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The Rundown: First Quarter 2024 Guide

calendar iconApril 26, 2024

The Financial Accounting Standards Board (FASB) issued two Accounting Standard Updates (ASUs) in the first quarter of 2024, while the Government Accounting Standards Board (GASB) did not issue any new statements. The latest issue of the Rundown features a summary of these new standards. For summaries of standards issued in previous periods, view our previous rundowns here. In addition, we’ve got a comprehensive listing of all standards newly effective for calendar year-end December 31, 2024 broken down by public business entities and private entities.

First Quarter 2024 Newly Issued Standards

ASU 2024-01

Scope Application of Profits Interest and Similar Awards

Currently, profit interests pose several issues for practitioners. First, there has been a lack of prescriptive authoritative guidance. Second, determining the proper accounting involves judgment. Due to the lack of prescriptive authoritative guidance, interpretive guidance has developed over time with diversity in practice. With ASU 2024-01, the FASB is catching up to the interpretive guidance and hopefully reducing diversity in practice.

Many private entities issue profit interest to align compensation with an entity’s performance and allow holders to participant in the future profits and/or equity appreciation of the entity. Profit interests are not defined within GAAP and differ from other capital interests because profit interests only participant in future profits and/or equity appreciation and do not have rights to existing net assets like other capital interests do (e.g., common stock). This can make it difficult to determine if profit interests should be accounted for as a share-based payment under ASC 718 or like bonuses under ASC 710.

ASU 2024-01 adds 4 illustrative examples (example 10 at ASC 718-10-55-138, case A-D) that provides authoritative guidance for when profit interests should be accounted for under ASC 718.

An instrument is within the scope of ASC 718 if a grantor acquires goods or services by either:

  1. Issuing shares, options or other equity instruments; or
  2. Incurring a liability that meets either of the following:
    1. The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments; or
    2. The awards require or may require settlement by issuing the entity’s shares or other equity instruments.

The examples in cases A-D are summarized below. Entity X is a partnership that granted a new class of units (Class B) in exchange for services.

Case Scope of ASC 718?
Case A:

·       Once vested, Class B participate pro rata with other equity interest after the other equity interest receive their distribution preference (i.e., participation threshold);

·       If still employed upon an exit event, then Class B immediately vest;

·       Upon termination, any unvested Class B are forfeited but any vested Class B are retained;

·       Upon termination, the grantor has the right, but not the obligation, to purchase the Class B units at the fair value on the call date.

 Yes

 
Case B: Same assumptions as Case A, except

·       Immediately, regardless of vesting status, Class B participate pro rata with other equity interest after the other equity interest receive their distribution preference;

·       Class B only vest upon an exit event;

·       All Class B are forfeitable upon termination. If the employee terminates before an exit event, they receive no compensation.

 Yes
Case C: Same assumptions as Case A, except

·       Grantee never receives equity instruments (e.g., phantom stock);

·       Class B is not eligible to participate in distributions in the ordinary course of business;

·       If still employed upon an exit event upon an exit event, then Class B units immediately vest and must be repurchased by the grantor at fair value;

·       All Class B are forfeitable upon termination. If the employee terminates before an exit event, they receive no compensation.

 Yes
Case D: Same assumptions as Case A, except

·       Grantee never receives equity instruments (e.g., phantom stock);

·       After 3 years of service, Class B is eligible to participate in 1% of the preceding fiscal year’s net income;

·       Upon an exit event, Class B units will not participant in any proceeds;

·       Upon termination, all Class B are forfeited and the employee receives no compensation.

 No

1.  Shares are never issued;

2.  Liability created is not based, at least in part, on the price of the entity’s equity interest

Effective Date and Transition Requirements:

Public business entities:     Fiscal years beginning after December 15, 2024, and interim periods within those annual periods
All other entities:               Fiscal years beginning after December 15, 2025, and interim periods within those annual periods

Early adoption is permitted. If early adopted, then you must do so in the first quarter. The amendments can be applied retrospectively or prospectively to profit interests granted or modified after adoption.

ASU 2024-02

Codification Improvements—Amendments to Remove References to the Concepts Statements

The FASB’s Conceptual Framework establishes concepts that the Board considers in developing standards of financial accounting and reporting. However, FASB Concepts Statements are nonauthoritative. References to the Concepts Statements in the Codification could imply that the Concepts Statements are authoritative. In addition, the Codification references Concepts Statements that are sometimes superseded. This Update amends the Codification to remove references to FASB Concepts Statements and is not expected to have a significant effect on current accounting practice.

Effective Date and Transition Requirements:

Public business entities:     Fiscal years beginning after December 15, 2024
All other entities:               Fiscal years beginning after December 15, 2025

Early adoption is permitted. If early adopted, then you must do so in the first quarter. The amendments can be applied retrospectively or prospectively.

List of Newly Effective Standards This Busy Season

Calendar Year-end Public Companies

The following ASUs are effective for public companies for calendar year 2024:

Calendar Year-end Private Companies

The following ASUs are effective for private companies for calendar year 2024:

Standards Not Yet Effective***, But That You Should Consider Early Adopting

*    Effective for SRCs. Previously effective for all other public entities.
**  Amendment on rollforward information is effective for fiscal years beginning after December 15, 2023.
*** Not yet effective for private entities

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