By Editor George W. Benson & Teresa H. Castanias, CPA
By Editor Barbara A. Wech, Ph.D.; Steve Grice, Ph.D., CPA; Dena Mitchell, Ph.D., CPA
President
Erik Gillam, CPA
Aldrich CPAs +Advisors
Vice President
Julia Sevald, CPA Land O'Lakes, Inc.
Treasurer Kent Erhardt CoBank, ACB
Secretary Jim Halvorsen CLA (CliftonLarsonAllen)
Immediate Past President
Eric Krienert, CPA
Far Western
Executive Committee
Melissa Felty First
Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance
Collat School of Business
CSB 319, 710 13th Street South Birmingham, AL 35294-1460 • (205) 934-8827
fmessina@uab.edu
Back in 1999, I spent part of my professor sabbatical with NCFC in Washington DC lobbying cooperative tax law on Capitol Hill. It was truly a blessed experience of a lifetime. Most everything I learned about tax law and how it was made studying in college and getting my PhD, my eyes would now be opened in DC. In every meeting with every Congress House person or Senator (and there were many), the same story always came up that we would go in explaining our situation and why it was needed and then be told that another group had come in with its requests as well and how our position would hurt them. That is when you realize that each party had their “list” of requests and that truly the only way to get any agenda done was to control all of Congress and the Presidency or cooperate and negotiate.
It will be an interesting time in the United States over the next couple of years. We believe in the Cooperative Principles and know that the way forward is through cooperation.
Remember, we too are always looking for you to share your knowledge since you may have some extra time on your hands (like others continue to do) with us through articles in The Cooperative Accountant. Feel free to contact me (fmessina@ uab.edu) if you have any ideas or thoughts on a potential article contribution. Sharing knowledge is a wonderful thing for all!!! Knowledge can change our world!
That is why we must remember – “The Past is history; the Future is a mystery, but this Moment is a Gift – that’s why it’s called the Present.”
Positively Yours,
Frank M. Messina, DBA, CPA
Articles and other information which appear in The Cooperative Accountant do not necessarily reflect the official position of the NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed. The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Centerville, Ohio 45459 digitally. The Cooperative Accountant is published as a direct benefit/ service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available to university libraries, government agencies and other libraries. Land Grant colleges may receive a digital copy. Send requests and contact changes to: The National Society of Accountants for Cooperatives, 7946 Clyo Road, Suite A, Centerville, Ohio 45459.
Introduction
The role of an accountant has been evolving significantly over the last several years and will continue to be notably impacted by continuously emerging technology solutions. The days when accountants were predominantly number-crunchers and those that put together financial reports are dwindling, if not all together gone. Traditional accounting tasks have been streamlined or eliminated with the introduction of multiple technological solutions. Data analytics has instead risen to be one of the primary roles of the modern accountant, as the tasks of recording and processing financial data have become more automated. Less time is spent now on routine tasks such as data entry and more time is spent in analyzing financial data in order to provide value-added perspectives for decision-makers. Some of the latest modern technologies emerging that will continue to impact accountants in this analytic role-based trend are enhanced automation and artificial intelligence (AI), enhanced security and privacy challenges, real-time reporting and decision-support
technologies, data mining and visualization, and blockchain technology.
peggym@DEMCO.ORG
This article explores what digital literacy for accountants is and why it will be an important skill set for accountants to enhance through continuous learning and adaptation to a dynamic and changing technology environment. In the accounting profession, digital literacy refers to an accountant’s ability to use digital tools, software, and technology effectively to enhance accounting functions, financial analysis, compliance, and decision-making. This skill set has become crucial as the accounting field increasingly relies on digital platforms, data analytics, and automation to manage and interpret financial information.
Digital literacy is particularly important for finance and accounting staff in electric cooperatives because it enhances their ability to manage complex financial operations, Editor
regulatory requirements, and memberfocused services efficiently and accurately. Electric cooperatives face unique financial and operational challenges, often including extensive regulatory oversight, high capital costs, and a strong emphasis on member accountability.
The American Library Association Institutional Repository (ALAIR) definition is as follows:
Digital Literacy is the ability to use information and communication technologies to find, evaluate, create, and communicate information, requiring both cognitive and technical skills. (“What is Digital Literacy?” section)
The ALAIR contends that a digitally literate person is one that:
• Possesses the variety of skills – technical and cognitive – required to find, understand, evaluate, create, and communicate digital information in a wide variety of formats;
• Is able to use diverse technologies appropriately and effectively to retrieve information, interpret results, and judge the quality of that information;
• Understands the relationship between technology, life-long learning, personal privacy, and stewardship of information;
• Uses these skills and the appropriate technology to communicate and collaborate with peers, colleagues, family, and on occasion, the general public; and
• Uses these skills to actively participate in civic society and contribute to a vibrant, informed, and engaged community.
(“A Digitally Literate Person” section) Learning.com is a company that creates learning programs for educators to implement digital literacy programs. The LcomTeam (2023), from Learning.com, also provides a definition of digital literacy: Digital literacy means having the skills to effectively use technology, and the
knowledge and skills to do so safely and responsibly. “Digital” refers to technology, ranging from computers and the internet to technological objects and programs such as cellphones, smart home systems, check-in kiosks at airports and more. Literacy refers to the ability to use this technology—and to use it well.
(“What is Digital Literacy: Definition” section, para.1)
The Lcom Team explains that most people are using digital systems throughout their day, interacting with things like:
Communication technologies:
• Cell phones
• Texting
• Online chat
• Video calls/conference calls
• Social media platforms
News/Education technologies:
• Online news
• Digital learning programs
• Online searches
• Webinars
• Video streaming
• Digital portfolios
• Data analysis
• Educational games/apps
When it comes to accountants, some of the additional digital technologies that they might interact with in their professional duties could include:
• Job searching
• Work functions
• Communication
• CRM/CMS (Customer Relationship Management/Content Management System)
• Storing and retrieving records
• Time tracking/management software
• Task management software
• Accounting/tax preparation
(“Use of Digital Literacy in Everyday Life” section)
First Institution (FI), a British firm, offers study courses to develop financially fluent professionals. FI Hub (2022), their website, offers the following definition for data literacy:
Data literacy is defined as the ability to read, understand, create, and communicate data as information. It focuses on the competencies involved in working with data.
(“What do we mean by data literacy?” section)
Additionally, they note that as it relates to the role of an accountant, the benefits of data literacy skills include the following:
• Story-telling through interpretation to create insight
• Helps inform strategic decision-making
• Gives raw data context and the ability to assess risk and increase profit
• Ability to better understand a business –how it is operating and what can be done to improve it
• Information can be put in different contexts – new insight leads to new opportunities and more enjoyment in an employee’s role
• Make better and quicker decisions to become more competitive
• Helps recruitment by offering people the opportunity to learn new skills and further develop themselves – this can give a business an edge over the competition (“What are the benefits of data literacy skills?” section)
Additional benefits include, for both the accountant and the cooperative at which they work:
• Enhanced Efficiency: Digital tools help streamline repetitive tasks, enabling accountants to focus on the higher-value activities like analysis and advising.
• Improved Data Accuracy: Automated data entry and reconciliation reduce the risk of
human errors in financial records.
• Better Decision-Making: Analytics tools allow accountants to leverage data insights to better advise their organization strategically.
• Compliance Assurance: Digital literacy helps accountants stay compliant with regulations by using the latest software for accurate reporting and documentation.
• Adaptability: Technology in accounting is rapidly evolving. Digital literacy empowers accountants to adapt quickly to new tools and technologies.
Karbon is a practice management software company, and they publish a company magazine titled “Magazine.” Magazine (n.d.) notes that today’s accountants will need to adopt and refine new skills while realizing their roles will be ever-changing. The skills they see relevant in thriving within a digital environment include critical thinking, analysis, and problem solving. Additionally, self-management skills are becoming increasingly important, and include skills such as resilience, tolerance from stress, flexibility, active and ongoing learning. (“Accountants aren’t going away” section, para. 5-6)
Lach and Nzorubara (2024), of the International Federation of Accountants, list the following skill sets as key skills needed for digital financial literacy:
• Knowledge of digital financial products and services.
• Awareness of digital financial risks, including phishing, pharming, spyware, and SIM card swaps. This also includes an awareness that a user’s digital footprint, including information provided to digital financial service users, can be a source of risk.
• Knowledge of digital financial risk control.
• Knowledge of consumer rights and redress procedures.
(“What are some of the key skills needed for digital financial literacy?” section)
While many of these skills are ones that some accountants may already possess, the technologies being introduced will challenge accountants to stay focused on keeping skills up-to-date and sharpened in the ever evolving world of digital technologies. Accountants can also play a key role in advancing digital literacy throughout their departments and their cooperatives. Lach & Nzorubara remind us that accountants can serve as valuable resources in enhancing digital financial literacy in the following ways:
• They provide expert guidance on financial systems and data: Accountants possess indepth knowledge of financial systems and can provide guidance on navigating digital tools and platforms. As CPAs embrace digital finance tools, they can provide key strategic advice to clients.
• They provide security advice: Accountants are well versed in financial security measures, offering insights into protecting against online threats.
• They are educators: Accountants help translate financial concepts into accessible language, which can help individuals feel more confident in the evolving world of digital finance. They can also host training sessions and workshops to educate individuals and businesses on digital financial tools and practices. (“How can accountants help?” section)
Zhu et al. (2023), a group of three authors for the “Journal of Finance and Accountancy”, researched and identified specific themes related to skills needed for success. These included data analytics skills, automation and other AI-based application skills, digital communication skills, and cloudbased software skills. Proficiency in digital literacy for accountants includes proficiency in accounting software, data analytics skills, knowledge of cloud-based systems, cybersecurity awareness, automation and RPA (robotic process automation), familiarity with emerging technologies, digital
communication and collaboration tools, and regulatory and compliance software.
Digital literacy is no longer optional for accountants. As the role of accounting shifts from transactional to strategic, embracing digital competencies is vital for staying relevant and enhancing the value accountants bring to their organizations. Modern accountants need skills beyond the traditional bookkeeping skills, such as proficiency in data analytics, understanding of automation technologies, and effective digital communication skills to succeed in increasingly technological environments. When accountants are considering potential training opportunities or when hiring new accountants, it is important to consider the accountant’s knowledge or ability to develop effective skill sets in these areas and to engage in effective training programs to promote the development of these skill sets. For accountants to build and enhance their digital literacy, training and continuous education are essential. This can include:
• Taking online courses in data analytics, cloud technology, or cybersecurity.
• Participating in workshops or certifications focused on specific accounting software.
• Attending industry conferences on emerging technologies in accounting. Technology can be overwhelming and there is often a lot of fear about where to start. To overcome this intimidation, data literacy should be seen as a journey and can be approached by taking small steps and starting with one task or process at a time. While technology can eliminate the more rote or mundane tasks, some of the digital technologies will create new opportunities for accountants to expand their role and subsequent value to their cooperative. For instance, when spreadsheets originally started being used in finance a couple of decades ago, there was a lot of fear about what this meant for professional accountants
and their roles. Now the finance sector is one of the biggest users of spreadsheets, this is an example of the potential to partner with technology and use it as a career booster instead of a career limiter.
While technology provides an opportunity to streamline and become more efficient, it cannot replace the human element in getting work done. To be effective, accountants need to recognize there needs to be a partnership between human capabilities (which bring ethics, judgement, and trust into the operations of the cooperative) while maximizing the use of appropriate technologies in the workplace. In the end, it is the role of the accounting professional to show information, advise on the best outcome, and advise others what to focus on
from the data in order to support effective decision-making.
Digital literacy equips finance and accounting staff in electric cooperatives with tools and knowledge to handle the complex, data-intensive environment of utility management. It enables them to enhance financial reporting and compliance, use data to drive operational efficiencies, protect sensitive financial and member data, improve member transparency, and leverage emerging technologies to serve members more effectively. Ultimately, digital literacy is essential for building a financially resilient cooperative that meets member needs, operates efficiently, and adapts to the rapidly evolving technological landscape in the utility sector.
American Library Association Institutional Repository (ALAIR) Office of Information Technology Policy (OITP) and Digital Literacy Task Force. (2011). What is Digital Literacy? Retrieved November 8, 2024 from the following website: https://alair.ala.org/server/api/core/ bitstreams/6a42b84d-dbaf-4871-b2da-d60b51b21aef/content
FI Hub. (October 25, 2022). Do ALL accountants need data literacy skills? Retrieved November 8, 2024 from the following website: https://www.firstintuition.co.uk/fihub/do-allaccountants-need-data-literacy-skills/
Karbon. (n.d.). Magazine article: The World Economic Forum labeled accounting as the #3 most at-risk job. This is why you don’t need to worry. Retrieved November 8, 2024 from the following website: https://karbonhq.com/resources/diversify-your-accounting-skills/
Lach, L. & Nzorubara, D. (April 26, 2024). The New Challenge in Financial Literacy. International Federation of Accountants (IFAC). Retrieved November 8, 2024 from the following website: https://www.ifac.org/knowledge-gateway/preparing-future-readyprofessionals/discussion/new-challenge-financial-literacy
Learning.com. (January 26, 2023). What is Digital Literacy: Definition and Uses in Daily Life. Retrieved November 8, 2024 from the following website: https://www.learning.com/blog/ what-is-digital-literacy-definition-and-uses-in-daily-life/
Zhu, P., Mayer, R., & Chien, W. (2023). Strategies to Improve Digital Skills for Accountants. Journal of Finance and Accountancy, Volume 32. Retrieved November 8, 2024 from the following website: https://www.aabri.com/manuscripts/223603.pdf
By Greg Taylor
FASB ISSUES Accounting Standards Update 2024-03 INCOME STATEMENT-REPORTING COMPREHENSIVE INCOME - EXPENSE DISAGGREGATION DISCLOSURES (Subtopic 220-40) November 2024
Summary
Feedback from investors, lenders, creditors, and other allocators of capital (collectively, “investors”) on the 2021 FASB Invitation to Comment, Agenda Consultation, indicated that disclosure of disaggregated financial reporting information (in the income statement, the statement of cash flows, or the notes to financial statements) should be a top priority for the Board. The Board received similar feedback as part of the 2016 FASB Invitation to Comment, Agenda Consultation. Investors observed that more detailed information about expenses is critically important in understanding an entity’s performance, assessing an entity’s prospects for future cash flows, and comparing an entity’s performance over time and with that of other entities. Investors specifically indicated that more granular information about cost of sales and selling, general, and administrative expenses (SG&A) would assist them in better understanding an entity’s cost structure and forecasting future cash flows. Some investors also noted
gregt@dwilliams.net
the need for greater disclosure of employee compensation costs. The Board is issuing this Update to improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, SG&A, and research and development). The Board expects that nearly all public business entities will disclose more information under the amendments in this Update about the components of those expense captions than is disclosed in financial statements today. That incremental information will allow investors to better understand the components of an entity’s expenses, make their own judgments about the entity’s performance, and more accurately forecast expenses, which in turn should enable investors to better assess an entity’s prospects for future cash flows. It also will provide contextual information for an entity’s preparation and an investor’s consideration of management’s discussion and analysis of 2 financial position and results of operations (MD&A). Coupled with recent standards that enhanced the disaggregation of revenue and income tax information, the disaggregated expense information required
by the amendments in this Update will enable investors to better understand the major components of an entity’s income statement because an investor will be able to reference specific disclosures in the notes to financial statements about revenue, expenses, and income taxes.
