As 2022 rolls along full-steam-ahead, financial professionals need to be aware of important accounting updates impacting companies this year. Several accounting standards are now taking effect — from government grant disclosures to income tax accounting simplifications — and you need to know which updates impact your company and when and how the transitions are happening.
Read on for a quick preview of what’s changing for 2022 reporting and what these accounting updates mean for you.
Accounting Updates Affecting Both Public and Private Companies
Accounting for Government Assistance
Both private and public entities need to know about the Financial Accounting Standards Board (FASB)’s latest guidance on accounting for government assistance, ASU 2021-10. The chances are strong that your organization has received government funding during the COVID-19 pandemic, whether through Paycheck Protection Program (PPP) loans or Employee Retention Tax Credit (ERTC), among other stimulus programs that were offered during 2020 and 2021. Accounting for these funds has been troublesome and unclear, but the new update adds transparency through increased disclosures for for-profit companies. You can read further details about this update here.
Lessor Accounting Update
Lease accounting changes under ASC 842 have already been adopted by public companies and in 2022 will be adopted by private companies, too. The FASB’s lessor accounting update in ASU 2021-05 provides guidance on accounting for certain leases with variable lease payments. Read more here.
Modification of Equity Classified Written Call Options, ASU 2021-04
The nuanced change released in ASU 2021-04 adds more explicit guidance for modification or exchanges of freestanding equity-classified written call options that are not within the scope of other authoritative codification guidance, such as ASC 718. Read more about what the changes means for your company here.
Private Company Accounting Updates
Lease Accounting
Delays enacted during the COVID financial crisis are coming to an end, and organizations will need to re-prioritize reviewing and accounting for existing leases under ASC 842. Private companies will enact ASU 2016-02 in 2022, along with ASU 2021-09, which expands on the risk-free rate practical expedient. Updates to lease accounting could mean significant changes for reporting and covenant calculations for nonpublic business entities, namely the fact that lessees will be required to recognize all lease assets and liabilities on their statement of financial position. Correctly identifying all leases and allocating between lease and non-lease components can be time-consuming, so plan accordingly.
The changes in ASU 2021-09 give private entity lessees more flexibility for determining the risk-free discount rate for measuring lease assets and liabilities. Private companies may now find an advantage in assessing their common lease practices by class of asset in order to find the ideal mix of providing benefits of more accurate rates and the cost of determining the discount rate for each new lease. Read more about the update here.
Income Tax Accounting Simplification
This standard update in ASU 2019-12 aims to simplify the complexity of accounting for income taxes that was exacerbated in 2017 by the tax reform law commonly known as the Tax Cuts and Jobs Act. It does so by removing certain exceptions. The core changes impact business losses and gains, foreign subsidiaries, franchise taxes, goodwill in business combinations, allocation of income tax to a subsidiary’s financial statements, tax reform effects, and employee stock ownership plans. Read more about it here.
Defined Benefit Plan Disclosures, ASU 2018-14
Changes to the defined benefit plan disclosure framework released in ASU 2018-14 include the removal of many disclosures that are no longer cost beneficial. The standard update clarifies disclosure requirements in Topic 715-20 as they relate to projected benefit obligation (PBO) and accumulated benefit obligation (ABO). Private companies will now be required to disclose the weighted average interest crediting rates for cash balance plans, along with other plans that include promised interest crediting rates. They will also need to include reasons for significant gains, losses, or any other significant changes in the benefit obligation. Read more here.
Expedient for Stock Compensation
A new practical expedient for private companies was issued in ASU 2021-07 that allows private companies to estimate the current price input of their equity-classified share-based awards by using a “reasonable application of a reasonable valuation method.” By using this new practical expedient, a private company may only need to get a single valuation to determine the current price input for the measurement of its share-based compensation award to fulfill both income tax and financial statement reporting purposes rather than separate valuations that comply with ASC Topic 718 and Treasury Regulations applied for income tax reporting. Read more here.
Other Updates
In addition, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, ASU 2020-08 clarifies when reevaluation of the scoping of callable debt securities for each reporting period is required. Read the full standard here.
Public Company Accounting Updates
Simplification of Complex Debt and Equity Instruments
The standard update in ASU 2020-06 reduces the complexity of applying U.S. generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The change focuses on convertible instruments and the derivatives scope exception for contracts in an entity’s equity, simplifying accounting while also providing financial statement users with more meaningful information. One clarification offered by ASU 2020-06 states that the use of an average market price is required to calculate the diluted earnings per share (EPS) denominator for instruments where the number of shares included in the denominator is variable. This comes into play when the exercise price or number of shares required to settle the contract may change based on an entity’s share price. ASU 2020-06 is only applicable to SEC Filers that are not Smaller Reporting Companies for fiscal years beginning after Dec. 15, 2021, and interim periods within that fiscal year. Read more about it here.
Where Can I Learn More?
All these standards take effect for fiscal years beginning after Dec. 15, 2021, that is calendar year end Dec. 31, 2022. For public companies, except for the new disclosure requirements for governmental grants, the standards are required to be applied to interim periods during the fiscal year beginning after Dec. 15, 2021. For private companies the new standards are applicable for interim periods in fiscal years beginning after Dec. 15, 2022. An experienced accounting provider can walk you through these changes and help you understand precisely what they mean for your organization.
For more information on the significant accounting updates affecting public and private companies in 2022, contact the experts at MHM.
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