The Rundown: A Comprehensive Review of Accounting Matters | 2021 Q4

Fourth Quarter 2021 Accounting Standard Updates

During the fourth quarter 2021, the Financial Accounting Standards Board (FASB) issued four new accounting standard updates (ASUs).  The list of ASUs and brief summary of each follows:

Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (a consensus of the Private Company Council)

ASU 2021-07

The amendments in this Update introduce a practical expedient for nonpublic entity’s that allows them to determine the current price input (e.g., used in a Black-Scholes model) of equity-classified share-based awards issued to both employees and nonemployees using the “reasonable application” of a “reasonable valuation method.” The practical expedient describes the characteristics of the reasonable application of a reasonable valuation method including:

• the date on which a valuation’s reasonableness is evaluated,
• the factors that a reasonable valuation should consider,
• the scope of information that a reasonable valuation should consider, and
• the criteria that should be met for the use of a previously calculated value to be considered reasonable.

The same characteristics are used for purposes IRC Section 409A to describe the reasonable application of a reasonable valuation method for income tax purposes. Therefore, a reasonable valuation performed in accordance with IRC Section 409A is an example of a way to achieve the practical expedient.

Importantly, a valuation by an independent appraiser is not required. Other valuations, including those conducted by internal personnel, could qualify if they meet the characteristics described in the practical expedient. However, it is expected that an independent appraisal will often be the method used by nonpublic entities electing the practical expedient.

Other Important Considerations:

• The practical expedient is not available for liability-classified awards,
• The practical expedient must be applied on a measurement-date-by-measurement-date basis (e.g., all options with the same grant date),
• The use of previously calculated is not reasonable as of the later of:
  • The previous calculation fails to reflect subsequent information that may materially change the value (e.g., acquisition, material litigation, issuance of a patent).
  • The previously calculated value was for a measurement date that is more than 12 months earlier than the current measurement date

Effective Date and Transition Requirements:

• Public business entities: Not applicable.
• All other entities: For all qualifying awards granted or modified during fiscal years beginning after December 15, 2021.

The amendments in this Update should be applied prospectively for all qualifying awards granted or modified after the effective date of the amendments.

Early application is permitted.

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

ASU 2021-08

Currently, whenever a business combination occurs, the acquirer is required to account for any pre-existing contract assets and liabilities related to revenue contracts acquired from the acquiree in accordance with ASC 805 Business Combinations which requires the contract assets and liabilities be measured at fair value. Often this results in “lost revenue” that was originally deferred by the acquiree, then remeasured at fair value in accordance with ASC 805 resulting in a decrease to the carrying value and causing subsequent revenue recognized to less than original carrying value of deferred revenue on the acquiree’s financial statements. The amendments in this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for any contract asset or liability related to a pre-existing revenue contract of the acquiree in accordance with Topic 606 as though the acquirer had originated the contract. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. However, there may be circumstances in which the acquiree’s carrying value would not be used such as:

• The acquiree did use generally accepted accounting principles (GAAP); or
• The acquirer is unable to assess or rely on how the acquiree applied Topic 606; or
• If there were errors identified in the acquiree’s accounting; of
• Changes are required to conform with the acquirer’s accounting policies.

Importantly, the amendments in this Update do not affect the accounting for other assets or liabilities acquired in a business combination (e.g., refund liabilities, customer-related intangible assets, intangible assets for off-market terms, etc.).

Effective Date and Transition Requirements:

• Public business entities: For fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
• All other entities: For fiscal years beginning after December 15, 2023.

The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments.

Early application is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business combinations that occurred during that fiscal year and prospectively to all future business combinations.

DISCOUNT RATE FOR LESSEES THAT ARE NOT PUBLIC BUSINESS ENTITIES

ASU 2021-09

Nonpublic business entities can currently elect a practical expedient that allows them to use a risk-free rate as the discount rate for all leases. Importantly, the current practical expedient must be applied to all leases if elected. The amendments in this Update allows nonpublic lessees to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. An entity that makes the risk-free rate election is required to disclose which asset classes it has elected to apply a risk-free rate.