The amendments in this Update apply to all public business entities.
What Are the Main Provisions? The amendments in this Update require disclosure, in the notes to financial statements, of specified information about certain costs and expenses. The amendments require that at each interim and annual reporting period an entity:
1. Disclose the amounts of (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil and gas-producing activities (DD&A) (or other amounts of depletion expense) included in each relevant expense caption.
A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed in (a)–(e).
2. Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.
An entity is not precluded from providing additional voluntary disclosures that may provide investors with additional decision-
useful information.
How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Are They an Improvement?
The amendments in this Update improve financial reporting by requiring that public business entities disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. This information is generally not presented in the financial statements today.
Currently, Topic 220, Income Statement— Reporting Comprehensive Income, does not require the presentation of specific expense captions on the face of the income statement (excluding the U.S. Securities and Exchange Commission [SEC] Sections). That Topic also does not currently require any disaggregation of expense captions. Certain income statement expense captions are required by industry-specific guidance or are triggered when a specific event occurs (for example, goodwill impairment). Other types of expenses, even when not required to be presented separately on the face of the income statement, are required to be disclosed separately in the notes to financial statements. For public business entities subject to the SEC’s presentation requirements, certain articles of SEC Regulation S-X Rule 210, Form and Content of and Requirements for Financial Statements, apply to entities in different industries. The amendments in this Update do not change or remove those presentation requirements or any other current presentation requirements.
The amendments in this Update do not change or remove current expense disclosure requirements. However, the amendments affect where this information appears in the notes to financial statements because entities are required to include certain current disclosures in the same tabular format disclosure as the other disaggregation requirements in the amendments.
When Will the Amendments Be Effective and What Are the Transition Requirements?
The amendments in this Update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted.
The amendments in this Update should be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this Update or (2) retrospectively to any or all prior periods presented in the financial statements.
The ASU, including effective date information, is available at www.fasb.org
FASB ISSUES Proposed Accounting Standards Update DERIVATIVES AND HEDGING (Topic 815) Hedge Accounting Improvements 2024-ED200 Issued September 25, 2024 – Comments Due November 25, 2024
Who Would Be Affected by the Amendments in This Proposed Update?
The amendments in this proposed Update would apply to any entity that elects to apply hedge accounting in accordance with Topic 815.
What Are the Main Provisions, How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Would They Be an Improvement?
Issue 1: Similar Risk Assessment for Cash Flow Hedges
The amendments in this proposed Update would expand the hedged risks permitted to be aggregated in a group of individual forecasted transactions in a cash flow hedge by changing the requirement to designate a group of individual forecasted transactions from having a shared risk exposure to having a similar risk exposure. Entities would be required to assess risk similarity both at hedge
inception and on an ongoing basis. The proposed amendments also would clarify that a group of individual forecasted transactions would be considered to have a similar risk exposure if the derivative used as the hedging instrument is highly effective against each risk in the group. In addition, in some cases, entities would be permitted to perform an ongoing qualitative assessment of whether a group of individual forecasted transactions has a similar risk exposure on a hedge-byhedge basis.
The amendments in this proposed Update would improve GAAP by expanding the hedged risks permitted to be aggregated in a group of individual forecasted transactions, thereby enabling entities to apply hedge accounting to broader portfolios of forecasted transactions. Entities would be able to apply hedge accounting in a more efficient, cost-effective manner while reducing the risk of missed forecasts for highly effective economic hedges. Furthermore, clarifying the application of the similar risk assessment would improve operability and help entities apply the guidance more consistently. Therefore, investors would have more relevant information about entities’ risk management activities related to cash flow hedges of groups of forecasted transactions.
The amendments in this proposed Update would facilitate the application of the change in hedged risk guidance to cash flow hedges of forecasted interest payments on variablerate debt instruments with contractual terms that permit the borrower to change the interest rate index and interest rate tenor (that is, reset frequency) upon which interest is accrued (commonly referred to as “chooseyour-rate” debt instruments). The contractual terms of the debt agreement would determine the alternative interest rate indexes and interest rate tenors that an entity may select during the hedging relationship without
needing to discontinue hedge accounting. In addition, the proposed amendments would permit entities to use simplified assumptions when assessing hedge effectiveness and the probability of forecasted transactions occurring. Entities would be prohibited from applying this simplified guidance by analogy to other circumstances. The amendments in this proposed Update would improve GAAP by establishing an operable model to address a pervasive hedging strategy for which stakeholders highlighted that diversity in practice exists. Furthermore, the amendments would enable entities to reduce the risk of hedge dedesignation events and missed forecasts, while broadening the application of hedge accounting. As a result, entities would be able to more consistently reflect risk management strategies in the financial information provided to investors.
The amendments in this proposed Update would expand hedge accounting for forecasted purchases and sales of nonfinancial assets. Entities would be permitted to designate variable price components of the forecasted purchase or sale of a nonfinancial asset that meet the clearly-and-closelyrelated criteria within the normal purchases and normal sales scope exception. Relative to current GAAP, which limits designation of nonfinancial components to those that are contractually specified, a model based on the clearly-and-closely-related criteria would permit hedge accounting for eligible components of forecasted spot-market transactions and subcomponents of explicitly referenced components in an agreement’s pricing formula. The amendments in this proposed Update would improve GAAP because the application of hedge accounting would not necessarily be limited by whether the nonfinancial purchase or sale transaction is executed in the spot or forward market. Furthermore, the proposed amendments also may enable entities to reduce the risk of
missed forecasts for highly effective economic hedges, more closely aligning entities’ risk management strategies with hedge accounting to better reflect those strategies in financial reporting. The amendments in this proposed Update also would clarify that entities may designate a variable price component in a contract that is accounted for as a derivative as the hedged risk if the associated forecasted purchase or sale of the nonfinancial asset qualifies to be a hedged forecasted transaction. That clarification would improve GAAP because it would resolve diversity in practice about whether hedge accounting may be applied in those situations and would allow hedge accounting to be applied to highly effective economic hedges.
The amendments in this proposed Update would permit compound derivatives composed of a written option and a nonoption derivative (for example, an interest rate swap with a written cap or floor) to qualify for designation as a hedging instrument in a cash flow hedge by adjusting the eligibility criteria for when a net written option may be designated as a hedging instrument. The proposed amendments would permit an entity to assume that certain terms of the hedged forecasted transactions match those of the hedging instrument for purposes of applying the net written option test. The amendments in this proposed Update would improve GAAP by making the net written option test more operable for hedging relationships involving a variablerate loan with an interest rate floor hedged by an interest rate swap that contains a mirror-image interest rate floor. The proposed amendments would accomplish that by allowing simplifying assumptions to be made that would accommodate differences in the loan and swap markets that exist after the cessation of the London Interbank Offered Rate (LIBOR). Making those simplifying
assumptions would allow entities to continue to apply hedge accounting for strategies involving compound derivatives composed of a written option and a non-option derivative after LIBOR cessation.
The amendments in this proposed Update would eliminate the recognition and presentation mismatch related to a dual hedge strategy (that is, a hedge for which a foreign-currency-denominated debt instrument is both designated as the hedging instrument in a net investment hedge and designated as the hedged item in a fair value hedge of interest rate risk). The proposed amendments would require that an entity exclude the debt instrument’s fair value hedge basis adjustment from the net investment hedge effectiveness assessment. As a result, an entity would immediately recognize in earnings the gains and losses from the remeasurement of the debt instrument’s fair value hedge basis adjustment at the spot exchange rate. Entities would be prohibited from applying this guidance by analogy to other circumstances.
The amendments in this proposed Update would improve GAAP by enabling entities that utilize dual hedging strategies to reflect the economic offset of changes attributable to both interest rate risk and foreign exchange risk.
The effective date for the amendments in this proposed Update will be determined after the Board considers stakeholders’ feedback on the proposed amendments.
The amendments in this proposed Update would require that an entity apply the guidance on a prospective basis for existing hedging relationships as of the date of adoption. Early adoption would be permitted for all entities on any date on or after issuance
Upon adoption of the amendments in this proposed Update, entities may either be required or permitted to modify critical terms of certain existing hedging relationships, without dedesignating the hedge.
The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org
Standards Update COMPENSATIONSTOCK COMPENSATION (Topic 718) and REVENUE FROM CONTRACTS WITH CUSTOMERS (Topic 606) CLARIFICATIONS TO SHARE BASED CONSIDERATION PAYABLE TO A CUSTOMER 2024-ED300 Issued September 30, 2024 – Comments Due November 14, 2024
The Board is issuing this guidance to reduce diversity in practice and improve the decision usefulness and operability of the guidance for share-based consideration payable to a customer in conjunction with selling goods or services.
Some entities offer to provide consideration to a customer (or to other parties that purchase the entity’s goods or services from the customer) to incentivize the customer (or its customers) to purchase goods and services. Although consideration payable to a customer often takes the form of cash or credit that can be applied against amounts owed to the entity, it also can take the form of equity instruments (or other types of sharebased consideration) such as warrants. When share-based consideration is granted to a customer (a grantee), it often vests upon the grantee purchasing a specified volume or monetary amount of goods and services from the grantor.
The guidance in Topic 606, Revenue from Contracts with Customers, requires that an entity account for consideration payable to a customer as a reduction of the transaction
price and, therefore, as a reduction of revenue unless the payment to the customer is in exchange for a distinct good or service.
The amendments in Accounting Standards Update No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer, require that a grantor apply the guidance in Topic 718, Compensation—Stock Compensation, to measure and classify share-based consideration payable to a customer (the “Topic 718 approach”). Those amendments also require that if share-based consideration payable to a customer contains vesting conditions, the grantor must determine whether the vesting conditions represent service conditions or performance conditions. That determination can affect when the grantor recognizes revenue because it is required to estimate the probable outcome of a performance condition (and, therefore, whether the share-based consideration is expected to vest or is expected to be forfeited). By contrast, for service conditions, instead of estimating forfeitures, a grantor can elect to account for forfeitures as they occur. When the grantor elects to account for forfeitures as they occur, revenue recognition may be delayed for awards that are not probable of vesting.
Stakeholders indicated that this delay in revenue recognition can diminish the decision usefulness of a grantor’s revenue information. For example, revenue may be recognized upon the forfeiture of warrants that were not expected to vest. Therefore, revenue may be recognized several reporting periods after the grantor has satisfied the related performance obligation(s), even if in that time there has been no change in the likelihood that the award will vest. Stakeholders also noted that the current guidance for forfeitures can increase the differences in financial reporting outcomes between share-based consideration payable to a customer and other forms of consideration payable to a customer
(including cash consideration).
Under current guidance, there is diversity in practice in determining whether certain conditions (for example, those based on customer purchases) are service conditions or performance conditions. Therefore, stakeholders asked that the Board clarify how to distinguish between service conditions and performance conditions. Stakeholders also asked the Board to more closely align how forfeitures of share-based consideration with service conditions and forfeitures of share-based consideration with performance conditions affect the measurement of the transaction price (which affects revenue recognition timing) to improve the operability of the guidance and the decision usefulness of the resulting financial reporting information.
The amendments in this proposed Update would affect all entities that issue share-based consideration to a customer that is within the scope of Topic 606.
Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Would They Be an
Under current GAAP, the definitions of performance condition and service condition do not explicitly discuss purchases made by a customer or parties that purchase a grantor’s goods or services from the grantor’s customers. For share-based consideration payable to a customer (including share-based consideration payable to other parties that purchase the grantor’s goods or services from the grantor’s customers) with a service condition, current GAAP permits the grantor to elect to account for the effect of forfeitures as they occur, which may result in a delay in revenue recognition for awards that are not probable of vesting.
In addition, current GAAP also does not explicitly state whether the guidance
in Topic 606 on constraining estimates of variable consideration applies to share-based consideration payable to a customer that is measured and classified under the Topic 718 approach.
The amendments in this proposed Update would revise the Master Glossary definition of the term performance condition for sharebased consideration payable to a customer. The revised definition would incorporate conditions (including vesting conditions) that are based on the volume, monetary amount, or timing of a customer’s purchases of goods or services from the grantor. The revised definition also would incorporate performance targets based on the volume of purchases made by other parties that purchase the grantor’s goods or services from the grantor’s customers.
Although proportionally fewer customer awards would be expected to have service conditions, for those that do have service conditions, the amendments in this proposed Update would eliminate the policy election permitting a grantor to account for forfeitures as they occur. Therefore, when measuring share-based consideration payable to a customer that has a service condition, the grantor would be required to estimate the number of forfeitures expected to occur. Separate policy elections for forfeitures would remain available for share-based payment awards with service conditions granted to employees and non-employees in exchange for goods or services to be used or consumed in the grantor’s own operations.
The amendments in this proposed Update would clarify that share-based consideration encompasses the same instruments as sharebased payment arrangements but the grantee would not need to be a supplier of goods or services to the grantor.
Finally, the amendments in this proposed Update would clarify that, under the Topic 718 approach, a grantor should not apply the guidance in Topic 606 on constraining estimates of variable consideration to share-
based consideration payable to a customer. Therefore, a grantor would be required to assess the probability that an award will vest using only the guidance in Topic 718.
Collectively, these changes would improve the decision usefulness of a grantor’s financial statements, improve the operability of the guidance, and reduce diversity in practice for accounting for share-based consideration payable to a customer. Under the proposed amendments, revenue recognition would no longer be delayed when an entity grants awards that are not expected to vest. This is expected to result in estimates of the transaction price that better reflect the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer and, therefore, more decision-useful financial reporting.
The amendments in this proposed Update would permit a grantor to apply the new guidance on either a modified retrospective or a retrospective basis.
