Financial Reporting and Regulatory Update

Third Quarter 2022

From the FASB

Final standards

While the FASB issued no new standards during the third quarter ended Sept. 30, 2022, the board did make a significant decision on a forthcoming final ASU.

Reference rate reform 

On Oct. 5, 2022, the FASB discussed reference rate reform – fair value hedging and the staff research since the December 2021 board meeting. Several alternatives were considered, including principles-based approaches for adding new benchmark rates to the Master Glossary. Ultimately, the FASB elected to remove this project from its technical agenda and revisit at a later date, citing a desire to reconsider the issue when market transition with certain reference rates is more mature to permit a more robust decision on a principles-based approach. The FASB also voted in favor of a moratorium on adding new benchmarks to the Master Glossary’s existing list, in conjunction with this decision. 

Next the FASB redeliberated its proposed ASU, “Reference Rate Reform (Topic 848) and Derivatives and Hedging (Topic 815): Deferral of the Sunset Date of Topic 848 and Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate,” which defers the sunset date of relief provisions within Topic 848 from Dec. 31, 2022, to Dec. 31, 2024. The board approved the extension. 

Based on the moratorium action on the reference rate reform – fair value project, the board elected to not amend the definition of the SOFR overnight index swap rate within the Master Glossary. The proposed change would have had the effect of adding term SOFR as a benchmark interest rate. The FASB noted that while the board is observing the market transition for reference rates, it still is possible for entities to utilize hedge accounting without the proposed benchmark amendments. 

While momentum has been developing in the derivative markets for the use of term SOFRs, without this addition, entities should be mindful of how term SOFR derivatives are utilized in hedge accounting including transition off LIBOR. For example, a term SOFR derivative could be used in a cash flow hedge of an instrument with the same contractually specified term SOFR without resulting in a mismatch. In contrast, to avoid a mismatch, hedges of benchmark rates (as might be designated in a fair value hedge or a cash flow hedge of rolling fixed rate debt) need to use a derivative tied to a benchmark rate such as SOFR Overnight Index Swap Rate or Fed Funds Effective Rate Overnight Index Swap Rate. Using term SOFR in a benchmark interest-rate hedge would result in a mismatch that will require the use of a more robust effectiveness assessment method such as regression analysis. 

The final ASU is expected to be issued by Dec. 31, 2022. 


Segment Reporting Requirements

On Oct. 6, 2022, the FASB issued a proposed ASU, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which would require public entities to disclose more information about a reportable segment’s significant expenses on an interim and annual basis. Significant expense categories and amounts subject to disclosure would be derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker (CODM) and 2) included in a segment’s reported measure of profit or loss. The proposal, however, does not establish a level for assessing the significance of each expense category in that population of expenses. Public entities also would be required to disclose an amount for “other segment items,” representing the difference between 1) segment revenue less significant segment expenses and 2) the reportable segment’s profit or loss measure. A description of the composition of the “other segment items” would be required. The proposal would require public entities to provide at each interim period certain segment-related disclosures that are now required only on an annual basis. Public entities also would be required to disclose the name and title of the CODM. The proposed changes to the segment reporting guidance would apply retrospectively. The proposed changes to the segment reporting guidance would apply retrospectively.  

Comments are due by Dec. 20, 2022. 

For more information, see the Crowe article, “FASB Proposes Changing Segment Reporting Requirements.” 

Investments in tax credit structures 

On Aug. 22, 2022, the FASB issued a proposed ASU, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force),” to permit an entity to account for its tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). An entity would be allowed to make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis. The proposal would require specific disclosures for all tax equity investments in a program to which an entity has elected to apply the proportional amortization method. 

The proposed ASU does not yet include an effective date.   

Comments were due Oct. 6, 2022. 

For more information, see the Crowe article, “FASB Proposal Improves Accounting for Income Tax Credits.” 

Derecognition of long-duration contracts 

On July 14, 2022, the FASB issued a proposed ASU, “Financial Services – Insurance (Topic 944): Transition for Sold Contracts,” to amend the transition guidance of ASU 2018-12, “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” (LDTI). This proposal allows an insurance entity to make an accounting policy election to exclude contracts that meet certain criteria from applying the transition guidance of ASU 2018-12 when such contracts have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date. This proposal would prevent preparers from having to communicate why previously recognized gains and losses have changed because of the adoption of ASU 2018-12. 

The proposed ASU would be effective consistent with the effective dates in ASU 2020-11. 

Comments were due Aug. 8, 2022.