Regulatory updates

On 27 March 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Leases (Topic 842): Common Control Arrangements to improve lease guidance on related party arrangements between entities under common control. The key issues addressed by the ASU include:

• Terms and conditions to be considered: Topic 842 states that the entities should determine whether a related party arrangement between entities under common control constitutes a lease arrangement. If yes, then it must classify and account for the lease on the same basis as an arrangement with an unrelated party (on the basis of legally enforceable terms and conditions). The ASU has provided a practical expedient for certain private companies and not-for-profit entities to use the written terms and conditions of a common control arrangement to determine

1. Whether a lease exists, and if so
2. The classification of and accounting for such lease.

Where no written terms and conditions exist, an entity is prohibited from applying the practical expedient and must evaluate the enforceable terms and conditions to apply Topic 842.

• Accounting for leasehold improvements: Topic 842 requires the leasehold improvements to have an amortisation period, which is consistent with the shorter of the remaining lease term and the useful life of the improvements. However, it was observed that multiple methods of accounting for such improvements exist, leading to diversity in practice. In this regard, the ASU has introduced certain amendments to the leasehold improvements associated with common control leases. Such improvements should be:

1. Amortised by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term), as long as the lessee controls the use of the underlying asset through a lease. However, in cases where the lessor obtained the right to control the use of the asset through a lease with another entity (not within the same common control group), the amortisation period may not exceed the amortisation period of the common control group
2. Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities), where the lessee no longer controls the use of the underlying asset.

Additionally, these leasehold improvements are subject to impairment guidance in Topic 360, Property, Plant and Equipment .

Effective date: The amendments would become effective for fiscal years beginning after 15 December 2023, including the interim periods within these fiscal years. Additionally, early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance.

To access the text of the ASU, please click here

The US Generally Accepted Accounting Principles (GAAP) do not provide any specific authoritative guidance on how a joint venture, upon formation, should recognise and initially measure assets contributed and liabilities assumed. As a result, there is diversity in practice with respect to accounting for the contributions a joint venture receives upon formation. Some joint ventures initially measure their net assets at fair value, while others measure them at the venturers’ carrying amounts.

In this regard, recently, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU): Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and initial measurement to address the aforementioned diversity in accounting. The amendments in the ASU address the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements.

As per the amendment, a joint venture, upon formation, would apply a new basis of accounting and recognise and initially measure its assets and liabilities at fair value. Further, the ASU requires that a joint venture, upon formation should apply the following key adaptations from the existing guidance on business combinations:

• A joint venture is the formation of a new entity without an accounting acquirer: The formation of a joint venture is the creation of a new reporting entity, and none of the assets and/or businesses contributed to the joint venture are viewed as an independent entity, i.e., an accounting acquirer would not be identified

• A joint venture measures its identifiable net assets and goodwill, if any, at the formation date: The joint venture formation date is the date on which an entity initially meets the definition of a joint venture

• Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 per cent of the joint venture’s equity: The amendments require that a joint venture measures its total net assets upon formation, as the fair value of the joint venture as a whole, which equals the fair value of 100 per cent of its equity immediately following formation (including any non-controlling interest in the net assets recognised by the joint venture), and

• A joint venture provides relevant disclosures: The ASU clarifies that the joint venture disclosure requirements, upon formation are different from the requirements specified in case of business combinations.

Effective date: The amendments are effective prospectively for all the joint venture formations, with a formation date on or after 1 January 2025. Additionally, a joint venture that was formed before 1 January 2025 may elect to apply the amendments retrospectively, if it has sufficient information available. Early adoption is permitted.

To access the text of the ASU, please click here

In the Securities and Exchange Commission (SEC) Release No. 33-10532, Disclosure Update and Simplification, issued in August 2018, the SEC referred certain disclosure requirements hat overlap with, but require incremental information to, the generally accepted accounting principles to the Financial Accounting Standards Board (FASB).

Accordingly, on 9 October 2023, FASB issued an Accounting Standards Update (ASU) that incorporates these disclosure requirements. The amendments in the ASU are expected to Clarify and improve disclosure and presentation requirements of a variety of topics and allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements.

To access the text of the ASU, please click here

Investors, lenders, creditors, and other allocators of capital (collectively, “investors”) have observed that segment information is important in understanding a public entity’s different business activities. That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows.

While investors are supporting the management approach to segment reporting, few investors required more segment information to be reported⁹ Investors observed that although information about a segment’s revenue and measure of profit or loss is disclosed in an entity’s financial statements, there generally is limited information disclosed about a segment’s expenses. .

Accordingly, in 2017, the Financial Accounting Standards Board (FASB) undertook a project to improve segment disclosures.

In November 2023, the FASB issued a final Accounting Standards Update (ASU) which prescribes improvements to a public entity’s reportable segment disclosures and addresses requests from investors for additional, more detailed information about a reportable segment’s expenses.