When applying the amendments in this proposed Update on a modified retrospective basis, a grantor would be required to recognize a cumulative effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the period of adoption and would not recast any financial statement information before the period of adoption. A grantor would apply the proposed amendments as of the date of initial application to all share-based consideration payable to a customer.
When applying the amendments in this proposed Update on a retrospective basis, a grantor would be required to recast comparative periods and recognize a cumulative-effect adjustment to the opening
balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the earliest period presented.
The effective date and whether early application should be permitted will be determined after the Board considers stakeholders’ feedback on this proposed Update.
The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org
FASB ISSUES Proposed Accounting Standards Update INTANGIBLESGOODWILL AND OTHER-INTERNAL USE SOFTWARE Targeted Improvements to the Accounting for Internal-Use Software (Subtopic 350-40) 2024-ED400 Issued October 29, 2024 – Comments Due January 27, 2025
Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)?
The Board is issuing this proposed Update to modernize the accounting for software costs that are accounted for under Subtopic 350-40, Intangibles— Goodwill and Other—InternalUse Software (referred to as “internal-use software”), and enhance the transparency of an entity’s cash flows related to internal-use software costs.
Feedback from preparer and practitioner stakeholders on the 2021 FASB Invitation to Comment, Agenda Consultation (2021 Agenda Consultation), indicated that the accounting for software costs should be a top priority for the Board. Those stakeholders encouraged the Board to better align the accounting with how software is developed because the current guidance is outdated and lacks relevance given the evolution of software development. Specifically, many entities have shifted from using a prescriptive and sequential development method (for example, waterfall) to using an incremental and iterative development method (for
example, agile). Stakeholders stated that the current internal-use software accounting requirements do not specifically address software developed using an incremental and iterative method. As a result, stakeholders stated there are challenges in applying the current internal use software guidance, which has led to diversity in practice in determining when to begin capitalizing software costs.
Considering this feedback, the Board decided to make targeted improvements to the internal-use software guidance. Specifically, the Board decided to make targeted improvements to Subtopic 350-40 to improve the operability of the recognition guidance considering different methods of software development and to enhance the transparency of cash outflows for capitalized software costs.
The amendments in this proposed Update would apply to all entities subject to the internal-use software guidance in Subtopic 350-40. The proposed amendments also would apply to all entities that account for website development costs in accordance with Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs.
The amendments in this proposed Update would not affect entities subject to Subtopic 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed, for software to be sold, leased, or marketed (referred to as “externaluse software”).
The amendments in this proposed Update would remove all references to a prescriptive and sequential software development method (referred to as “project stages”) throughout Subtopic 350-40. The proposed amendments would specify that an entity would be required to start capitalizing software costs when both of the following occur:
1. Management has authorized and committed to funding the software project.
2. It is probable that the project will be completed, and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”).
In evaluating the probable-to-complete recognition threshold, an entity may have to consider whether there is significant uncertainty associated with the development activities of the software (referred to as “significant development uncertainty”). Factors to consider in determining whether there is significant development uncertainty include whether:
1. The software being developed has novel, unique, unproven functions and features or technological innovations.
2. The entity has determined what it needs the software to do (for example, functions or features), including whether the entity has identified or continues to substantially revise the software’s significant performance requirements.
The proposed amendments would require an entity to separately present cash paid for capitalized internal-use software costs as investing cash outflows in the statement of cash flows.
Additionally, the proposed amendments would supersede the website development costs guidance and incorporate the recognition requirements for website-specific development costs from Subtopic 350-50 into Subtopic 350- 40.
Under current GAAP, entities are required to capitalize development costs incurred for internal-use software depending on the nature of the costs and the project stage during which they occur. Stakeholders have said that applying this guidance can be challenging because entities have trouble differentiating between the project stages, particularly in
an iterative development environment. The amendments in this proposed Update would improve the operability of the guidance by removing all references to software development project stages so that the guidance would be neutral to different software development methods, including methods that entities may use to develop software in the future.
Many investors have noted that transparency about an entity’s software costs could be enhanced and, in certain circumstances, additional information could be decision useful. The amendments in this proposed Update would enhance transparency for investors, lenders, creditors, and other allocators of capital (collectively, “investors”) by requiring entities to classify cash paid for software costs accounted for under Subtopic 350-40 as investing cash flows in the statement of cash flows and to present those cash outflows separately from other cash outflows.
The amendments in this proposed Update would permit an entity to apply the guidance either prospectively or retrospectively. Under the prospective transition approach, an entity would apply the proposed amendments to software costs incurred during annual reporting periods (and interim reporting periods within those annual reporting periods) beginning after the effective date, including costs incurred after the effective date for inprocess projects.
Under the retrospective transition approach, an entity would recast comparative periods and recognize a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the first period presented.
The Board will determine the effective
date and whether early application should be permitted after it considers stakeholder feedback on the amendments in this proposed Update.
The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org
FASB ISSUES Proposed Accounting Standards Update BUSINESS COMBINATIONS (Topic 805) AND CONSOLIDATION (Topic 810) Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity 2024-ED500 Issued October 30, 2024 – Comments Due December 16, 2024
The Board is issuing this proposed Update to improve the requirements for identifying the accounting acquirer in Topic 805, Business Combinations.
In a business combination, the determination of the accounting acquirer and acquiree can significantly affect the carrying amounts of the combined entity’s assets and liabilities, which, in turn, can affect post combination net income. The accounting acquiree’s assets and liabilities are generally required to be initially measured at fair value, subject to specific exceptions in Topic 805. By contrast, the accounting acquirer’s existing assets and liabilities are not remeasured under the business combinations guidance.
In a business combination in which the acquired entity is not a variable interest entity (VIE), an entity may be required to consider certain factors to identify the accounting acquirer. When applying those factors, an entity may determine that a transaction is a reverse acquisition (in which the legal acquirer is identified as the acquiree for accounting purposes) or that the transaction should not be accounted for as a business combination (because the accounting acquiree is not a business). However, in a business combination
in which a VIE is acquired, current guidance requires that the primary beneficiary (the entity that consolidates a VIE) always is the accounting acquirer.
Stakeholders indicated that the current guidance for determining the accounting acquirer results in a lack of comparability between transactions involving VIEs and those not involving VIEs. Specifically, stakeholders have noted that if the legal acquiree is a VIE, the transaction cannot be accounted for as a reverse acquisition. Stakeholders noted that the current guidance affects not only the determination of which entity is the accounting acquirer but also whether a business combination has occurred.
To address stakeholder concerns, the amendments in this proposed Update would revise current guidance for determining the accounting acquirer for a transaction effected primarily by exchanging equity interests in which the legal acquiree is a VIE that meets the definition of a business. The proposed amendments would require an entity to consider the same factors that are currently required for determining which entity is the accounting acquirer in other acquisition transactions.
The amendments in this proposed Update would affect entities involved in acquisition transactions effected primarily by exchanging equity interests when the legal acquiree is a VIE that meets the definition of a business.
The amendments in this proposed Update would require an entity involved in an acquisition transaction effected primarily by exchanging equity interests when the legal acquiree is a VIE that meets the definition of
a business to assess the factors in paragraphs 805-10-55-12 through 55-15 to determine which entity is the accounting acquirer.
The amendments in this proposed Update would differ from current GAAP because, for certain transactions, they would replace the requirement that the primary beneficiary always is the acquirer with an assessment that would require an entity to consider the factors to determine which entity is the accounting acquirer.
The amendments in this proposed Update would enhance the comparability of financial statements across entities engaging in acquisition transactions effected primarily by exchanging equity interests when the legal acquiree meets the definition of a business. Specifically, under the proposed amendments, acquisition transactions in which the legal acquiree is a VIE would, in more instances, result in the same accounting outcomes as economically similar transactions in which the legal acquiree is a voting interest entity.
For a transaction that is determined to be a reverse acquisition, the required accounting would not be changed. The accounting required for a transaction in which the legal acquirer is not a business and is determined to be the accounting acquiree also would not be changed.
The amendments in this proposed Update would require that an entity apply the new guidance prospectively to any acquisition transaction that occurs after the initial application date. Early adoption would be permitted.
The effective date will be determined after the Board considers stakeholder feedback on the amendments in this proposed Update.
The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org
(Topic 270)
Scope Improvements 2024-ED600 Issued November 13, 2024 –Comments Due March 31, 2025
The Board is issuing the amendments in this proposed Update to improve the guidance in Topic 270, Interim Reporting, by improving the navigability of the required interim disclosures and clarifying when that guidance is applicable. The proposed amendments also provide additional guidance on what disclosures should be provided in interim reporting periods. The proposed amendments include adding to Topic 270 a principle that would require entities to disclose events and changes since the end of the last annual reporting period that have a material impact on the entity. The Board does not intend to change the fundamental nature of interim reporting or expand or reduce current interim disclosure requirements, which were determined by prior Boards when the disclosure requirements were initially issued. Rather, the objective of the proposed amendments is to provide clarity on the current interim reporting requirements.
The Board has received feedback from stakeholders that Topic 270 is challenging and complex to navigate. The complexity of this Topic is mainly a result of the development of the source literature, the initial codification of the historical content, and subsequent amendments to the Topic as new accounting guidance was issued over time. Accordingly, the Board sought to clarify the types of interim reporting that are subject to the requirements in Topic 270.
The Board previously considered amendments to interim reporting in Topic 270 as part of the Disclosure Framework project, which resulted in the issuance of proposed Accounting Standards Update, Interim Reporting (Topic 270): Disclosure
Framework—Changes to
Requirements, in 2021. Although respondents to that proposed Update supported the Board’s efforts, they expressed concerns about the proposed amendments. When redeliberating the 2021 proposed Update, the Board decided that the project’s objective is to improve the guidance in Topic 270 by clarifying when that guidance is applicable, thereby improving the navigability of the required interim disclosures. The Board also decided to provide additional guidance on what interim disclosures should be provided in interim reporting periods.
The amendments in this proposed Update would apply to all entities that provide interim financial statements and notes in accordance with generally accepted accounting principles (GAAP).
The amendments in this proposed Update include guidance about what is meant by the phrase interim financial statements and notes in accordance with GAAP, including referencing U.S. Securities and Exchange Commission (SEC) requirements for entities to which those requirements apply.
The amendments in this proposed Update would clarify interim disclosure requirements and the applicability of Topic 270.
The amendments in this proposed Update would result in a comprehensive list of interim disclosures that are required by GAAP. In developing the list of disclosures required by other Topics, the Board focused on identifying the interim disclosures that are currently required under GAAP. The objective of the proposed amendments is to provide clarity about the current requirements, rather than evaluate whether to expand or reduce interim disclosure requirements.
The amendments in this proposed Update also include a disclosure principle that would require entities to disclose events and changes since the end of the last annual reporting period that have a material impact on the entity. The intent of the proposed disclosure principle, which is modeled after (and intended to be applied consistently with) a previous SEC disclosure requirement, is to help entities determine whether disclosures not specified in Topic 270 should be provided in interim reporting periods.
The amendments in this proposed Update also would clarify the applicability of Topic 270, the types of interim reporting, and the form and content of interim financial statements in accordance with GAAP. The Board expects that these clarifications would enhance consistency in interim reporting for all entities.
The Board considers the amendments in this proposed Update to be necessary to reflect the development of interim reporting over time.
The amendments in this proposed Update would be applied prospectively to interim financial statements and notes in accordance with GAAP issued for interim reporting periods after the effective date.
The Board will determine the effective date and whether early adoption should be permitted after it considers stakeholder feedback on the amendments in this proposed Update.
The Proposed ASU, including questions for respondents and effective date information, is available at www.fasb.org
INDICATORS FOR BUSINESS ENTITIES 2024-ITC100 Issued November 14, 2024 –Comments Due April 30, 2025
For purposes of this document, a Financial KPI is any financial measure that is calculated or derived from the financial statements and/ or underlying accounting records that is not presented in the GAAP financial statements. This includes:
1. Measures derived from amounts presented in the financial statements (for example, a current ratio calculated using current assets and current liabilities as presented in a classified balance sheet)
2. Measures derived from adjusting amounts presented in the financial statements (for example, adjusted net income, adjusted revenue, and adjusted earnings per share (EPS))
3. Measures derived from or calculations based on other information included in financial statements or other financial records (for example, earnings before interest, taxes, depreciation, and amortization (EBITDA), free cash flow (FCF), organic sales growth, and funds from operations (FFO)).
The financial statements include certain financial performance measures, totals, and subtotals that appear directly in the financial statements. Current GAAP requires certain performance measures (for example, EPS), totals (for example, revenue), and subtotals (for example, net income or current liabilities in a classified balance sheet), and entities may also provide certain other subtotals on a voluntary basis (for example, gross profit). Those financial reporting measures, totals, and subtotals presented in the financial statements are not Financial KPIs as described in this ITC and are not the subject of this ITC.
Over the years, the FASB staff has received diverse feedback about addressing the perceived issues with Financial KPIs. Some
stakeholders support the FASB defining certain commonly used Financial KPIs, such as EBITDA, because those measures are viewed as widely applicable across many sectors and can provide a useful starting point for comparison among entities. In addition, some stakeholders noted that if a common definition is included in the financial statements, any non-GAAP disclosure of an adjusted figure would need to be reconciled to the closest GAAP requirement (for example, adjusted EBITDA presented outside the financial statements would be reconciled to EBITDA as included in the financial statements).
Some stakeholders support increased transparency surrounding Financial KPIs in the financial statements rather than standardization. Those stakeholders noted that Financial KPIs are important tools that allow management to articulate its specific view of an entity’s performance and by design should be entity specific.
Other stakeholders do not support the FASB undertaking a project on Financial KPIs. Some of those stakeholders indicated that even if certain commonly used Financial KPIs were defined, many entities would continue to present adjusted versions, potentially diminishing the benefit of a standardized definition. Furthermore, a small number of investors indicated that current GAAP totals and subtotals (for example, net income and cash flow from operations) are sufficient and that elevating any Financial KPIs to the GAAP financial statements would give those measures undue prominence.
This ITC is intended to gather information about those diverse views to aid the Board and the FASB staff in determining next steps.
One approach for a potential project would be to define certain commonly used Financial KPIs (for example, EBITDA and/or FCF) and require or permit disclosure of those measures in an entity’s GAAP financial statements.
Another approach for a potential project would be to require or permit an entity to disclose Financial KPIs that management presents outside the financial statements. This approach could be similar to the presentation requirements for management performance measures (MPMs) under International Financial Reporting Standards (IFRS) 18, Presentation and Disclosure in Financial Statements. See Appendix D for a summary of the IFRS 18 reporting requirements for MPMs.