Importantly, the amendments require the lessee use the rate implicit in the lease if it is readily determinable for an individual lease rather than a risk-free rate. However, in practice the lessee is usually not privy to the implicit rate. In addition, the adoption of the amendments should not be considered an event that would cause remeasurement and reallocation of existing leases (e.g., lease payments, lease term, or classification).

Effective Date and Transition Requirements:

• Public business entities: Not applicable.
• All other entities:
  • If ASC 842 Leases has not been adopted as of November 11, 2021: Effective at the same time ASC 842 is adopted (e.g., 2022 for calendar year-end nonpublic entities) using the same transition method elected for ASC 842.
  • If ASC 842 Leases has been adopted as of November 11, 2021:  Effective for fiscal years beginning after December 15, 2021 using a modified retrospective basis to leases that exist at the beginning of the fiscal year of adoption of this Update.

Earlier application is permitted.

DISCLOSURES BY BUSINESS ENTITIES ABOUT GOVERNMENT ASSISTANCE

ASU 2021-10

Current GAAP has no specific authoritative guidance on the accounting for, or the disclosure of, government assistance received by business entities. The amendments in this Update require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy:

• Information about the nature of the transactions and the related accounting policy used to account for the transactions
• The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item
• Significant terms and conditions of the transactions, including commitments and contingencies.

Importantly, the amendments do not apply to not-for-profit (NFP) entities within the scope of Topic 958, Not-for-Profit Entities, and employee benefit plans within the scope of Topic 960, Plan Accounting— Defined Benefit Pension Plans, Topic 962, Plan Accounting—Defined Contribution Pension Plans, or Topic 965, Plan Accounting—Health and Welfare Benefit Plans.

Effective Date and Transition Requirements:

The amendments in this Update are effective for all entities within scope for annual periods beginning after December 15, 2021.

An entity can apply the amendments either prospectively or retrospectively.

Early application is permitted.

2021 Accounting Pronouncements: Private Companies

As a reminder, the following ASUs are effective for private companies for calendar year 2021:

• ASU  2021-03: Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
• ASU  2021-02: Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient
• ASU  2021-01: Reference Rate Reform (Topic 848): Scope
• ASU  2020-07: Not-for-Profit Entities (Topic 958) – Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
• ASU  2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
• ASU  2020-03: Codification Improvements to Financial Instruments
• ASU  2019-10: Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)-Effective Dates
• ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
• ASU  2019-02: Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials (a consensus of the FASB Emerging Issues Task Force)
• ASU  2018-18: Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
• ASU  2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
• ASU 2018-16: Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
• ASU  2018-15: Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
• ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

2022 Accounting Pronouncements: Private Companies

As a reminder, the following ASUs are effective for private companies for calendar year 2022:

• ASU  2020-10: Codification Improvements
• ASU  2020-01: Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force)
• ASU  2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
• ASU  2019-01: Leases (Topic 842): Codification Improvements
• ASU  2018-20: Leases (Topic 842)-Narrow-Scope Improvements for Lessors
• ASU  2018-14: Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
• ASU  2018-11: Leases (Topic 842)-Targeted Improvements
• ASU  2018-10: Codification Improvements to Topic 842, Leases
• ASU  2018-01: Leases (Topic 842)-Land Easement Practical Expedient for Transition to Topic 842
• ASU  2016-02: Leases (Topic 842)

2022 Accounting Pronouncements: Public Companies

As a reminder, the following ASUs are effective for public companies for calendar year 2022:

• ASU 2021-10: Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance
• ASU 2021-05: Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments
• 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 (a consensus of the FASB Emerging Issues Task Force)
• ASU  2020-07: Not-for-Profit Entities (Topic 958)-Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
• ASU  2020-06: Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

2022 Accounting Pronouncements: Governmental Entities

As a reminder, the following ASU is effective for governmental entities for calendar year 2022:

• GASB Statement 87: Leases