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 2021-07.
ASU 2021-07 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) (“ASU 2021-07”):
Measuring the grant-date fair value of equity-classified share-based awards, can be extremely complicated and costly to the entity, particularly because the underlying shares are often not actively traded. Such feedback was submitted by private companies to the Private Company Council to the FASB, resulting in the issuance of the practical expedient under ASU 2021-07.
This practical expedient applies to nonpublic companies only.
Per ASU 2021-07, “The practical expedient describes the characteristics of the reasonable application of a reasonable valuation method including (1) the date on which a valuation’s reasonableness is evaluated, (2) the factors that a reasonable valuation should consider, (3) the scope of information that a reasonable valuation should consider, and (4) the criteria that should be met for the use of a previously calculated value to be considered reasonable.”
The FASB points out in ASU 2021-07, that these same characteristics “…are used in the regulations of the U.S. Department of Treasury related to Section 409A of the U.S. Internal Revenue Code (the Treasury Regulations) to describe the reasonable application of a reasonable valuation method for income tax purposes.” Thus, the practical expedient aligns with the Internal Revenue Code and the same measurement may be used for both GAAP and tax purposes, potentially eliminating the need for two separate valuations.
In addition, the FASB notes that while independent appraisal may still be used by nonpublic entities, the practical expedient permits internal valuations when meeting the required characteristics in this Update.
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.