The key decision to make under Approach 2 would be to establish the specific criteria to determine if an entity would be required or permitted to disclose a Financial KPI within its GAAP financial statements. One alternative would be to require or permit disclosure within GAAP financial statements of all Financial KPIs that entities present outside the financial statements, regardless of the venue or format. Another alternative would be to require or permit disclosure within GAAP financial statements any Financial KPIs that entities present in their earnings announcements or other regulatory filings.
Approaches 1 and 2 are not mutually exclusive. The FASB could pursue standard setting that combines elements of Approach 1 and Approach 2. The Invitation to Comment, including questions for respondents, is available at www.fasb.org
Wednesday, September 18, 2024, FASB Board Meeting
The Board discussed various Codification Improvement issues and made the following decisions:
1. Remove the Master Glossary term amortized cost.
2. Clarify comparative financial statement
requirements in paragraph 205-10-452 by replacing the list of individually named financial statements with the phrase financial statements.
3. Clarify the illustration in paragraph 220-10-55-7 by (a) updating the “other comprehensive income, before tax” line item to “other comprehensive income, net of tax” and (b) correcting the arithmetic errors in the illustration.
4. Clarify that when a loss from continuing operations exists, an entity should consider whether including potential common shares in the denominator of a diluted earnings per share (EPS) calculation would have a dilutive effect, by evaluating the combined effect of adjustments to the numerator and denominator.
5. Add a subparagraph in paragraph 31010-50-40 to clarify that a lessor’s net investment in leases or lease receivables arising from sales-type leases or direct financing leases should be excluded from the enhanced disclosure requirements introduced by the amendments in Accounting Standards Update No. 202202, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.
6. Update the description of the calculation of the reference amount for beneficial interests in paragraph 325-40-35-4B to include the allowance for credit losses.
7. Link the Master Glossary term class of financing receivable to paragraphs 32620-30-4A, 326-20-35-8A, and 326-20-455.
8. Remove paragraph 360-10-40-2, which was previously superseded as part of the amendments in Accounting Standards Update No. 2017-05, Other Income— Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 61020): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.
9. Update paragraph 410-30-25-17
to include references to relevant capitalization guidance for environmental remediation costs.
10. Clarify the treasury stock retirement guidance in paragraph 505-30-30-8 to explicitly permit the excess of repurchase price over par or stated value to be accounted for entirely as a deduction from additional paid-in capital.
11. Clarify the repurchase agreement illustrative example for a call option in paragraph 606-10-55-404 by correcting the error in the date that the option lapses unexercised.
12. Amend paragraph 740-10-55-38(b)(1) to reflect the intraperiod tax allocation guidance in paragraph 740-20-55-12C.
13. Remove reference to the pooling-of interests method in paragraph 815-40-555.
14.Update the references in paragraph 820-10-55-53 for investments in equity securities to Subtopics 321-10, Investments—Equity Securities—Overall, and 958-321, Not-for-Profit Entities— Investments—Equity Securities.
15.Update the scope of the not-for-profit entity (NFP) fair value option guidance in paragraph 825-10-15-7(c) to reference the relevant presentation guidance in paragraphs 958-220-45-9 through 45-12.
16. Add a reference to other-than-temporary impairment (OTTI) in paragraph 825-1025-4(e) to reflect that it would not be appropriate to elect the fair value option for an equity method investment upon recording an OTTI for that investment.
17. Amend the illustrative statement of cash flows for an entity that is in reorganization in paragraph 852-10-55-3 to correct labeling errors.
18. Update the illustrations in paragraphs 852-10-55-9 through 55-10 to reflect that reorganization value in excess of amounts allocable to identifiable assets is required to be recognized as goodwill in accordance with paragraph 852-10-45-20.
19. Update paragraph 860-10-55-3 to replace cost method investments with investments accounted for in accordance with Topic 321, Investments—Equity Securities.
20. Clarify that the sale or transfer of receivables from contracts with customers recognized in accordance with the guidance in paragraph 606-10-45-4 is accounted for as a sale or transfer of financial assets and, therefore, is subject to the requirements of Subtopic 860-10, Transfers and Servicing—Overall.
21. Correct the sentence fragment in paragraph 860-10-55-42B.
22. Remove the OTTI guidance in paragraph 944-360-45-5.
23. Clarify in paragraph 954-810-15-3(b) that an NFP business-oriented health care entity with an investment in a for-profit entity, other than a limited partnership or similar legal entity (such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership), should apply the guidance in the General Subsections of Subtopic 810-10, Consolidation—Overall, to determine whether that interest constitutes a controlling financial interest.
24. Remove the phrase recognized and unrecognized from the NFP income statement guidance in paragraph 958220-45-9(c).
25. Update paragraph 958-310-35-3 to refer to Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, for guidance on the accounting for receivables.
26. Update footnote (b) in the illustrative example in paragraph 958-310-551 to remove the qualifier with readily determinable fair values and add the reference to Topic 321 and Subtopic 958321, for guidance on equity securities.
27. Add references in paragraph 958325-35-1 to other Subtopics, such as Subtopic 360-10, Property, Plant, and
Equipment—Overall, and Subtopic 35010, Intangibles—Goodwill and Other— Overall, to reference impairment guidance for other types of investments applicable to Subtopic 958-325, Not-for-Profit Entities—Investments—Other.
28. Remove the phrase are not equity securities from the NFP other investments guidance in paragraphs 958-325-35-5 and 958-325-35-7.
29. Remove paragraphs 958-360-50-4(d) and 958-605-55-25 related to the use of a probability assessment in evaluating whether to recognize part of a transaction as a contribution.
30. Update paragraph 958-805-25-21 to reference the exceptions discussed in paragraphs 805-20-25-16 through 25-17 and related guidance.
31. Update paragraph 958-805-30-5 to clarify that an NFP that is an acquirer applies the guidance in Subtopic 958-805, Not-forProfit Entities—Business Combinations, instead of the guidance in Subtopic 805-20, Business Combinations— Identifiable Assets and Liabilities, and Any Noncontrolling Interest, or Subtopic 805-30, Business Combinations—Goodwill or Gain from Bargain Purchase, Including Consideration Transferred.
32. Add paragraph 958-815-25-2 to reference relevant guidance for the timing of hedge documentation and hedge effectiveness assessments for certain NFPs.
33. Update the illustrative financial statements and disclosures of a defined contribution plan in paragraph 962-325-55-17 to remove the reference to (a) allowance for credit losses and (b) transfers between Levels 1 and 2 fair value measurements.
34. Update paragraph 970-323-05-4 to reference the use of the proportional amortization method to investments made primarily for the purpose of receiving income tax credits and other income tax benefits.
The Board decided that, in the period of adoption, the proposed amendments to Topic 260, Earnings Per Share, should be applied retrospectively and an entity should provide, in the interim period of the change (if applicable) and the annual period of the change, the transition disclosures in paragraphs 250-10-50-1, except for the requirements in paragraph 250-10-50-1(b)(2) for the current period and paragraph 250-1050-1(c).
The Board decided to permit an entity to apply all other proposed amendments either prospectively or retrospectively.
The Board decided that upon adoption of the amendments, if an entity elects the prospective transition approach, it should disclose the nature of and reason for the change in accounting principle, consistent with the requirements in paragraph 250-1050-1(a).
The Board decided that upon adoption of all other proposed amendments, if an entity elects the retrospective transition approach, it should provide, in the interim period of the change (if applicable) and the annual period of the change, the transition disclosures in paragraphs 250-10-50-1, except for the requirements in paragraphs 250-10-50-1(b)(2) for the current period and paragraphs 250-1050-1(b)(4) and 250-10-50-1(c)(1).
The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected costs and expected benefits of the amendments in the proposed Update and that the expected benefits of those amendments would justify the expected costs.
The Board directed the staff to draft a
proposed Accounting Standards Update for vote by written ballot. The Board also decided on a 90-day comment period for the proposed Update.
October 2, 2024, FASB
Post-Implementation Review of Topic 606, Revenue from Contracts with Customers. The Board discussed the post-implementation review (PIR) activities completed on Topic 606 and the status of the Revenue PIR process. The Board made no decisions. Financial Instruments—Credit Losses (Topic 326)—Purchased Financial Assets. The Board continued redeliberations on the proposed Accounting Standards Update, Financial Instruments—Credit Losses (Topic 326): Purchased Financial Assets, and made the following decisions.
The Board affirmed its proposal to include HTM debt securities in the scope of the grossup approach and that all purchased HTM debt securities are deemed seasoned. However, the Board decided that HTM beneficial interests within the scope of Subtopic 32540, Investments—Other—Beneficial Interests in Securitized Financial Assets, should follow the guidance in that Subtopic and only be subject to the gross-up approach when an HTM beneficial interest is accounted for under Subtopic 326-20, Financial Instruments— Credit Losses—Measured at Amortized Cost.
The Board decided to recognize offbalance-sheet credit exposures under the gross-up approach by recognizing the credit loss in other comprehensive income on the date that an entity either (1) enters into a forward commitment to purchase financial assets accounted for under the gross-up approach or (2) purchases an unfunded commitment that would have been accounted
for under the gross-up approach if it had been funded at the purchase date.
The Board decided to exclude contract assets and lease receivables from the scope of the gross-up approach and clarify that any initial allowance for credit losses should be established through the income statement and not through purchase accounting.
The Board decided to exclude trade accounts receivable from the scope of the gross-up approach.
The Board discussed the gross-up approach related to revolving credit arrangements and directed the staff to perform additional research on credit cards, other consumer revolvers, and commercial revolvers relevant to determining which assets should be included in a scope exception. The Board also directed the staff to perform additional research on credit-impaired available-for-sale debt securities.
Wednesday, October 16, 2024 FASB Board
Meeting
Presentation of contract assets and contract liabilities for construction contractors. The Board discussed the Private Company Council’s (PCC’s) project on the presentation of contract assets and contract liabilities for construction contractors and made the following decisions.
The Board endorsed the PCC’s decision that the scope of the presentation alternative would be private construction companies within the scope of Topic 910, Contractors— Construction.
The Board endorsed the PCC’s decision to
provide an alternative for private companies to present contract assets and contract liabilities on a gross basis on the statement of financial position. The presentation alternative would be applied at the entity level.
The Board endorsed the PCC’s decision to require that a private company disclose when it has elected the presentation alternative.
The Board endorsed the PCC’s decision to require a full retrospective transition approach and related transition disclosures. The Board also decided that when a private company initially applies the presentation alternative for contract assets and contract liabilities, it need not justify that the use of the accounting alternative is preferable as described in paragraph 250-10-45-2.
The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected benefits and expected costs of the amendments in the proposed Update and that the expected benefits of the proposed amendments would justify the expected costs.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The Board also decided on a 45-day comment period for the proposed Update.
Credit losses—Topic 606 receivables. The Board discussed the Private Company Council’s (PCC’s) project on the application of Topic 326, Financial Instruments—Credit Losses, to current accounts receivable and contract assets arising from revenue transactions and made the following decisions.
Scope
The Board decided that private companies
and not-for-profit entities excluding not-forprofit conduit bond obligors would be eligible for the simplified approach.
The Board endorsed the PCC’s decision that the scope of the simplified approach would be current accounts receivable and contract asset balances arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers.
The Board endorsed the PCC’s decision to provide a recognition and measurement practical expedient and, for entities that elect the practical expedient, an accounting policy election designed to simplify the credit loss allowance determination.
Practical expedient. An entity that elects the practical expedient would not be required to adjust historical loss information to reflect changes related to relevant economic data. Rather, an entity would assume that current economic conditions as of the balance sheet date will persist throughout the forecast period.
Accounting policy election. An entity that elects the practical expedient would also be permitted to make an accounting policy election to consider subsequent cash collection after the balance sheet date but before the date the financial statements are available to be issued.
The Board endorsed the PCC’s decision to require that an entity disclose when the practical expedient and accounting policy election have been used.
The Board endorsed the PCC’s decision to require a prospective transition method, with the ability for an entity to forgo a preferability assessment (as described in paragraph 250-10-45-2) the first time that it elects the practical expedient and the accounting policy election.
The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected benefits and expected costs of the amendments in the proposed Update and that the expected benefits of those amendments would justify the expected costs.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The Board also decided on a 45-day comment period for the proposed Update.
Interim reporting—narrow-scope improvements, accounting for government grants, and accounting for environmental credit programs. The Board discussed extending the comment period for the proposed Accounting Standards Updates on the following projects:
1. Interim Reporting—Narrow-Scope Improvements
2. Accounting for Government Grants
3. Accounting for Environmental Credit Programs.
The Board decided to set the following comment period deadlines:
1. Interim Reporting—Narrow-Scope Improvements—March 31, 2025
2. Accounting for Government Grants—March 31, 2025
3. Accounting for Environmental Credit Programs—April 15, 2025.
The Private Company Council (PCC) met on Tuesday, September 24, 2024. Below is a summary of topics discussed by PCC and FASB members at the meeting:
• PCC Agenda Priorities: The PCC continued discussing the topics identified
and discussed at the April and June 2024 PCC meetings: credit losses— short-term trade accounts receivable and contract assets, debt modifications and extinguishments, presentation of conditional retainage and overbillings as contract assets and liabilities, and lease accounting simplifications.
• PCC added a project to its technical agenda on the application of Topic 326, Financial Instruments—Credit Losses (CECL), to current accounts receivable and contract assets arising from revenue transactions. PCC members completed initial deliberations and made decisions on (1) scoping the project to current accounts receivable and contract assets resulting from transactions accounted for under Topic 606, Revenue from Contracts with Customers, for private companies, (2) providing a practical expedient that, as part of the development of a reasonable and supportable forecast, a private company need not adjust historical loss information to reflect changes related to relevant economic data and may assume that current economic conditions as of the balance sheet date persist throughout the forecast period, (3) providing an accounting policy election to consider subsequent cash collection if the practical expedient is elected, (4) requiring private companies to disclose when the practical expedient and the accounting policy has been elected, and (5) requiring prospective transition. The PCC asked the FASB staff to draft an Exposure Draft of a proposed Accounting Standards Update, subject to FASB endorsement.
• PCC added a project to its technical agenda on the presentation of contract assets and contract liabilities for private companies in the construction industry. PCC members completed initial deliberations and made decisions on (1) providing a private company alternative
that allows private construction companies within the scope of Subtopic 910-10, Contractors—Construction— Overall, to separately present contract assets and contract liabilities on a gross basis, at the contract level, on the balance sheet for all of a company’s contracts with customers, (2) requiring a private construction company to disclose when it has elected the private company alternative, and (3) requiring retrospective transition and certain transition disclosures in the period of adoption. The PCC asked the FASB staff to draft an Exposure Draft of a proposed Accounting Standards Update, subject to FASB endorsement.
