “bristled against the plan,” contending that it was too expensive and time-consuming, with many raising, in particular, issues regarding the difficulty of providing more detailed inventory and manufacturing expense disclosures required in each relevant expense category. Companies also asked for specific industry carve-outs or exemptions for smaller reporting companies. But the FASB rejected that that request. Last week, the FASB announced that it had adopted a new Accounting Standards Update—ASU 2024-03—that will require “public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements.” According to FASB Chair Richard Jones, the “project was one of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative….We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail.”
Will companies need to provide more detailed country-by-country tax disclosure?
The topic of taxes—corporate, presidential and otherwise—seems to be trending these days, with calls for greater transparency coming from investors, analysts and others, including speakers at the SEC’s Investor Advisory Committee. They contend that some corporate tax practices may give rise to financial, legal and reputational risks that would be material for investors to understand. Currently, however, financial statements are required to include disclosure of the total taxes paid, but are not required to break out the amounts by country or state. Consequently, investors and analysts say that they do not have sufficient visibility to understand the impact on companies of changes in tax laws or the tax environment in different jurisdictions or to otherwise evaluate companies’ exposure to tax risks.
FASB issues proposed ASU on segment reporting
Last month, the FASB issued a proposed ASU on segment reporting. In its announcement, the FASB explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses. According to FASB Chair Richard Jones, the “proposed ASU would represent the FASB’s most significant change to segment reporting since 1997….On the basis of our extensive stakeholder outreach, the proposed ASU would provide investors and other allocators of capital with valuable insights into significant segment expenses, expand segment disclosures reported in interim periods, and require disclosures for single-segment entities.”
The FASB issues new ASU on supply chain financing arrangements
For several years, the SEC staff and advisory committees, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been making noise about a popular financing technique called “supply chain financing.” It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. Moreover, there were no explicit GAAP disclosure requirements to provide transparency about a company’s use of supply chain financing. That may be why Bloomberg has referred to supply chain financing as “hidden debt.” But that’s about to change. Last week, the FASB announced that it has issued a new Accounting Standards Update that enhances the transparency surrounding the use of supplier finance programs. According to FASB Chair Richard Jones, the “FASB’s new ASU responds to requests from investors for greater transparency around a buyer’s use of supplier finance programs….It enhances transparency by requiring new disclosures intended to help them better consider the effect of these programs on a company’s working capital, liquidity, and cash flows over time.” The ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which has a one-year delay.
More financial information about human capital? FASB looks to require disaggregation of expenses on the income statement
In June, the Working Group on Human Capital Accounting Disclosure, a group of ten academics that includes former SEC Commissioners Joe Grundfest and Robert Jackson, Jr. and former SEC general counsel, John Coates, submitted a rulemaking petition requesting that the SEC require more disclosure of financial information about human capital. According to the petition, there has been “an explosion” of companies “that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor.” (See this PubCo post.) The Group may be about to have its wishes granted—at least in part—but not by the SEC. Rather, the FASB is hard at work on a project to disaggregate income statement expenses, and high on all of the FASB board members’ lists was the need to separately disclose labor costs/employee compensation. Of course, as reported by Bloomberg (here and here), there has been a push for disaggregation of expenses on the income statement since at least 2016, but in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It’s been quite a lengthy pause, but, in February 2022—perhaps hearing the call from investors and others—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.” It seemed from the FASB Board discussion that the Board members were favorably inclined to proceed with a disaggregation requirement—especially with respect to labor costs.
FASB plans to require supply chain financing disclosure beginning next year
For several years, the SEC staff and advisory committees, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been making noise about a popular financing technique called “supply chain financing.” It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. Currently, there are no explicit GAAP disclosure requirements to provide transparency about a company’s use of supply chain financing. That may be why Bloomberg has referred to supply chain financing as “hidden debt.” In December, the FASB announced that it had issued a proposed Accounting Standards Update intended to help investors and others “better consider the effect of supplier finance programs on a buyer’s working capital, liquidity, and cash flows.” The proposed ASU would require the buyer in a supply chain financing program to “disclose sufficient information about the program to allow an investor to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.” On Wednesday, the FASB finalized the details of the plan and gave the go-ahead to draft the new ASU (which is expected to be available later this year). The new ASU would apply to both public and private companies. Although the final ASU has not yet been issued and is still subject to a final ballot, companies with supply chain financing programs may want to take note of this anticipated new requirement now. According to Bloomberg, there “will be a shorter turnaround than usual for complying with new FASB requirements”; compliance will be required retrospectively for fiscal years beginning after December 15, 2022, i.e., the first quarter of 2023.
FASB issues proposed update on supply chain financing programs
For over two years, the SEC staff and advisory committees, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been making noise about a popular financing technique called “supply chain financing.” It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. Currently, there are no explicit GAAP disclosure requirements to provide transparency about a company’s use of supply chain financing. That may be why Bloomberg has referred to supply chain financing as “hidden debt.” Late last month, the FASB announced that it had issued a proposed Accounting Standards Update intended to help investors and others “better consider the effect of supplier finance programs on a buyer’s working capital, liquidity, and cash flows.” The proposed ASU would require the buyer in a supply chain financing program to “disclose sufficient information about the program to allow an investor to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.” The comment period will be open until March 21, 2022.
SEC to scrutinize company accounting for impact of climate
In February, then-Acting SEC Chair Allison Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. (See this PubCo post.) In March, the SEC announced the creation of a new Climate and ESG Task Force in the Division of Enforcement. (See this PubCo post.) How else does this new ESG focus play out? On Wednesday, Bloomberg reported, Lindsay McCord, Corp Fin Chief Accountant, in remarks to the Baruch College spring financial reporting conference, said that the SEC staff are also “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.” So, in addition to refreshing their understandings of the 2010 guidance, companies will also need to take a hard look at the how environmental issues could affect their financials.
FASB to look at requiring disclosure of supply chain financing
For over a year, the SEC, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been sounding the alarm about a popular financing technique called “supply chain financing”—not that there’s anything wrong with it, inherently at least. It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. This week, the FASB voted to add to its agenda a project to address the lack of transparency associated with the use of supplier finance programs.
FASB tentatively decides on new staggered approach to effective dates for major standards
As anticipated in this PubCo post, at its July 17 meeting, the FASB Board signaled its intent to adopt a new “two-bucket” approach that would stagger the effective dates for new major accounting standards. Under the new approach, the effective dates of major new standards would be delayed for entities in “Bucket Two”—smaller reporting companies, private companies, employee benefit plans and not-for-profit organizations— for at least two years after the effective dates for entities in “Bucket One”—other SEC filers. The determination of whether an entity is an SRC will be based on the entity’s most recent assessment in accordance with SEC regulations. (See this PubCo post and this Cooley Alert.)
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