The amendments in the ASU improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments are:

• A public entity should disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the Chief Operating Decision Maker (CODM) and included within each reported measure of segment profit or loss
• A public entity should disclose, on an annual and interim basis, an amount for other segment items¹⁰The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss. by reportable segment and a description of its composition
• A public entity must provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by the FASB Accounting Standards Codification Topic 280, Segment Reporting, in interim periods
• Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements
• A public entity needs to disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources
• Requires that a public entity which has a single reportable segment should provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280.

The ASU would be applicable to all public entities that are required to report segment information in accordance with Topic 280. All public entities would be required to report segment information in accordance with the new guidance starting in annual periods beginning after 15 December 2023 .

To access the text of the ASU, please click here

Recently, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU), Intangibles – Goodwill and Other-Crypto Assets (Subtopic 350-60) to improve the accounting for and disclosure of certain crypto assets. The amendments in the ASU apply to all assets that meet all of the following criteria:

• Fall within the definition of intangible asset as defined in the FASB Accounting Standards Codification
• Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
• Are created or reside on a distributed ledger based on blockchain or similar technology
• Are secured through cryptography
• Are fungible, and
• Are not created or issued by the reporting entity or its related parties.

These criteria together are referred to as the ‘crypto assets criteria’. Some of the key amendments introduced pertain to:

• Accounting for crypto assets: An entity is required to subsequently measure assets that meet the crypto assets criteria at fair value with changes recognised in net income each reporting period.
• Presentation of crypto assets: An entity should present – crypto assets measured at fair value separately from other intangible assets in the balance sheet, and changes from the remeasurement of crypto assets separately from changes in the carrying amounts of other intangible assets in the income statement (or statement of activities for not-for-profit entities).
• Presentation of cash receipts arising from crypto assets: The amendments require specific presentation of cash receipts arising from crypto assets that are received as non-cash consideration in the ordinary course of business (or as a contribution, in the case of a not-for-profit entity) and are converted nearly immediately into cash.
• Disclosure requirements: The amendments prescribe that for annual and interim reporting periods , an entity should disclose:

• The name, cost basis, fair value, and number of units for each significant crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant
• For crypto assets that are subject to contractual sale restrictions – the fair value of those crypto assets, the nature and remaining duration of the restriction(s), and the circumstances that could cause the restriction(s) to lapse.

Further, for annual reporting periods , the amendments require the following information to be disclosed:

• A roll-forward, in aggregate, of activity in the reporting period for crypto asset holdings, including additions (with a description of the activities that resulted in the additions), dispositions, gains, and losses
• For any dispositions of crypto assets in the reporting period, the difference between disposal price and the cost basis and a description of the activities that resulted in the dispositions
• If gains and losses are not presented separately, the income statement line item in which those gains and losses are recognised, and
• The method for determining the cost basis of crypto assets.

Effective date: The amendments are effective for all entities for fiscal years beginning after 15 December 2024, including interim periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued.

To access the text of the ASU, please click here

Recently, FASB issued the ASU, Income Taxes (Topic 740) on improvements to income tax disclosures. The ASU improves the transparency of income tax disclosures by requiring:

• Consistent categories and greater disaggregation of information in the rate reconciliation, and
• Income taxes paid disaggregated by jurisdiction.

Further, the ASU also includes certain other amendments to improve the effectiveness of income tax disclosures. These include:

• Requiring all entities to disclose – income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign, and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign taxes
• Eliminating the requirement to disclose the nature and estimate of the range of reasonably possible change in the unrecognised tax benefits balance in the next 12 months, or make a statement that an estimate of the range cannot be made
• Removing the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognised, because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.

Effective date: For public business entities, the amendments are effective for fiscal years beginning after 15 December 2024. For other than public business entities, the amendments are effective for annual periods beginning after 15 December 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.

To access the text of the ASU, please click here

Certain entities provide employees or non-employees with ‘profits interest’ awards to align compensation with an entity’s operating performance and provide the holders with the opportunity to participate in future profits and/or equity appreciation of the entity.

Since ‘profits interest’ holders only participate in future profits and/or equity appreciation and have no rights to the existing net assets of the partnership, stakeholders indicated to the Financial Accounting Standards Board (FASB), that it can be complex to determine whether a ‘profits interest’ award should be accounted for as a share-based payment arrangement (Topic 718), or similar to a cash bonus or profit-sharing arrangement (Topic 710, Compensation—General). Thus, the stakeholders highlighted the existing diversity in practice.

Accordingly, in March 2024, the Financial Accounting Standards Board (FASB) issued the ASU on Compensation – Stock Compensation (Topic 718), Scope Application of Profits Interest and Similar Awards. The ASU has added an illustrative example that includes four fact patterns to demonstrate how an entity should apply the guidance to determine whether a ‘profits interest’ award should be accounted for in accordance with Topic 718.

Effective Date: For Public Business Entities (PBEs), the amendments would be effective for annual periods beginning after 15 December 2024, and interim periods within those annual periods.

For all other entities, the amendments would be effective for annual periods beginning after 15 December 2025, and interim periods within those annual periods.

To access the text of the ASU, please click here