It takes time to implement new accounting policies and procedures and supporting controls and systems. Below is a select list of new accounting standard updates (“ASU” or “Update”) effective for nonpublic entities in calendar year 2022.
Warning… accounting complexities may prove challenging! Now is the time to evaluate the implications these may have on your financial reporting framework.
Click below on any of the topics not covered in this article to read our individual blogs.
- ASU 2016-02 Leases (Topic 842)
- ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes
- ASU 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (A Consensus of the Emerging Issues Task Force)
- ASU 2021-07 Stock Compensation – Stock Compensation (Topic 718) Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (A Consensus of the Private Company Council)
Below is a summary of ASU 2020-01.
ASU 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (A Consensus of the Emerging Issues Task Force) (“ASU 2020-01):
The new guidance clarifies the interactions between ASC 321, ASC 323 and ASC 815, including accounting for the transition to/from the equity method of accounting for certain equity securities and the accounting for certain forward contracts and purchased options.
As stated in the amendment of the FASB Codification for this Update, “The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.”
If, for an equity investment, an entity must transition, due to an observable transaction, from the measurement alternative under ASC 321 to the equity method, the entity must remeasure the investment immediately before the transition.
If, for an equity investment, an entity must transition, because of an observable transaction, from the equity investment to the measurement alternative under ASC 321, the entity must remeasure the investment immediately after the transition.
The amendment of the FASB Codification for this Update also states, “The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.”
Therefore, the entity will not consider how it will account for the underlying securities upon the eventual settlement of the forward contract or exercise of the purchased option as part of assessing the accounting for these arrangements. The entity should continue to assess the accounting for these arrangements under the characteristics in paragraphs 815-10-15-141(b) through 815-10-15-141(d).
Please refer to the Codification in its entirety for the complete guidance and a full understanding of the implications.
The adoption of a new accounting standard can consume a significant amount of a company’s valuable time and resources. Sarbey, Lexow & Kaufman’s Audit & Assurance professionals are available to assist your organization in navigating and implementing these, as well as all other accounting standards. Please contact us at [email protected] so we may assist you with specific advice and/or implementation support.