Financial Reporting and Regulatory Update

Second Quarter 2021

From the FASB

Final standards

Modifications or exchanges of freestanding equity-classified written call options

On May 3, 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-04, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options,” to clarify an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. Based on this ASU, an entity must treat a modification of the terms or conditions of an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. The amendments provide guidance on how an entity should measure the effect of the modification or exchange distinguishing between transactions to issue or modify debt and transactions to issue equity or for other reasons. The amendments provide recognition guidance for the effect of the modifications or exchanges based on the substance of the transaction, in the same manner as if cash had been paid as consideration. In a modification that includes both debt financing and equity financing (referred to as a multiple-element transaction), the total effect of the modification should be allocated to the respective elements in the transaction.

Effective dates

For all entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied prospectively to modifications or exchanges occurring on or after the effective date of the amendments.


Improvements to hedge accounting guidance

On May 5, 2021, the FASB issued a proposed ASU, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method,” to assist entities that elect to apply the portfolio layer method (currently referred to as the last-of-layer method) of hedge accounting in accordance with Topic 815. The proposed amendments expand the current single-layer model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments. The proposal would result in changing the name of the “last-of-layer” method to the “portfolio layer” method. The proposed amendments specify that eligible hedging instruments in a single-layer strategy may include spot- starting or forward-starting constant-notional swaps, or spot- or forward-starting amortizing-notional swaps and that the number of hedged layers (single or multiple) corresponds with the number of hedges designated.

The proposal provides additional guidance on accounting for and disclosure of fair value hedge basis adjustments that would be applicable to both the current single-layer model and the proposed multiple-layer model. The proposal also indicates how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

The proposed ASU does not yet include an effective date. Comments were due on July 5, 2021.

Discount rate for lessees that are not PBEs

On June 16, 2021, the FASB issued a proposed ASU, “Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities,” to provide entities that are not public business entities (PBEs) with more flexibility in how they determine the discount rate and make the risk-free rate election to reduce initial adoption and ongoing implementation costs associated with adopting the new leasing standard. Currently, Topic 842 provides lessees that are not PBEs with a practical expedient that allows them to elect an accounting policy to use a risk-free rate as the discount rate for all leases. The proposed amendments would allow those lessees to make the risk-free rate election by class of underlying asset rather than at the entitywide level. In making the risk-free rate election, entities would be required to disclose to which asset classes it has elected to apply the risk-free rate. Under the proposed amendments, when the rate implicit in the lease is readily determinable for any individual lease, the lessee would use that rate regardless of whether it has made a risk-free rate election.

For entities that have not adopted Topic 842, the proposed ASU would be effective at the same time that they adopt Topic 842. For entities that already have adopted Topic 842, the proposed amendments would be effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption would be permitted.

Comments were due July 16, 2021.