New Rules Coming Will Pull SEC Disclosures into GAAP
FASB plans to publish an accounting standard in October that will bring 14 SEC disclosures into the U.S. GAAP codification, staff told the board’s not-for-profit advisers on September 7. The coming rules will finalize Proposed Accounting Standards Update (ASU) 2019-600, Disclosure Improvements, Codification Amendments in Response to the SEC ’s Disclosure Update and Simplification Initiative, with clarifications, published four years ago under a prior FASB for public comment. The standard will introduce narrow changes into GAAP from disclosures that originate in either Regulation S-X or Regulation S-K. But the accounting provisions are coming with potentially confusing effective dates as they are contingent on SEC action, discussions signal. “The effective date is unique,” staff explained at FASB’s Not-for-Profit Advisory Committee (NAC) meeting. The rules must be applied prospectively and if any of the disclosures are not removed from the SEC’s own literature by June 30, 2027, the amendments will expire and not become effective for any entities, she said. Specifically, for entities subject to the SEC’s existing disclosure requirements, or for entities required to file or furnish financial statements with the SEC in preparation for the sale or purposes of issuing securities, the effective date for each disclosure will be “the day on which the SEC removes the related disclosure” for regulation S-X or S-K.
Accounting Rules for a Simple Agreement for Future Equity Raising Concerns
Constituents have raised concerns to FASB’s private company advisers about the complexity of reporting a Simple Agreement for Future Equity (SAFE)—a type of investment used to fund startups, according to discussions held on September 12. There is diversity in practice about whether to classify a SAFE under ASC 480, Distinguishing Liabilities from Equity, or as a liability under ASC 815-40, Derivatives and Hedging–Contracts in Entity’s Own Equity, now that these agreements have increased in use, Private Company Council (PCC) members said. “I think most of these things end up as a liability,” Michael Cheng, national professional practice partner for Frazier & Deeter LLC, said. “The problem is you can’t really fast forward to that [answer] unless you prove that there is no equity component to it and I think that that’s what generates some of the difficulty in accounting for it,” he said. “And there’s just general push back. You talk to a lot of investors and reporting entities they will tell you that this is equity and it’s almost a nonstarter.” U.S. GAAP may need a practical expedient for SAFEs, as those agreements have become more prominent over the past 10 years. A practical expedient is a shortcut to an accounting answer. The tension in the topic is that people who issue them believe they are equity, but the accounting process does not confirm that. “I think when you go through the accounting you very rarely end up there and that’s where there is a lot of diversity in practice because people who have them sometimes don’t navigate that guidance all the way through,” PCC Chair Candace Wright said. No decisions were made on the issue during PCC discussions.
IASB Seeking Public Comment on Clarifying Amendments to Five Standards
The IASB has proposed narrow amendments to five accounting standards as part of its annual improvements process. The board is seeking public input on the proposal, issued as Exposure Draft 2023-1, “Annual Improvements to IFRS Accounting Standards—Volume 11,” with an aim to clarify, simplify and make editorial corrections to current standards.
The proposal addresses the following standards:
- IFRS 1, First-time Adoption of International Financial Reporting Standards: to improve consistency with hedge accounting requirements and add cross references
- IFRS 7, Financial Instruments: Disclosures: updates, simplifications and clarifications to guidance about gain or loss on derecognition
- Guidance on implementing IFRS 7, Financial Instruments, Disclosures: disclosure of deferred difference between fair value and transaction price; credit risk disclosures
- IFRS 9, Financial Instruments: derecognition of lease liabilities; transaction price
- IFRS 10, Consolidated Financial Statements: determination of a “de facto agent”
- IAS 7, Statement of Cash Flows: the cost method
Comments are due by December 11.