Discussions Continue on ‘DISE’ Proposal, Environmental Credits

FASB’s March 27, 2024, meeting was intended to advance discussions on two topics, including the proposed “disaggregation of income statement expenses” rules—nicknamed “DISE” by the board. The second topic surrounds building a proposal on accounting for and disclosure of environmental credit programs. On the DISE project, the board continues redeliberating Proposed Accounting Standards Update (ASU) “2023-ED500, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” which was issued in 2023 for public comment and received 80 comment letters. The meeting will be the second round of redeliberation on the proposal. At the first round, on January 31, the board affirmed the main theme of the proposal to require that companies disclose certain types of expenses that are currently obscured on the income statement—i.e. figures that investors say will enable them to better understand a company’s performance and prospects for future cash flows. Various other items were affirmed from the proposal. The board also discussed interim reporting requirements; miscellaneous issues; how to transition the rules; the effective date; and a cost-benefit analysis of the guidance.

New Rule on Profits Interest Awards Could Mean Changes

FASB has published a narrow rule on profits interest awards that could mean changes for some entities—causing them to have to switch to stock compensation accounting rules at a cost. The board issued Accounting Standards Update (ASU) 2024-01, Compensation—Stock Compensation (Topic 718), Scope Application of Profits Interest and Similar Awards, which provides an illustrative example that shows how to determine whether a profits interest award should be accounted for as a share-based payment arrangement under Topic 718, Compensation—Stock Compensation, or under another rule such as Topic 710, Compensation—General. The example is intended to reduce “complexity in determining whether a profits interest or similar award is subject to the guidance in Topic 718” and eliminate “diversity in practice,” according to the “Basis for Conclusions” section of the standard. “Investors and other allocators of capital will benefit from entities accounting for economically similar awards consistently.” But a knock-on implication for some firms is that they may have to have to change from using Topic 710 to account for “certain profits interest and similar awards” to using Topic 718. “Those preparers may incur incremental costs to apply the guidance in Topic 718,” the “Basis for Conclusions” explains. Ultimately, the board concluded that the general benefits would outweigh any costs that are incurred, and that those that already use Topic 718 for profits interest awards will see a reduction in costs.

IRS News

Proposal Would Amend Rules for Providing Advance Notice of Third-Party Contacts

The IRS has proposed updating the rules for providing taxpayers with advance notice of third-party contacts to conform to the requirements of the Taxpayer First Act of 2019 (PL 116-25). Under federal tax law, the IRS generally may examine a taxpayer’s books and records, issue summonses, and take testimony under oath for any reason that may be “relevant or material” or when “inquiring into any offense connected with the administration or enforcement of the internal revenue laws.” The IRS is authorized to examine a taxpayer’s books and records that are kept by a third party. The proposed regulations would keep the rule that IRS officers or employees may not contact third parties with respect to the determination or collection of the tax liability of a taxpayer unless the advance notice requirements have been satisfied. They would also provide exceptions to the 45-day advance notice requirement in certain circumstances.