FASB’s ESG Research Dives into Nuances of Derivatives Accounting Rules
FASB’s research into financial instruments that are linked to environmental, social, and governance (ESG) matters will clarify whether or not they should be accounted for as derivatives, according to May 11 board discussions. FASB staff will also research ways to ensure that the disclosures surrounding financial instruments with ESG-linked features are more transparent. The discussions come as recent ESG market developments have given rise to the issuance of different types of financial instruments, an emerging area that can be tricky because of the nuances of both the topic and the accounting rules involved. Will the board, for example, need to redefine derivatives in GAAP as a result? Maybe, according to the discussions: “I think it’s important that we get the accounting right for these instruments, and I don’t think bifurcated derivative accounting is the right accounting,” FASB Chair Richard Jones said. “In my experience, if somebody found a derivative and other people don’t think it is, eventually they all end up accounting for it as a derivative.” The board will vote at a future meeting about whether to add a project to its technical agenda, including the scope of the project.
Adviser Questions whether Effort on Government Grants Rules Is Too Late
FASB might have missed a major opportunity over the past two years by not tackling reporting rules for government grants, especially in light of the CARES Act, a member of the board’s small public company advisers said. “The big window, unless we actually think it’s going to be significant in the future, which it could be—I’m not very clear on that—was the CARES Act, and most people have it behind them in terms of the accounting,” said Ryan Siurek, chief accounting officer at Biodesix, Inc., during the May 12 Small Business Advisory Committee (SBAC) meeting. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a $2.2 trillion economic stimulus bill that was passed in 2020 in response to the economic fallout of the COVID-19 pandemic. “And I haven’t heard a lot from the investment community with regard to confusion and/or misunderstanding as to how people apply the accounting for the grants,” said Siurek. “So I’m curious if this is more from the perspective of investors or users?” The discussions come as FASB staff are getting ready to issue an Invitation-to-Comment on whether to incorporate the recognition and measurement rules from International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, into U.S. GAAP.
FASB Mulling Whether to Require Disclosure of Taxes Paid by Top Jurisdictions
FASB said it would research whether to require companies to disclose the top jurisdictions in which they pay the most income taxes. The board will also research improvements to the tax rate reconciliation table, a tool that can help with the understanding of future cash flows when there are changes in tax laws, according to the discussions. No rulemaking decisions were made. The staff will research two alternatives: 1) disclosure of income taxes paid to states and countries (such as top 5, top 10, or another number) on the basis of the amount of income taxes it paid to each jurisdiction during a reporting period; and 2) disclosure of the amount of income taxes paid for each of the jurisdictions identified on the basis of a quantitative threshold. “I think [a jurisdictional approach] is really the only viable alternative,” FASB member Marsha Hunt said. “That’s the auditable way to go,” she said. “An entity is actually transferring cash somewhere. So you know who you paid, you know how much you paid.” Especially important are disclosures for taxes paid in foreign countries, as there is less transparency, some board members said. “To me this is a really important issue,” FASB member Gary Buesser said. “If you look at it by jurisdiction, U.S. federal clearly is important; the states’ one line item for me is fine, [but] it’s really the foreign jurisdictions that are important here.”