• PCC members discussed the outreach conducted with financial statement users on the financial reporting outcomes associated with applying Subtopic 470-50, Debt—Modifications and Extinguishments, to term loans that are exchanged or modified. PCC members requested the FASB staff to research a technically feasible solution to simplify the guidance for term debt, including an entity-wide accounting policy election to allow a private company to account for all modifications and exchanges under one model.
• PCC members discussed the recent formation of the leases working group, the objectives of the working group, and its activities to date. Working group members noted that during their first meeting, members discussed identifying private company challenges in applying the leases guidance, how the FASB’s post-implementation review project on leases could help to inform the working group, and plans for future outreach, including the type of private company stakeholders with whom to perform outreach and content for outreach materials.
• 2024 FASB Agenda Consultation: PCC members provided several financial reporting areas for the Board to consider as part of its 2024 Agenda Consultation process. Those areas included (1) increased disaggregation of financial reporting information for private companies, (2) additional simplifications to debt modifications guidance beyond the current scope of the PCC research project, (3) expansion of the PCC’s technical agenda projects on CECL and presentation of contract assets and contract liabilities to entities beyond private companies, (4) simplifications to distinguishing liabilities from equity guidance, (5) simplifications to consolidation guidance, and (6) increased disclosure around contingent liabilities, debt guarantees, and related party transactions.
• Town Hall/Liaison Meeting Update: PCC members discussed feedback received during the September 2024 liaison meeting with the AICPA Private Companies Practice Section (PCPS) Technical Issues Committee (TIC). FASB staff also noted that the PCC will hold a liaison meeting with (1) the Risk Management Association (RMA) in October 2024, (2) the Auditing Standards Board Audit Issues Task Force (ASB AITF) in November 2024, and (3) representatives from the surety industry in January 2025.
• Other Business: The PCC Chair summarized the PCC’s closed meeting discussion on the accounting for Common Interest Realty Associations (CIRAs) and noted that this issue will not be addressed by the PCC at this time. The PCC Chair also noted that during the December PCC meeting, members will reassess their ongoing agenda priorities.
The next PCC meeting is scheduled for Monday, December 16, and Tuesday, December 17, 2024.
THE FOLLOWING ARE SELECTED TOPICS FROM THE WEEKLY ACCOUNTING HIGHLIGHTS PUBLISHED BY THOMSON REUTERS – FULL ATTRIBUTION TO SOYOUNG HO (SEC matters) and DENISE LUGO (FASB, AICPA matters), WHO WRITE THESE SUMMARIES FOR THOMSON REUTERS
PCAOB Sets Aside Noncompliance With Laws and Regulations for Now, Will Finalize Rules to Increase Auditor Transparency
Soyoung Ho Senior Editor, Accounting and Compliance Alert November 19, 2024
The Public Company Accounting Oversight Board (PCAOB) will no longer consider finalizing its controversial standard-setting project on the auditor’s consideration of the company’s noncompliance with laws and regulations (NOCLAR) by the end of 2024, according to a board spokesperson.
“Following the recent issuance of staff guidance, the PCAOB will not take additional action on NOCLAR this year,” the spokesperson said in an emailed statement on November 18, 2024. “We will continue engaging with stakeholders, including the SEC, as we determine potential next steps. As our process has demonstrated, the PCAOB is committed to listening to all stakeholders and getting it right.”
As capital markets regulator, the Securities and Exchange Commission oversees the board, and its standards must be approved by the commission.
The PCAOB spokesperson was referring to the staff spotlight report that explains existing requirements for auditors to detect, evaluate, and communicate illegal acts by a company under audit, published on November 12. The staff put the guide together following feedback on the NOCLAR, noting that they believe that an overview of existing responsibilities may be beneficial.
It appears that the decision to put NOCLAR on the back burner at this juncture was made on Friday, November 15.
The decision also comes as some observers have questioned whether the SEC will be able to approve the standard as it would be seen as midnight regulations. The incoming Trump administration in January 2025 is expected to make a sharp turn, pulling back on regulations that businesses deem burdensome.
And when the PCAOB issued the NOCLAR proposal in June 2023, auditors, public companies, and even stock exchanges strongly opposed it, arguing that the board is trying to fix a rule that they believe is not broken. Unlike existing standards, the proposal would have covered all ranges of non-compliance—intentional or unintentional—from outright financial statement fraud to non-compliance matters that may have a material effect on the financial statements.
Opponents said that it would likely put auditors in a legal compliance role outside their purview. And auditors and business groups, including the U.S. Chamber of Commerce, asked the board to either drop the proposal or at least do another round of proposal.
“The Chamber has repeatedly recommended that the Public Company Accounting Oversight Board rescind its unwarranted proposal on” NOCLAR, Tom Quaadman, U.S. Chamber of Commerce Senior Vice president of Economic Policy, said in an emailed statement on November 18. “We look forward to working with the new SEC leadership to ensure that the PCAOB’s actions protect investors and adhere to economic and legal guidelines.”
On November 14, when the PCAOB met to consider adopting part of a proposal on firm registration, board member Christina Ho said she was “deeply concerned” that the PCAOB could be adopting a series of rules in the coming weeks, overwhelming “institutional review process” both at the PCAOB and the SEC, “that helps ensure that regulations have been carefully considered, are based on sound evidence, and can justify their costs.”
“Modernizing our standards and rules is
important, but if we rush to get things done before any changes in the composition of the Commission, we could end up wasting taxpayer dollars by adopting ill-considered rules and running our professional staff ragged while at the same time undermining the democratic process,” Ho added.
The PCAOB had started the project as members of the board’s Investor Advisory Group over the years have pressed the board to strengthen the current standards, which was put in place temporarily.
When the PCAOB was established over two decades ago following accounting scandals at companies like Enron and Worldcom, it had adopted standards from the AICPA on an interim basis. While a few were updated, many more were not updated, and one of the current board’s goals is to modernize its standards, including NOCLAR.
Moreover, the Consumer Federation of America in a comment letter said that under existing requirements, auditors often do not detect NOCLARs and investors end up paying for the price. The group cited a study that in normal times only one-third of corporate frauds are detected.
“Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, the study’s authors estimated that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021,” the organization wrote. “The proposal would help to address these shortcomings in the current standards.”
And Lynn Turner, former SEC chief accountant who sits on the board’s advisory groups, was unhappy with the latest development.
“Unfortunately, this is a total capitulation to the large auditing firms who refuse to inform investors when they become aware of,” he said. “Companies breaking laws.”
In the meantime, the PCAOB on November 15 announced that it is still going ahead to consider finalizing a pair of proposals intended to increase auditor
transparency on November 21.
The board will consider adopting “requirements for reporting of specified firmlevel metrics on new Form FM, Firm Metrics, and specified engagement-level metrics on an amended and renamed Form AP, Audit Participants and Metrics.”
It will also consider adopting “amendments to PCAOB annual and special reporting requirements to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms.”
The two proposals were issued at the same time in April this year. The first one was previously called audit quality indicators, and the PCAOB proposed a requirement for firms to disclose a set of 11 standardized metrics that are intended to give some insight into the performance of audits, which reform and investor advocates have pushed the board to do so since at least 2008.
The other proposal would require firms to provide more disclosure, such as financial data and governance information in annual and special reporting forms filed with the PCAOB. This was also recommended by reform advocates in 2008.
While some investors may have been disappointed that NOCLAR is no longer under consideration for now, others believe that increasing firm transparency is more important.
“Providing more public information about the company’s external audit and external auditor to inform shareholder voting for the election of audit committee chairs and members and the ratification of external auditor may be the most important action the PCAOB can take as part of its auditing standard setting responsibilities,” said Jeff Mahoney, general counsel of the Council of Institutional Investors who serves on the board’s advisory groups.
On November 21, the PCAOB will also consider its 2025 budget.
The approved spending for 2024 was $384.7 million, which was a significant
increase of 11% over its revised 2023 spending plan of $347.3 million.
Much of the budget is allocated to the PCAOB’s inspections program, which has been credited for improving audit quality over the long run.
Conversation
US Chamber’s Tom Quaadman About the PCAOB
Soyoung Ho Senior Editor, Accounting and Compliance Alert
October 24, 2024
Summary: The following article is a conversation with Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness about the PCAOB.
Thomson Reuters recently sat down with Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, for a conversation about the Public Company Accounting Oversight Board (PCAOB).
The following questions and answers, which have been edited for clarity and length, come as the PCAOB has been working on a record-breaking number of standard-setting and rulemaking projects as well as bringing record-setting enforcement actions year after year under Erica Williams’ leadership since January 2022.
Question: What are your thoughts on the board’s ambitious standard-setting agenda?
Quaadman: The agenda is so expansive it’s unclear what problems you are trying to solve. That’s a big issue because normally there’s going to be an articulation as to what the board’s trying to or the SEC is trying to accomplish, how they are going to press forward on that.
Editor’s note: The SEC oversees the PCAOB. And the market regulator under Gary Gensler’s leadership has also been pursuing an ambitious regulatory agenda, both in terms of rulemaking and enforcement.
Quaadman: The SEC’s rulemaking agenda under Chairman Gensler, at some points, was larger than it was with Dodd-Frank
implementation. What’s the market failures you are trying to solve? Same thing with the PCAOB. Statistics show there’s been steady march towards improved audit quality for 20 years. What’s the market failure they are trying to solve? There hasn’t been an articulation like that. So, why do you have such an expansive agenda? The PCAOB’s proposal on noncompliance with laws and regulations (NOCLAR) is an example. The existing rule has been in place since 1977, and there’s not been an articulation as to why there needs to be such a radical change with it.
Question: The PCAOB’s quality control standard is another one that audit firms and the U.S. Chamber strongly opposed, in particular the requirement for larger firms to set up an external quality control function. But among other reasons, the board pointed out that some firms already have such advisory boards up and running.
Quaadman: Why shouldn’t the marketplace decide? And the marketplace has been deciding whether or not you should have advisory boards, not have advisory boards. They are not public companies. What’s the regulatory failure that occurred as to why you have to now mandate this for the profession? Why can’t the firm sort of figure out the best way to manage themselves and make sure that they are providing a product that conforms with the law.
Question: But the PCAOB has brought enforcement actions against firms because of quality control failures, including exam cheating scandals, especially at the foreign affiliates of Big Four firms.
Quaadman: I agree that cheating is a serious problem. But what are the reforms that PCAOB has done on its side of the cheating scandal?
Editor’s note: He was referring to a scheme that KPMG LLP professionals and PCAOB staff members engaged in to fraudulently improve the Big Four firm’s inspection results.
Quaadman: What are the reforms that the board has undertaken to make sure this is going to happen on their end because I
would agree that’s a serious issue, and people should go to jail for that, which they did.
And for other cheating scandals, well, those are issues that are outside the United States. So, are we seeing the same type of issues in the United States that you are seeing elsewhere? The answer is not really, or at least not on the same level because we would argue that audit quality has greatly increased since 2002. But it’s hard for the board to mandate changes based on a scandal that they were a party to.
Question: But one of the things the PCAOB is doing is replacing interim AICPA standards that it adopted over 20 years ago as part of its strategic plans to modernize its standards.
Quaadman: Which we don’t necessarily disagree with either.
Question: And then there’s been technological change.
Quaadman: But what’s the technological advances the PCAOB has brought in house to make sure that they can stay on top of audit? If you take a look at the audit firms, they are very sophisticated tech players. The PCAOB has to have not only the technology but also experts who are able to use the technology. I would argue that the PCAOB, in trying to modernize standards, is actually looking at an audit profession from 15 years ago. But audit firms are doing that with AI, they are doing that with quantum computing that’s going to be coming online in several years. There have been these technological leaps over 15 years that the board has neither acquired the resources, the expertise, or even had the vision for how they should be using that to be a better regulator. And by the way, we were saying that to Bill Duhnke [January 2018 to June 2021] when he was chair. So we have said that to both sides.
Question: Moving on to inspections, which played a big role in improving audit quality. But then in the past few years, the deficiency rate has been going up. For example, in 2022, the rate was 40% and 46% in 2023. I am not sure what could
explain this, but firms seem to be saying that remote work had something to do with it.
Quaadman: First off, what is an audit deficiency? It can be as simple as the auditor and the inspector having a difference in opinion. That doesn’t necessarily mean something’s wrong. They’re just looking at something differently. And in fact, we had a very extensive discussion where we brought in CFOs and controllers at the end of Doty’s tenure [January 2011 to January 2018], with Jim Schnurr when he was SEC chief accountant, because we were also showing from the company side where the PCAOB, through its inspections process, was actually getting things wrong. Because one of the markers that some in the audit regulatory community actually use is increase in audit fees as a marker for audit quality, and what they were saying is, ‘well, audit fees have been flat because companies are actually eating the costs.’ So even the metrics that they are looking at don’t even necessarily make sense.
The other part of that is, if you’ve got a regulator that has got a 46% failure rate now, they are not necessarily a good regulator. Think about transportation safety. Think about the FAA having a 46% failure rate.
Question: The PCAOB has been bringing a record number of enforcement actions as well as imposing record-setting amount of fines.
Quaadman: But you are not seeing any uptick in major restatements.
Question: The PCAOB is talking about sending a clear message to the auditing profession.
Quaadman: What’s the message? The message to the business community is: don’t become a public company.
Question: You say that a lot.
Quaadman: That’s exactly the message. I have been going out to Silicon Valley to talk about tech issues. But I keep getting back from companies that say they are having trouble raising capital. ‘The one thing we
don’t want to do is become a public company. The PCAOB is a part of that problem.’ So that’s the clear message Erica Williams and Gary Gensler are sending is: Don’t go public. People are just looking at the PCAOB, which is putting all these different things in place, which doesn’t make audit quality any better, doesn’t provide any additional high-quality information for investors. You have got proxy advisory firms, which are a separate problem, and businesses are looking at that like, ‘why do I want to go through that mess? I just want to run a company.’
Question: Do you think that certain investor protection advocates who are on advisory groups have an outsize influence? For example, the PCAOB would put certain projects on its agenda after recommendations by its Investor Advisory Group.
Quaadman: Yes, we said this with the FASB, too. But with the PCAOB very often you hear that ‘well, we’ve heard from investors.’ Well, have you heard from a representative cross section of the investor community? And you get a blank stare. You see a small cabal that is putting out proposals and thoughts that have been around for 20 years, and then they end up on the agenda. Well, it shows you exactly who they are listening to.
Question: But the PCAOB could also say that it has only one mission: to protect investors.
