New Lease Accounting Rules Better for Investors but Some Reports Lack Comparability

Questions continue to surface about FASB’s relatively new lease accounting rules, including whether analysts and lenders find the resulting new information useful for making investment decisions, a board webcast revealed on June 12. Investors are able to make better assessments of companies’ business operations under ASC Topic 842, “Leases,” although some forms of information lack comparability, FASB member and analyst Frederick Cannon told a board webcast geared toward private companies and not-for-profit organizations. “Overall, the financial statement users have found 842 useful. In particular, I think the balance sheet recognition has allowed for both fixed income and select equity investors to better understand the dynamics of companies and their liabilities,” Cannon stressed. “It also has enhanced the ability of many financial statement users to provide for better ratio analysis when we look at leveraged ratios,” he said. “I would also say in some cases some users have found that comparability can be challenging under the new standard, but the added information that’s available does make adjustments possible for those financial statement users.” ASC 842, which requires the full magnitude of long-term lease obligations to be reported on the balance sheet, took effect in 2022 for privately held companies. The standard has been trickier to implement than the board expected, resulting in several deferrals to the effective date and amendments to simplify certain aspects of the rules.

Board Staying Ahead of ESG Trends but Won’t Tackle Beyond Targeted Accounting Issues

FASB Chair Richard Jones has reiterated that the board will not dive into the ESG reporting waters except in targeted accounting areas that clearly need to be addressed. Last year, FASB added narrowly defined ESG projects to its technical and research agenda but has not discussed them yet this year. The board will continue to stay the course of its mission on financial accounting and reporting but has also seen “that there are some transactions and there are some trends that actually appear that they would benefit from us seeking to look at the accounting,” Jones told the SEC and Financial Reporting Institute Conference, which was hosted by the Leventhal School of Accounting at the University of Southern California. His remarks were in response to moderator Paul Beswick, partner, deputy chief accountant at Ernst & Young LLP, who had observed that environmental, social, and governance (ESG) issues get a lot of discussion, covers a wide range of things, and is a focus of the SEC “where they’re looking at climate” and are going “to look at human capital disclosures and there’s going to be a proposal at some point on that, and they’ll finalize their climate proposal.” Beswick also observed that FASB got a fair amount of feedback during its agenda outreach last year that led to it subsequently adding the narrow projects to its research agenda. “Where are you on the ESG front? Do you see the board going into a greater role around ESG?” he asked. Currently, the board has a project on its technical agenda related ESG-related credits and environmental credits; and is researching whether to add another project related to ESG-linked instruments that meet the definition of a derivative, Jones said.

Firms Want More Guidance and Fixes for Crypto Asset Rules

Some of the nation’s largest crypto businesses, the Big Four, and others, told FASB that its proposed crypto assets accounting rules would be operable, with fixes, but guidance is still needed for other equally pressing items that were not included. In general, businesses want to be able to adopt the proposed guidance immediately upon issuance as a first step, according to June 2023 comment letters to the board. “We expect to be able to implement the proposed amendments within one quarter. We strongly support an early adoption transition option,” Jennifer Jones, chief accounting officer at Coinbase Global, Inc, said in a June 5 letter. US’s Chief Accounting Officer Cary Okawa said he believes “that most companies should be able to implement the proposed amendments in a fairly short amount of time and early adoption should be permitted.” If finalized, the guidance would require crypto assets that meet six specific conditions to be measured at fair value and changes in value recognized in each reporting period as profit or loss. Businesses would present crypto assets separately from other intangible assets on the balance and disclose information about significant crypto holdings, restrictions, and changes in those holdings.