Regulatory updates

On 28 August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in that update made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements.

Based on the feedback received from various stakeholders, on 28 March 2022, FASB has issued an ASU on Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method, intended to better align hedge accounting with an organization’s risk management strategies.

Some of the key amendments issued in this regard include:

• Allows multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. As a result, an entity can achieve hedge accounting for hedges of a greater proportion of the interest rate risk inherent in the assets included in the closed portfolio, further aligning hedge accounting with risk management strategies.
• Expanding the scope of the portfolio layer method to include non-prepayable financial assets.
• Specifying that eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot or forward-starting amortising-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated.
• Providing additional guidance on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method whether a single hedged layer or multiple hedged layers are designate.
• Specifying how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

Effective date: The amendments in this update are effective for public business entities for fiscal years beginning after 15 December 2022, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after 15 December 2023, and interim periods within those fiscal years.

FASB also decided to permit early adoption on any date on or after the issuance of this update for any entity that has adopted the amendments in update 2017-12 for the corresponding period.

To access the text of the ASU, please click here

On 31 March 2022, FASB has issued an Accounting Standards Update (ASU) on Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures, intended to improve the decision usefulness of information provided to investors about certain loan refinancing, restructuring, and write off.

The new ASU responds to feedback received by FASB from investors and other stakeholders during the post-implementation review (PIR) of the credit losses standard. The amendments create a single model for loan modification accounting by creditors while providing improved loan modification and write off disclosures.

The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted CECL while enhancing disclosure requirements for certain loan refinancing and restructuring by creditors made to borrowers experiencing financial difficulty.

The disclosure of gross write off information by year of origination was cited by numerous investors as an essential input to their analysis. To address this feedback, the amendments in the new ASU require that a public business entity disclose current-period gross write offs by year of origination for financing receivables and net investment in leases. 

Effective date: For entities that have adopted the amendments in Update 2016-13, the amendments in this update would be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted the amendments in update 2016-13, the effective dates for the amendments in this update are the same as the effective dates in Update 2016-13. The amendments are applicable on a prospective basis, except for in certain cases9.

9. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption

To access the text of the FASB notification, please click here

On 30 June 2022, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) for improving financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value and are subject to contractual restrictions preventing the sale of those securities.

Topic 820, Fair Value Measurement, states that for measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, (including restrictions on the sale of the asset or liability), if such characteristics are taken into account by a market participant. An important consideration in this regard is the unit of account for the asset or liability being measured at fair value.

Based on the feedback received from different stakeholders, FASB noted that Topic 820 contains conflicting guidance with respect to the unit of account, when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.

Therefore, the amendments in the ASU have clarified that a contractual restriction on the sale of an equity security would not be considered as a part of the unit of account of the equity, security and therefore would not be considered in measuring the fair value. The ASU has also introduced certain new disclosure requirements for equity securities which are subject to contractual sale restrictions¹⁹

1. The fair value of equity securities subject to contractual sale restriction(s),
2. The nature and remaining duration of the restriction(s), and
3. Circumstances that could cause a lapse in the restriction(s).

Effective date: The amendments in this update are effective for public business entities for fiscal years beginning after 15 December 2023, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after 15 December 2024, and interim periods within those fiscal years.

FASB also decided to permit early adoption for both interim and annual financial statements that have not yet been issued or made available for issuance.

To access the text of the ASU, please click here

19. Equity securities which are restricted from sale due to being pledged as collateral and included in other disclosures required by other Topics would not be included in the information required to be disclosed as per the new requirements.

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: 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

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) to enhance financial reporting by requiring public companies to provide more detailed disclosures about certain expenses in the notes to financial statements at each interim and annual reporting periods.

Key updates in the ASU include:

Enhanced disclosures: Public companies should now disclose the following specific expenses:

• Purchases of inventory
• Employee compensation
• Depreciation
• Intangible asset amortization
• Depreciation, depletion, and amortisation related to oil- and gas-producing activities included in each relevant expense caption.

Qualitative descriptions: Companies should provide qualitative descriptions of amounts not separately disaggregated quantitatively.

Selling expenses: Companies should disclose total selling expenses and, in annual reports provide a definition of selling expenses.

The amendments are effective for annual reporting periods beginning after 15 December 2026, and for interim periods beginning after 15 December 2027. Early adoption is permitted.

To access the ASU please click here

The FASB has released an Accounting Standards Update (ASU) to improve the relevance and consistency of the guidance on induced conversions in Subtopic 470-20, Debt—Debt with Conversion and Other Options.

Currently, the guidance on induced conversions applies only to conversions that include the issuance of all equity securities issuable pursuant to the conversion privileges provided in the terms of the debt at issuance. Current Generally Accepted Accounting Principles (GAAP) do not address how this criterion should be applied to the settlement of a convertible debt instrument that does not require the issuance of equity securities upon conversion (for example, a convertible debt instrument with a cash conversion feature).

The ASU clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. Under the amendments, to account for a settlement of a convertible debt instrument as an induced conversion, an inducement offer is required to provide the debt holder with, at a minimum, the consideration (in form and amount) issuable under the conversion privileges provided in the terms of the instrument. An entity should assess whether this criterion is satisfied as of the date the inducement offer is accepted by the holder. If, when applying this criterion, the convertible debt instrument had been exchanged or modified (without being deemed substantially different) within the one-year period leading up to the offer acceptance date, an entity should compare the terms provided in the inducement offer with the terms that existed one year before the offer acceptance date. The amendments do not change the other criteria that are required to be satisfied to account for a settlement transaction as an induced conversion.

The amendments in the ASU are effective for annual reporting periods beginning after 15 December 2025, with early adoption permitted. The transition requirements have also been provided for the amendments.

To access the text please click here