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Financial Reporting and Regulatory Update

First Quarter 2021

From the FASB

Final standards

Reference rate reform clarification

On Jan. 7, 2021, the FASB issued Accounting Standards Update (ASU) 2021-01, “Reference Rate Reform (Topic 848): Scope.” Changes in the interest rate used in the derivatives market for margining, discounting, or contract price alignment are being implemented as part of the marketwide transition to new reference rates (commonly referred to as the “discounting transition”), and these changes have created particular accounting implications. The amendments clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. If an entity elects certain provisions in Topic 848, those provisions apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This ASU also clarifies that the provisions in Topic 848 apply to all entities that designate receive-variable rate, pay-variable-rate cross-currency interest-rate swaps as hedging instruments in net investment hedges that are modified as a result of the reference rate reform.

Effective dates

This ASU is effective immediately for all entities. The amendments in this ASU do not apply to contract modifications, new hedging relationships, and existing hedging relationships evaluated for effectiveness in periods after Dec. 31, 2022, except for hedging relationships existing as of Dec. 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after Dec. 31, 2022).

Practical expedient for applying Topic 606 by franchisors

On Jan. 28, 2021, the FASB issued ASU 2021-02, “Franchisors – Revenue From Contracts With Customers (Subtopic 952-606): Practical Expedient.” This ASU provides a targeted practical expedient to Topic 606, “Revenue From Contracts With Customers,” for nonpublic business entities that meet the definition of a franchisor. A nonpublic franchisor that enters into a franchise agreement may elect to account for preopening services that are consistent with those listed in the ASU as distinct from the franchise license. If elected, the expedient must be applied consistently to contracts with similar characteristics and circumstances. A franchisor that elects the expedient may also make an accounting policy election to account for all preopening services as a single performance obligation; otherwise, it will need to apply the guidance within Topic 606 to determine whether the preopening services are distinct from one another.

Effective dates

For entities that have not yet adopted Topic 606, this ASU is to be adopted using the same transaction and effective dates as those within Topic 606. For entities that have already adopted Topic 606, this ASU is effective in interim and annual periods beginning after Dec. 15, 2020. Early adoption is permitted.

Alternative for goodwill triggering event assessments

On March 30, 2021, the FASB issued ASU 2021-03, “Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.” This ASU provides private companies and not-for-profit entities with an alternative to monitor and evaluate goodwill impairment triggering events only as of the reporting date, whether the reporting period is an interim or annual period. An entity that elects this alternative is not required to monitor for goodwill impairment triggering events during the reporting period. Under the alternative, an entity should evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and, if so, whether it is more likely than not that goodwill is impaired. The amendments in this ASU do not require incremental disclosures beyond existing disclosure requirements.

Effective dates

The ASU is effective on a prospective basis for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. Furthermore, an entity should not retroactively adopt this ASU for interim financial statements already issued. The ASU provides an unconditional one-time option to adopt the amendments prospectively after its effective date without assessing preferability under Topic 250.                                                                                                           

Not-for-profits consultation paper

Development of international reporting guidance

International Financial Reporting for Non-Profit Organisations (IFR4NPO) is an initiative to develop internationally applicable financial reporting guidance for nonprofit organizations. IFR4NPO has published a consultation paper to provide nonprofit organizations (NPOs) and their stakeholders an opportunity to contribute to the development of the first international financial reporting guidance for this sector.

NPOs do not currently have a commonly accepted international accounting framework, which leads to variability in the financial reporting of NPOs. The goal of the IFR4NPO project is to allow NPO reporting to be more transparent, credible, and comparable. This consultation paper, the first output from the project, has been developed in two parts and serves to raise awareness and understanding of the project and the issues it will address.

Part I covers general NPO financial reporting issues and outlines the broad characteristics of NPOs that likely will fall within the scope of the guidance. This includes entities that:

  • Have the primary objective of delivering services for public benefit
  • Direct any surpluses to furthering their primary service delivery objective
  • Derive income from voluntary funding
  • Hold and use assets for social purposes

The model currently proposed draws on existing international financial reporting frameworks that have undergone due process in their development and will facilitate meeting the five-year project time frame. The proposed guidance uses the International Financial Reporting Standards (IFRS) for SMEs Standard (for small and medium-sized entities) as the foundational framework and draws on full IFRS standards, International Public Sector Accounting Standards, and jurisdictional-level standards where those better meet the needs of NPOs.

Part 2 covers specific NPO financial reporting issues and is directed to those who prepare, audit, or extensively use NPO financial reports. This section outlines the following priority issues:

  • The reporting entity
  • Accounting for incoming resources
  • Accounting for outgoing resources
  • Accounting for financial and nonfinancial assets
  • Presentation, scope, and content of financial reports

Comments can be provided through submission of a comment letter, completion of a template, or completion of a survey. Part I comments are due by July 30, 2021, and Part II comments are due by Sept. 24, 2021. The exposure draft is expected to be released in mid-2023, with final guidance expected in early 2025.