Quaadman: We disagree with that. They have public company in their name. We have suggested to them that they also have a public company advisory group as well, the business advisory group. We’ve suggested that for years.
When we went back and showed how the inspections process was driving up costs around internal controls without improving audit quality, we were actually able to show where some things could be changed. During that same dialogue, the PCAOB was also able to show what its rationale was for its relatedparty rule as an example, which I think was
also informative for the business community as to why the PCAOB did what it did and why, despite opposition, was probably the right thing to do. So again, they’ve got public company in their name. They don’t talk to public companies.
Question: They do talk to audit committee chairs during inspections.
Quaadman: But are they bringing in CFOs? Are they bringing in controllers to have these discussions outside the inspections process around what their policies mean and what they mean to companies?
Question: What about the Standards and Emerging Issues Advisory Group? It has public company representatives.
Quaadman: We’ve got a couple. The impression we’ve gotten is that they are not necessarily looking for diverse set of opinions in those groups.
Question: NOCLAR is being opposed strongly, but the PCAOB is planning to finalize it in the coming weeks or months.
Quaadman: We think they should leave the existing rule in place because under the existing standard, it’s: Is there a violation of law that is material in nature that should be disclosed. So, using the materiality definition and screen to determine whether or not something should be disclosed. This now changes to any violation of any rule or regulation in any jurisdiction.
Think about if I run a delivery service in New York City, how much do you think I pay in parking tickets a year? It could be tens of millions of dollars. Those are violations of law. Is that an audit issue? It’s cost of doing business. But that’s now an audit issue.
But an investor may care about in the other way of if you are not getting parking tickets, it means you’ arenot doing enough business. So, it’s an extreme example, but again, this now becomes the Wild Wild West. And activists are going to start to use that to go after companies. If you have an expansive agenda like that, why do you want to be a public company?
Soyoung Ho Senior Editor, Accounting and Compliance Alert
October 16, 2024
KPMG LLP has become the first among the Big Four accounting firms to publicly support swapping the extra 30-hour academic requirements with work experience or workstudy programs as an alternative to reduce the burden of 150-hour credits needed to become a CPA and address the shortage of accountants.
This comes as fewer students have been studying accounting in the past few years. Without addressing the problem, it will be harder and harder to hire and retain accountants and auditors.
The Bureau of Labor Statistics found that more than 300,000 accountants and auditors quit their jobs between 2019 and 2021. And students getting a bachelor’s degree in accounting decreased 7.8% from 2021 to 2022 following a steady decline of 1% to 3% a year since 2015 to 2016.
“While we can recruit the talent we need today, we have a brewing crisis that will impact accounting firms and corporations. We need to absolutely address it in the very near term,” said KPMG US Chair and Chief Executive Officer Paul Knopp in an emailed statement on October 9, 2024.
And research by MIT and the (CAQ) found that the 150-hour rule, which effectively adds a fifth year of study, is a barrier, especially among students of color.
In particular, there was a 13% greater entry decline following the implementation of the 150-hour requirement for minority than non-minority CPA candidates, according to a December 2023 academic paper by MIT professor Andrew Sutherland.
“Our analyses of parental income and financial aid availability point to a socioeconomic status channel explaining the differential entry declines,” the paper states. “Studying exam passing patterns, professional
misconduct, and job postings we find a deterioration, or at best, no change in CPA quality following enactment.”
The CAQ also found that the 150-hour requirement is a top barrier across the board, though it is even more pronounced for Black and Latino students.
“The cost of becoming a CPA has become too high, including both the cost of the extra education and the opportunity cost of spending an extra year in school,” KPMG CEO Knopp said. “We can accelerate the development of talent by having people working with us earlier, especially as data and technology fundamentally change the nature of the profession. Hands-on experience with data and technology at the cutting edge is incredibly valuable.”
For example, KPMG equipped its 10,000 tax professionals with a tax generative artificial intelligence (AI) tool and the enterprise version of Copilot. And the firm estimates the burden spent on this type of work was reduced by 10% to 20% in one year.
The Big Four firm uses more than four times the number of advanced technology for audit work compared to three years ago.
In the meantime, some states have already taken action. Oklahoma passed legislation lowering the hour credits needed to 120, for example.
The AICPA and the National Association of State Boards of Accountancy (NASBA) in September issued a proposal—CPA Competency-Based Experience Pathway that would provide flexibility.
CPA candidates would be allowed to meet initial licensing requirements by exhibiting competency in specific professional and technical areas; for example, ethical behavior, critical thinking skills, and communication. Technical competencies include audit and assurance services, tax engagements, and financial reporting. Candidates would still be required to get a bachelor’s degree, complete one year of general experience, and pass the CPA exam, which would be equivalent to 150 hours.
“KPMG supports alternative pathways to CPA licensure that emphasize experience after one earns a bachelor’s degree,” said a spokesperson. “Conversations across the country are a step in the right direction in that they recognize the consensus for change, but the details matter. Importantly, any change needs to create a simpler approach to both licensure and automobility.”
While the 150-hour requirement has been a key barrier, there are other reasons, including relatively low starting salaries compared to other professions, especially in finance and data technology. And KPMG said that it has raised starting salaries by about 25% in three years, which is nearly double the rate of inflation.
Its CPA Kickstart program pays new hires to prepare for the CPA exam. The firm said that last year 266 opted into the two-month, 40-hours-per-week program to study for the exam.
In addition, the firm has been changing the so-called busy season experience. Compared to 2020, the average weekly hours worked on audit engagements from early January to early March declined by 18%. Further, the percentage of staff working no hours on the weekend increased from 20% to 40% of the firm’s practice.
need for standardization, clearer guidance, and more accurate representation of a company’s financial health.
David Gonzales, Vice President and Senior Accounting Analyst at Moody’s Investors Service, Inc., sounded the alarm, warning that cash flow statements are plagued by a myriad of issues, including murky reporting, inadequate tracking of capital expenditures, and misleading financing cash outflows that distort borrowing and cash flow metrics. The outdated “cash and cash equivalents” metric, he noted, fails to capture the complexities of modern liquidity management, leaving investors in the dark.
As the discussion unfolded, Shripad Joshi, Senior Director and Accounting Officer at S&P Global Ratings, emphasized the critical nature of cash flow statements for investors and users. “It really tells the story,” Joshi said, noting that the statement could be improved to better clarify operating, investing, and financing activities, as well as through additional disclosures.
But what’s driving this latest push for reform? The answer lies in the increasingly complex landscape of corporate finance. With companies relying more heavily on stockbased compensation and other innovative financing strategies, the traditional boundaries between operating, investing, and financing activities have grown murky.
Denise Lugo Editor, Accounting and Compliance Alert
– October 7, 2024
In the high-stakes world of finance, one critical aspect of corporate reporting has long been shrouded in mystery: cash flow. For years, investors, analysts, and regulators have struggled to make sense of the complex and often opaque numbers that govern a company’s lifeblood. Now, the chorus of experts grows louder, demanding reform.
At a recent meeting of the Financial Accounting Standards Advisory Council (FASAC), industry leaders voiced concerns about cash flow statements, highlighting the
Niall O’Malley, Portfolio Manager at Blue Point Investment, has a solution: reclassify stock-based compensation from the operating section to the financing section of the cash flow statement. “This change would provide a more accurate representation of a company’s financial health, particularly benefiting retail investors who might not fully understand the impact of stock-based compensation on a company’s financials,” O’Malley said on September 30, 2024.
As the debate rages on, one thing is clear: the status quo is no longer sustainable. Will the industry answer the call, or will the cash flow conundrum continue to confound all?
Christine Smith, a Senior Professor at Tulane’s A.B. Freeman School of Business, has been closely following the debate. “The primary purpose of the statement of cash flows is to provide meaningful information about what happened to cash,” Smith stated on October 3, emphasizing that the other three financial statements – the balance sheet, income statement, and statement of stockholders’ equity – are prepared using the accrual method of accounting, which is in accordance with Generally Accepted Accounting Principles (GAAP).
“The point and purpose and the reason the statement of cash flows came into existence was because nowhere else in those three chapters of the story can the user get meaningful information about what happened to cash… they can calculate did it go up or did it go down but they have no idea how or why,” she said, underscoring the importance of why it needs to be clear.
The FASB has been working on a project to amend Accounting Standards Codification (ASC) 230, Statement of Cash Flows, with a focus on a limited set of changes rather than a comprehensive overhaul. The goal is to make cash flow statements easier to understand for banks and other financial institutions, and to create a new disclosure showing cash interest received by companies. But will this project move the dial for investors?
Smith sounded a cautionary note, warning that the FASB’s efforts could fall short. “If what is going to come out the black box of the FASB efforts is a change in the standard which says ‘we are significantly changing how the statement of cash flow is prepared for finance houses from every other industry’, my concern would be to regular investor who’s not doing this all day for a living, that they could understand the nuances in those changes,” she said.
At its core, the statement of cash flows is a vital financial document that shows a
company’s inflows and outflows of cash over a specific period. Unlike the income statement, which focuses on revenues and expenses, the cash flow statement reveals a company’s true cash situation, crucial for its survival and growth. It helps stakeholders assess a company’s ability to generate cash, pay debts, and invest in its future.
But despite its importance, the statement of cash flows is often misunderstood. One of the biggest challenges is the choice between the direct and indirect methods of preparation. While the direct method provides a clear and straightforward account of cash inflows and outflows, the indirect method starts with net income and adjusts for noncash items and changes in working capital.
Ray Pfeiffer, Professor in accounting at Simmons University, has taught students about the cash flow statement for years. “I wouldn’t be surprised if in finance courses and in financial analysis practice people actively convert the indirect method cash flow statement to a direct cash flow statement because information about cash collections from customers, cash payments to employees, etc. are what is actually needed,” Pfeiffer said on October 1 via email. “However, the conversion process is necessarily inaccurate because there isn’t sufficient detailed information to unravel everything – it would be so much more efficient and accurate if companies did it themselves for the readers.”
Smith concurs that the direct method, which provides a clear and straightforward account of cash inflows and outflows, is more informative. However, she notes that companies often find it too time-consuming and therefore opt not to use it.
“The argument has been ongoing forever,” Smith said, “but my counterargument now is that with the advancements in our technology and accounting information systems, are we still in a position where it’s really that challenging to extract and present the necessary information using the direct method?” She believes that this is a question that needs to be asked, particularly to controllers and CFOs.
By Teresa H. Castanias
The U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) provide taxpayers with an opportunity to suggest tax issues of general interest for which guidance would be helpful to taxpayers under a program called the Priority Guidance Plan.
The National Council of Farmer Cooperatives (NCFC) sent a letter on May 30, 2024 recommending the issuance of guidance with respect to the treatment of patronage dividends received by a patron with business interest expense generated by debt financing issued by a credit cooperative. The Farm Credit Council (FCC) sent a letter on July 22, 2024 supporting the NCFC request.
A taxpayer patron subject to Internal Revenue Code (IRC) section 163(j), which may be an individual or entity taxed as a partnership, S corporation, C corporation or cooperative, becomes a patron of a credit cooperative upon executing a loan agreement for interest-bearing financing issued by a credit cooperative. A credit cooperative may be a member of the Farm Credit System, such as CoBank or an Agricultural Credit Association regulated by the Federal
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George W. Benson Counsel
McDermott Will & Emery LLP 444 West Lake Street, Suite 4000 Chicago, Illinois 60606-0029
tel: (312) 984-7529
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Farm Credit Administration. Other cooperative lending organizations include the National Rural Utilities Cooperative Finance Corporation and the National Cooperative Bank.
Teresa H. Castanias, CPA 1500 E. Split Rock Drive Ivins, UT 84738 tel: (916) 761-8686
e-mail: tcastanias@aol.com
A taxpayer patron’s gross interest expense paid to the credit cooperative is business interest expense subject to section 163(j). The patron’s patronage dividend received from the credit cooperative is included in its gross income under section 1385(a)(1). Under the final section 163(j) regulations, the patron does not have a specific provision describing a procedure to net the patronage dividend from the credit cooperative with the business interest expense. This is even though under the facts of the credit cooperative lending arrangement, the patronage dividend represents a rebate from the cooperative on the business interest expense paid by the patron.
Section 163(j)(1) generally limits the taxpayer’s deduction for business interest expense to the sum of (1) the taxpayer’s business interest income
(BII),
(2) 30% of the taxpayer’s adjusted taxable income (ATI), and
(3) the taxpayer’s floor plan financing interest.
Section 163(j)(8) defines ATI as “the taxable income of the taxpayer computed (A) without regard to certain specified items, and (B) with such other adjustments as provided by the Secretary.
When section 163(j) was first passed in 2017, the limitation on ATI was 50%, depreciation was excluded from the computation, and interest rates were much lower. As a result of the change to the percentage in 2022 from 50% to 30%, and the end of the depreciation adjustment in the calendar 2022/ fiscal 2023 year, more cooperatives and business taxpayers have indicated that the section 163(j) limitation is impacting their taxable income. While the deduction is not lost, it can be challenging to plan for any disallowed amounts usage in future years as well.
Hence, NCFC and the Farm Credit Council have recommended that the issue of netting the credit cooperative’s patronage dividend against the taxpayer’s gross business interest expense paid to the credit cooperative be reviewed by Treasury and the IRS. NCFC provided a reference to Private Letter Ruling 201524017 where a taxpayer REIT were parties to a term revolver credit facility with a Farm Credit System association. The REIT received annual patronage dividends from its lender, and requested the ruling to treat the patronage dividend as a reduction of interest expense on its tax returns. The IRS agreed to this treatment.
The NCFC letter also referenced the “conduit treatment” applicable to RICs and REITs in the final regulations to section 163(j). The conduit treatment is also discussed in Dr. P. Phillips Cooperative v. Commissioner, 17 T.C. 1002 (1951) and also in Affiliated Foods, Inc. v. Commissioner, 128 T.C. 62 (2007).
Guidance under Section 163(j) was on the 2023-2024 Priority Guidance Plan, which provided:
“Guidance under § 163(j) regarding the limitation on business interest, including the application of § 163(j) to interest capitalized under § 266.
The same language appears in the 20242025 Priority Guidance Plan.
While the cooperative issue is not specifically mentioned, the hope is that the NCFC and FCC letters will prompt Treasury and the IRS to include address that issue in any future guidance it issues it issues with respect to this item on its Guidance Plan. Such guidance might take the form of a notice, revenue ruling or amendment to the section 163(j) regulations.
By George W. Benson
Last year the Tax Court rejected an attempt of a corporation to claim amortization with respect to farmland that it leased to tenant farmers. See, Conmac Investments Inc. v. Commissioner, T.C. Memo. 2023-40 (March 27, 2023). This case is on appeal to the 8th Circuit Court of Appeals and was briefed by the parties this past summer.
The underlying issue in the case is whether, when a purchaser of farmland acquires acreage (referred to as “base acres”) that is entitled to participate in U.S. Department of Agriculture farm program subsidy programs, the purchaser can allocate a portion of the purchase price to the base acres and then amortize that amount.
In a footnote in its appeal brief, the IRS makes it clear that it believes amortization is not proper:
“Because the subsidy rights represented by ‘base acres’ do not lose value over time due to ‘exhaustion’ or ‘wear and tear,’ the Court might question whether amortization of such an asset is appropriate. In fact, the Commissioner argued in the Tax Court that base acres are not eligible for amortization.
… Amortization of intangible property is available for ‘licenses, permits or other rights granted by a governmental unit,’ but not ‘any interest in land,’ and not for ‘a farm allotment, quota for farm commodities, or crop acreage base.’ I.R.C. § 197(d)(1)(D), (e)(2); Treas. Reg. § 1.197-2(c)(3). The Tax Court, however, did not reach this issue.”1
The Tax Court sidestepped the underlying issue by focusing on tax accounting.
Conmac historically had not allocated any value to base acres. Thus, it had never claimed amortization. After consulting with its accountant, Conmac began doing so in 2009 on base acres acquired in 2009 and on those acquired from 2004 to 2008. It made no change with respect to base acres acquired before 2004. It made this change without first obtaining permission from the IRS to make the change.
The Tax Court held that the change was an impermissible change in accounting method without IRS approval. Whether this analysis is correct is the focus of the appeal.2
The IRS first challenged Conmac several years after the change was made. When the IRS did raise the issue, the earliest open year was 2013. The IRS treated that as the year of change back to the original method and proposed a Section 481 adjustment to recapture the amortization claimed by Conmac in the 2008-2012 years as well as to disallow amortization claimed in 2012 and 2013. The Tax Court held that was proper. That holding is also being challenged on appeal.
Readers interested in the details of the change of accounting issues are referred to the Tax Court opinion. The opinion does
not address underlying issue, which is likely of more interest to most readers. Taxpayers historically have been interested in finding ways to amortize part of what they pay for farms.3
It will be interesting to see what the Eighth Circuit does with the case.
The simplest approach would be for it to affirm the Tax Court decision. If, for some reason the Eighth Circuit concludes that the Tax Court’s accounting method change analysis is erroneous, then it appears that the case should be remanded to the Tax Court for further proceedings on the underlying issue. The record does not appear complete enough for the Eighth Circuit to address whether amortization is proper.
By George W. Benson
A recent request for comments on Form 3491 provides a reminder that there is a way for some consumer cooperatives to avoid having to report patronage dividends paid to their members. See Notice and Request for Comments, 89 FR 65985 (August 13, 2024). The form itself is largely unchanged, and I expect no one will comment. But it is worthwhile reviewing the exemption since it is rarely discussed.
Section 6044 generally requires Subchapter T cooperatives to report patronage distributions (other than those in nonqualified form) and redemptions of nonqualified equities aggregating $10 or more on Form
1 See, the Brief for the Appellee to the Eighth Circuit Court of Appeals (July 22, 2024), at footnote 5. Consistent with this, the Government asked that, should the Eighth Circuit decide to reverse the Tax Court decision, it “remand to the Tax Court for consideration of the Commissioner’s argument that base acres are not amortizable at any time…” (at 51).
2 Interestingly, neither the Tax Court nor the parties on appeal distinguish between land obtained before 2009 (where there was a change with respect to the land) and land acquired in 2009 or later (which would always have been on the new method). Query whether there is an argument they can be treated differently?
3 See, for example, the debate over whether part of the purchase price of land can be allocated to “residual fertilizer supply” and amortized or deducted. See, “Is ‘residual fertilizer supply’ in farmland deductible?” by Neil E. Harl (July 2004), at https://www.iowafarmbureau.com/ArticleFile/file/4d4de986-90f84cbd-ac62-a2d6f5e95352/drf.pdf; “Excess Fertility – Is it Fully Deductible?” by Paul Neiffer (October 26, 2022), at https://www.agweb.com/opinion/excessfertility-it-fully-deductible; “Deducting Residual (Excess) Soil Fertility” by Roger A. McEowen (February 21, 2023), at https://www.agmanager.info/sites/ default/files/pdf/McEowen_ResidualExcessSoilFertility_02-23-23.pdf; and “The Tax Code and Residual Soil Fertility” by Dario Arezzo (May 1, 2023), at
1099-PATR. Treas. Reg. § 1.6044-3(c) provides certain exceptions to this requirement, notably for distributions paid to persons described in Treas. Reg. § 1.6049-4(c)(1)(ii) (which include corporations and tax-exempt organizations).
Section 1385(b) provides that recipients of patronage distributions are not required to include them in gross income to the extent they are “attributable to personal, living, or family items.” Individuals are not entitled to deduct the cost of “personal, living or family items.” At least for this purpose, patronage distributions with respect to such items are viewed as adjustments to the nondeductible purchase price of such items and thus are not income to the recipients.
Section 6042(c) recognizes that no purpose would be served with requiring reporting of such patronage distributions and exempts them from reporting. However, a consumer cooperative is required to file an application for exemption.
“(c) Exemption for Certain Consumer Cooperatives. – A cooperative which the Secretary determines is primarily engaged in selling at retail goods or services of a type that are generally for personal, living, or family use shall, upon application to the Secretary, be granted exemption from the reporting requirements imposed by subsection (a). Application for exemption under this subsection shall be made in accordance with regulations prescribed by the Secretary.”
There are limits detailed in Treas. Reg. § 1.6044-4, which was adopted shortly after the enactment of Subchapter T and has remained unchanged over the years.
Subsection (a)(1) of this regulation provides that the exemption applies only if “the cooperative file[s] an application in accordance with this section and obtain[s] a determination of exemption.” For this purpose, the IRS has developed Form 3491 (Consumer Cooperative Exemption Application).
Subsection (a)(2) sets a limit on organizations that may qualify. In order to for
an organization qualify for the exemption, “85 percent of its gross receipts for the preceding taxable year, or 85 percent of its aggregate gross receipts for the preceding three taxable years, must have been derived from the sale at retail of goods or services of a type that is generally for personal, living or family use.”
It is not clear why 85 percent was chosen. Goods or services which may be used either for personal or business use, but which when purchased for business use are usually be purchased at wholesale, will “when sold by a cooperative at retail, be treated as goods or services of a type generally for personal, living, or family use.”
Subsection (a)(3) provides that an exemption “shall apply beginning with the payments during the calendar year in which the determination is made.” Once granted, exemption “shall automatically cease to be effective beginning with payments made after the close of the first taxable year of the cooperative in which less than 70 percent of its gross receipts is derived from the sale at retain of goods or services of a type which is generally for personal, living or family use.” Here as well it is not clear why 70 percent was chosen.
Form 1099-PATR reporting, like other reporting, is based on a calendar year. The instructions to Form 3491 provide examples of how the rules related to when the exemption is effective apply to calendar and fiscal year cooperatives. They make it clear that compliance with the 70% and 85% tests is determined using the cooperative’s taxable year. When exemption is first granted, payments made before the exemption is granted but in the same calendar year are covered. However, payments made after the close of the taxable year where the 70% test is not met, but within the same calendar year, are not exempt. So, if a cooperative has a June 30 fiscal year, and fails the 70% test for its fiscal year ending June 30, 2022, patronage distributions made in August 2022 must be reported.
By George W. Benson
The Inflation Reduction Act passed in 2022 extended the Section 40A(g) and Section 6426(c)(6) biodiesel blender’s credits through the end of 2024, which is fast approaching. It replaced those and other biofuel credits with a new Section 45Z clean fuel production credit applicable to transportation fuel and sustainable aviation fuel (“SAF”) produced after December 31, 2024. This new credit sunsets for fuel sold after December 31, 2027.
The new Section 45Z credit is a producer’s credit, not a blender’s credit like the current biodiesel mixture credit. However, as a practical matter, under existing law producers are able to qualify for the blender’s credit by selling the biodiesel they produce as part of a blend consisting mostly of biodiesel. If they do so, there are procedures in place to assure that their customers will not also claim the blender’s credit, but it is common for blenders to share the credit with customers through pricing.
The Section 45Z credit is an income tax credit. For agricultural cooperatives, the credit can be passed through to patrons at the option of the cooperative. Sections 45Z(f) (5) and 45Y(g)(6). In the case of Section 521 cooperatives, Section 45Z credits not used or passed through are refundable. See, Section 6417(b)(9). In the case of nonexempt Subchapter T cooperatives, credits not used or passed through can be sold. See, Section 6418(f)(1)(A(viii).
The amount of the Section 45Z credit depends upon the life-cycle level of greenhouse gas emissions generated by the fuel produced and whether the producer met the prevailing wage and apprenticeship requirements generally applicable to the new energy credits. The maximum credit per
gallon that can be earned is $1.00 ($1.75 for sustainable aviation fuel) adjusted for inflation.
To qualify for the credit, a taxpayer must be a registered producer. The IRS has released registration guidance. Notice 2024-49 (May 31, 2024).4
• Guidance is much needed.
Section 45Z(e) directs the Treasury to issue “guidance regarding implementation of this section, including calculation of emissions factors for transportation fuel, the table described in subsection (b)(1)(B)(i), and the determination of clean fuel production credits under this section.” At the time this note is being prepared (late October 2024), detailed guidance has yet to be issued. That guidance is critical to understanding the new credit.
A bipartisan group of Congressmen and Senators, led by Joni Ernst, recently wrote to the Treasury Secretary, Janet Yellen, asking that guidance be issued promptly. See, letter dated July 23, 2024, Tax Notes Doc 202421304. They observed:
“Lack of regulatory certainty is already putting thriving businesses at risk as fuel producers are unable to make important business decisions regarding their fuel. Capital investment remains uncommitted, threatening certain projects and expansion plans, including the administration’s stated goals to support new markets like sustainable aviation fuel (SAF) and low-carbon transportation fuels.”
Critical to the operation of the new credit is the computation of the emissions factor for the transportation fuel produced by a credit claimant. Section 45Z(b)(1)(B)(ii) provides:
“(ii) Non-aviation Fuel. – In the case of any transportation fuel which is not a sustainable aviation fuel, the lifecycle greenhouse gas emissions of such fuel shall be based on the most recent determinations under the Greenhouse gases, Regulated Emissions, and Energy use in Transportation model [referred to as the “GREET model”] developed by Argonne National Laboratory, or a successor
model (as determined by the secretary).”
The GREET model has received considerable attention since the adoption of the Inflation Reduction Act as it was revised to be used in figuring the Section 40B sustainable aviation fuel credit (which is one of the current fuel credits being replaced by Section 45Z). A revised model (referred to as the “40BSAF-GREET 2024 model”) to be used for Section 40B was released in April. Notice 2024-7, 2024-21 IRB 1191 (April 30, 2024). That model was further updated in October for calculations on or after October 18, 2024. Notice 2024-74 – “40BSAF-GREET 2024 model (October 2024 version).”
Picking up on industry comments, the 40BSAF-GREET 2024 model takes into account, up to a point, climate smart agricultural (“CSA”) practices and several different production processes. However, many in the renewable fuels industry think that it should not be adopted for Section 45Z purposes without further refinements.
For instance, the Congressional letter contends more work is required in taking into account CSA practices:
“In 45Z, more CSA practices must be included and farmers must be permitted to adopt them in a practice-by-practice fashion without a ‘bundling’ requirement.”
Also, the letter contends that more work is required to take into account differing production processes:
“Further, Treasury must recognize a broader array of industrial technologies, power sources, and biofuel feedstocks that lower the lifecycle emissions of transportation fuels and reflect the innovation and ingenuity of American’s farmers and biofuel producers. Such industrial technologies should include energy (thermal and power) storage, both on-site and over-the-fence combined heat and power, mechanical vapor recompression, biomass to heat, advanced yeasts and enzymes, thermal vapor recompression, onfarm energy use reductions, and biogenic and non-biogenic carbon capture and storage (CCS). Power sources should include waste,
solar, and nuclear. Moreover, additional biofuel feedstocks, such as sorghum, corn wet mills, additional oilseeds and corn kernel fiber should be recognized.”
Other have had the same reaction. For instance, in a press release dated April 30, 2024, the President and CEO of the Renewable Fuels Association observed:
“We view today’s 40B announcement as the starting point – not the ending point – for additional modeling improvements, further integration of individual climatesmart agriculture practices, and emerging biorefinery technologies. 45Z is where the rubber really meets the road. We look forward to working with USDA and other agencies across the administration to ensure 45Z is implemented in a way that truly swings the door wide open for farmers and ethanol producers to participate in the enormous decarbonization opportunity.”
• Must the feedstocks be produced in the United States?
The statute is clear that transportation fuel must be produced in the United States (including possessions) in order for the producer to be eligible for a credit. Section 45Z(f)(1). However, it does not require that the feedstocks used to produce the fuel come from the United States.
A group of Senators sent a letter to Janet Yellen dated July 30, 2024 (Tax Notes Doc. 2024-22016) also requesting prompt guidance. They urged Treasury “to restrict the eligibility to renewable fuels made from feedstocks sourced domestically.”
“Failure to properly structure the feedstock sustainability criteria associated with 45Z credit will incentivize the use of foreign feedstocks over those from U.S. suppliers, contrary to the intent of Congress. If the guidance fails to establish robust, sciencebased, sustainability criteria that producers of domestic feedstocks can actually meet, and fails to include guardrails that ensure the credit is only available to renewable fuels made with domestically produced feedstocks, renewable fuel producers will take the path of
least resistance and import foreign feedstocks, such as used cooking oil (UCO) from China to produce renewable diesel or Brazilian ethanol as a feedstock for sustainable aviation fuel (SAF) in the U.S. This would reduce the utility of the credit to a manufacturing credit, rather than a credit that supports both manufacturing and feedstock production. That was not the intent of Congress.”
Query whether what the Senators are requesting requires an amendment to Section 45Z? A bill has been introduced in both the House and Senate with such an amendment (and extending Section 45Z until December 31, 2034). See the Farmer First Fuel Incentives Act. For an explanation of the bill, see,
https://www.marshall.senate.gov/ newsroom/press-releases/sens-marshallbrown-and-reps-mann-kaptur-lead-bipartisanlegislation-fighting-for-farmers-with-biofueltax-credit/
• An effort to extend the current biodiesel blender’s credit.
One thing appears to be clear: the credit under new Section 45Z will be less, probably significantly less, than the credit currently in effect for biodiesel mixtures. It also appears that credits produced using the kinds of feedstocks currently being imported (UCO from China, tallow from Brazil) end up benefiting more than, for example, biodiesel produced from soybeans under likely formulas used to measure greenhouse gas emissions. For an interesting article speculating on the dollar impact of Section 45Z on credit earned see “A Look at 40B and 45Z Credits for Soy Biofuels” by Scott Gerit, Chief Economist of the American Soybean Association (June 6, 2024), available at https://soygrowers.com/ news-releases/a-look-at-40b-and-45z-creditsfor-soy-biofuels/
It is also clear that the delay in guidance is causing significant concern on the part of producers of biodiesel. As recently reported: “Renewable fuel producers say the lack of
rules for a new clean-fuel tax credit is stifling demand to the point of threatening plant shutdowns and delaying climate-friendly investments. … Fuel producers say their customers are waiting on purchases for net year until the value of the tax credit is clearer. … Some biodiesel producers are preparing for the changing credit structure by buying less feedstock going into 2025.”5
This has all led to a renewed push to extend the existing biodiesel blender’s credits for a year.
A group of Congressmen recently introduced a bill entitled Biodiesel Tax Credit Extension Act of 2024 (H.R. 9060, introduced July 18, 2024) which would do that. Getting another extension seems unlikely, but the blender’s credit has been repeatedly extended over the years, often retroactively. The delay in guidance under Section 45Z may provide some impetus for one more extension. With the expiration of many provisions of the Tax Cuts and Jobs Act of 2017 at the end of 2025, next year promises to be a big year for tax legislation and this may be one more piece of the puzzle.
• How will ethanol producers fare?
Note, the Section 45Z credit is also potentially significant for ethanol producers. Since there currently is no credit for ethanol mixtures, ethanol producers are not in the same position as producers of biodiesel. For them, any credit under Section 45Z would be a benefit. But they too would like to know what the rules will be:
“Unlike other renewable fuels, firstgeneration ethanol hasn’t had a tax credit in over a decade. Producers are hoping they see a boon from the clean fuels credit. … But those in the ethanol industry don’t want to spend money on climate-friendly improvements without knowing the rules…”6
Stay tuned. Perhaps by the time this article appears in TAXFAX there will be proposed regulations.
5 “Delayed Tax Credit Rules Stall Renewable Fuel Investment Deals,” by Erin Schilling, Daily Tax Report (September 20, 2024).
6 “Delayed Tax Credit Rules Stall Renewable Fuel Investment Deals,” by Erin Schilling, Daily Tax Report (September 20, 2024).
In December 2023, the FASB issued Accounting Standards Update (ASU) 202308, entitled Accounting for and Disclosure of Crypto Assets. The provisions in ASU 202308 add Accounting Standards Codification (ASC) Subtopic 350-60, entitled Intangibles— Goodwill and Other—Crypto Assets to the accounting technical literature. This guidance applies to all entities that hold crypto assets that meet certain criteria. The provisions of ASU 2023-08 are effective for all reporting entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Reporting entities may adopt this guidance early for financial statements that have are not issued or available for issuance. The transition provisions require a cumulativeeffect adjustment to the beginning retained earnings (or net assets) as of the beginning of the period the reporting entity adopts ASU 2023-08.
Prior to the issuance of ASU 202308, crypto assets were accounted for as indefinite-lived intangible assets using the historical-cost-less-impairment model in ASC 350-30, entitled General Intangibles Other
EDITOR
Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu
GUEST WRITERS
Steve Grice, Ph.D., CPA Scholar-In-Residence Troy University Carr, Riggs, & Ingram, LLC sgrice@cricpa.com 334-434-9473
Dena Mitchell, Ph.D., CPA Assistant Professor Troy University dsmitchell@troy.edu 850-491-8278
than Goodwill Under this model, crypto assets were reflected in the financial statements at historical cost, less any impairments. In addition, subsequent increases in the carrying amount of the crypto assets and the reversal of previous impairment losses were prohibited. The provisions of ASU 2023-08 in the new ASC Subtopic 350-60 require that crypto assets be measured at fair value and that the changes in the fair value of the crypto asset be recognized in net income each reporting period. This new guidance
applies to an asset that meets the criteria shown in Exhibit I above.
ASU 2023-08 requires reporting entities to subsequently measure crypto assets at fair value. The guidance does not address the initial measurement of crypto assets. ASU 2023-08 indicates that reporting entities should account for initial measurements of crypto assets in accordance with other generally accepted accounting principles. Thus, entities are expected to continue to apply the guidance in ASC 350-30 when initially measuring crypto assets within the scope this new guidance.
ASU 2023-08 provides specific financial statement presentation guidance related to crypto assets. According to the new guidance, crypto assets should be presented separately from other intangible assets in the balance sheet. The reporting entity
may present the crypto assets on a more disaggregated basis (e.g., by individual crypto asset holding). The gains and losses from the changes in fair value of the crypto assets should be presented separately from changes in the carrying amount of other intangible assets in the income statement (or statement of activities). When crypto assets are received as noncash consideration in the ordinary course of business (e.g., the crypto assets were received in exchange for goods transferred to a customer) and nearly immediately (i.e., within hours or a few days, not weeks) converted to cash, the cash received should be classified as operating activities. When a non-for-profit entity nearly immediately converts a donated crypto asset into cash, the cash receipts should be classified as operating cash flows as long as the donor did not restrict the use of the contribution to a long-term purpose.
ASU 2023-08 requires certain disclosures for
both annual and interim reporting periods as well as certain disclosures that are applicable to only annual reporting periods. Exhibit 2 above shows the required disclosures in the new guidance.
In August 2023, the FASB issued ASU 2023-04, entitled Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121. These amendments affect paragraphs in Topic 405, entitled Liabilities. The SEC staff indicated that they have recently observed an increase in the number of entities that provide platform users with the ability to transact in cryptoassets. SEC Staff Accounting Bulletin No. 121 expresses the views of the staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for platform users. ASU 2023-04 added paragraph 405-
10-S99-1 to incorporate the staff’s views expressed in SEC Staff accounting Bulletin No. 121.
In general, when a reporting entity is responsible for safeguarding the cryptoassets held for its platform users, including maintaining the cryptographic key information necessary to access the cryptoassets, the staff believes that the reporting entity should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users. The staff believes the safeguarding liability would be appropriately measured at the fair value of the crypto-assets the reporting entity is responsible for holding for its platform users. The staff also expressed views related to financial statement disclosures in SEC Staff Accounting Bulletin No. 121. For example, the staff believes the financial statement notes should include a clear disclosure of
the nature and amount of crypto-assets that the reporting entity is responsible for holding for its platform users (with separate disclosure for each significant crypto-asset). Practitioners should carefully review the SEC views presented in SEC Staff Accounting Bulletin No. 121 (presented in ASC Paragraph 405-10-S99-1) when an entity is responsible for safeguarding crypto-assets it holds for its platform users.
In ASU 2023-08, the FASB details presentation guidance for intangible crypto assets. ASU 2023-08 also includes the criteria for intangible crypto assets, including the requirements that these assets lack physical substance, are created or reside on a distributed ledger based on blockchain or similar technology, are secured through cryptography, and are fungible, among others.
For tax purposes, crypto currency is considered a digital asset. The definition of a digital asset under IRC §6045(g)(3)(D) is a “digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology.” IRS Notice 2014-21 defines virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/ or a store of value” while convertible virtual currency is further defined as virtual currency with an “equivalent value in real currency, or that acts as a substitute for real currency,” and includes Bitcoin as an example of convertible virtual currency. IRS Notice 201421 further explains that convertible virtual currencies are to be treated as property in the hands of taxpayers. The provisions of Notice 2014-21 do not apply to virtual currencies that are not considered convertible.
In the FAQ section of IRS Notice 2014-21, question one addresses the tax treatment of virtual currency. The answer provided by the IRS is that virtual currency is treated as property, and tax principles which apply to property transactions apply to virtual currency transactions. IRC §1001(a) defines a gain from the sale of property as an amount received in a sale transaction that is greater than the taxpayer’s adjusted basis in the property being sold. A loss from the sale of property occurs when the taxpayer receives less in a sale transaction than that taxpayer’s basis in the property. Both gains and losses from the sale of property are includible in the calculation of gross income (§1001(c)). Adjusted basis of property is determined using IRC §1012 which defines basis, except in some narrowly defined situations, as the cost of the property.
The crypto currency market is highly volatile. Due to the high fluctuations in cost of the currency, it is important that taxpayers keep complete records. The basis of the property is the cost, or fair market value of the crypto currency being sold on the day it was purchased. Sellers of such property can use varied methods of identifying the basis of the unit or units sold, such as specific identification, LIFO and FIFO. Whatever method is being used, it is important to be consistent in application. If such currency is being held as an investment, any gain or loss resulting from a sale would be considered capital gain and classified as long term or short-term depending on the holding period. A short-term capital gain results from selling a unit or units of crypto currency that have been held less than one year. Short term capital gains generate ordinary income which is taxed at marginal tax rates in the same manner as wages or bank interest. When currency has been held for longer than a year before it is sold, the sale results in a long-
term capital gain. Long term capital gains are taxed at preferential tax rates (0%, 15% or 20% depending on the taxpayer’s marginal tax rate).
If a taxpayer receives crypto currency in return for providing goods or services, the fair market value of the currency in U.S. dollars on the day it is received by the taxpayer must be included in the ordinary income of the taxpayer and taxed at marginal tax rates. If a taxpayer exchanges another asset for crypto currency, the taxpayer will recognize a gain or loss on the exchange. A gain will be recognized if the fair market value of the crypto currency received is more than the fair market value of property given. A loss will be recognized if the fair market value of the crypto currency received is less than the fair market value of the property given.
The character of any gain or loss will be determined by the character of the asset given up. For example, if a taxpayer receives crypto currency in return for services or property that is considered inventory, that taxpayer will recognize ordinary income, in much the same way as if they had traded services or inventory for cash. The mere difference of receiving crypto currency instead of cash does not change the nature or substance of the transaction, so the tax consequences also do not change because the payment method is crypto currency.
In addition to the income tax consequences, transactions involving crypto currency can also be subject to employment taxes. If an employer compensates an employee utilizing crypto currency that compensation is subject to both income and employment taxes. The tax base would be the fair market value of the currency on the date it is received by the employee. Likewise, if a self-employed person receives crypto currency as compensation, the payment is subject to self-employment taxes. Also, if a payment is made to a taxpayer and exceeds
$600 in one year, the payment is required to be reported to the IRS and to the recipient on a Form 1096 and Form 1099 respectively.
For persons engaging in digital asset transactions, there are methods of obtaining additional units of these assets without purchasing them. Lending of digital assets, mining, staking, short sales and notional principal contract transactions are some of these methods.
When one entity lends another digital assets, the transaction works the same way as lending cash to another. The entity receiving the loan generally pays the lending entity for the use of their assets for a period of time. The amount paid is interest, and interest is taxable income to the entity receiving it. When digital assets are loaned instead of cash, the process is comparable. The entity lending the asset is paid interest by the borrower and this interest is taxable. If the interest is paid in the form of additional digital assets, interest income is the fair market value of the interest received on the day of receipt.
Mining is the process of creating additional digital assets and verifying transactions on a blockchain. This is accomplished by solving complex computations that verify the integrity of a blockchain. In return for solving these computations, miners are given additional units of cryptocurrency. Since the miner is receiving an asset of value in return for providing services, the asset received is considered ordinary taxable income. The amount of taxable income equals the fair market value of the currency received on the day of receipt. Mining is an expensive process. If the income received from mining is considered self-employment income, the costs associated with mining would be deductible in determining net income
from self-employment. If an entity such as a corporation is engaging in mining, the costs would be deductible business expenses in calculating taxable income.
Staking digital assets is a method of validating the processes and security of a blockchain. The act of validating the processes requires the staker to utilize their own units of crypto currency. In return for tying up their own assets to aid this process, stakers earn additional units of the currency. These additional units of currency are considered taxable income to the staker. The taxable amount is the fair market value of the additional units of currency received on the day of receipt.
Short selling crypto currency is comparable to short selling other assets. A trader will borrow the currency from another trader or trading platform, then sell it at the current market price. When the market price of the digital asset drops, the trader will purchase the asset and return it to the entity from which it was borrowed. The difference between the sale price of the original borrowed asset and the purchase price of the replacement asset that is returned to the lender is profit or loss. This profit or loss is considered in the calculation of the trader’s taxable income.
Notional principal contracts are used in financial transactions to effect interest rate swaps or currency swaps. In transactions involving crypto currency and other digital assets, notional principal contracts are utilized in similar ways. In a notional principal contract, two parties agree to transactions based on an amount, e.g. $1,000,000 and a time period. In a crypto currency contract, the parties might use §1,000,000 (bitcoin). While the principal amount of the contract, in this case §1,000,000, never changes hands, the contract parties agree to pay each other based on some agreed upon performance. For example, in a bitcoin interest rate swap, with §1,000,000 over a one-year term, one party may agree to pay the other a fixed
rate of interest. The other party will agree to pay a market rate of interest. The difference between the two payments, the market rate versus the fixed rate, will result in a gain or a loss on the transaction. Gains or losses from transactions such as these are utilized in the calculation of taxable income.
In simple terms, transactions involving crypto currency or digital assets are taxed consistent with the taxation of any other kind of property, including cash, shares of stock, or tangible capital assets. When a taxpayer’s economic position improves, the amount of the improvement is generally considered taxable income unless there is a specific exclusion listed in the Internal Revenue Code. There are no such exclusions for crypto currency or other digital assets.
Final regulations were recently released from the IRS regarding the reporting of digital asset transactions by a broker or other third party. In the same way that an entity is responsible for reporting compensation payments made to a non-employee on a 1099 NEC, there is now a requirement for brokers or third parties to report digital asset transactions on a 1099 DA. Under §1.6045(d)(2)(i)(B), transactions involving digital assets, including crypto currencies, are required to be reported to both the IRS and the taxpayer. Information required to be reported on the 1099 DA includes the name, address, taxpayer identification number, gross sales or proceeds amount, identifying number of item sold, sales date, and in some cases the basis and acquisition date of the asset.
Under §1.6045(d)(2)(i)(C), providing this information to the taxpayer and the IRS is only required if gross proceeds exceed $600. The $600 threshold applies to the total of all proceeds from transactions performed through a distinct broker. These rules are in effect for transactions occurring after January 1, 2025.