2024 GAAP Updates–Part 1

Though 2024 has been a relatively quiet year for the FASB in terms of GAAP updates, be aware of the following changes and updates as you prepare for your year-end audits or close your books for 2024.

New Accounting Standards Updates in 2024

ASU 2024-01 – Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interests and Similar Awards

Diversity in practice and uncertainty about whether profits interests should be accounted for under ASC 718 (Stock Compensation) or ASC 710 (Compensation), led the FASB to issue this ASU. ASC 718 covers share-based compensation, whereas ASC 710 covers profit-sharing arrangements, bonus programs, and compensation of that nature. Profits interests are generally issued to allow holders to participate in future profits or equity appreciation of the entity, whereas capital interests provide holders with rights to existing net assets, typically in a partnership or limited liability company. ASU 2024-01 added clarification to the scope conditions listed in 718-10-15-3, and also added an illustrative example with four fact patterns to better demonstrate when profits interest would fall under ASC 718, and when they would not.

The effective date for private companies is for annual periods beginning after Dec. 15, 2025, and early adoption is permitted. The application can be retrospective to all prior periods in the financial statements or prospective.

What is the key takeaway? If your company issues profits interests, review the revised scoping guidance and examples provided in the ASU to help determine which guidance should be applied when accounting for these awards.

What’s on the Horizon

Highlighted below are those topics we feel will be most applicable to private companies.

Targeted Improvements to the Accounting for Internal Use-Software – Exposure Draft Issued

This project was undertaken by the FASB as the different accounting models–software developed for internal use (generally following ASC 350) and software developed for external use (generally following ASC 985)–may no longer be relevant.

Further, agile development has replaced linear development in most cases, and the guidance in ASC 350 is predicated upon linear development. The FASB is proposing targeted improvements to Sub-Topic 350-40 and no changes to ASC 985. What are the main provisions of the exposure draft?

• Remove all references to stages (preliminary, application development, post-implementation)
• Capitalization of software costs will begin when: 1) management has authorized and committed to funding the project, and 2) it is probable (likely to occur) the project will be completed, and the software will be used for its intended function.
• When considering “probable to complete,” management must consider if there is significant development uncertainty, which includes:
  • Does the software have “novel, unique, unproven functions and features or technological innovations?”
  • Are the software’s performance requirements (what an entity needs the software to do – the functions and features it has/will have) been substantially finalized?
• Cash outflows for software costs capitalized under Sub-Topic 350-40 will be presented separately as investing cash flows on the statement of cash flows.
• Recognition requirements for website-specific costs would be incorporated under 350-40.
• Transition would be prospective, with a retrospective option permitted.

It’s important to note that possession drives which standard applies to your company (ASC 350 or ASC 985). If you are developing software that will not leave your possession (i.e.,–the code will not be transferred but will remain on your servers, as is the case with most software as a service [SaaS]), this would fall under ASC 350. If you are developing software in which the code will be transferred (i.e., it does not have to be hosted on your server), this falls under ASC 985.

The FASB noted following this approach will likely result in less costs being capitalized for software developed to be sold as a service (which generally falls under ASC 350) since the threshold to begin capitalizing may be a higher hurdle than what it was. Under ASC 350, to move into the application development stage (in which capitalization begins), you need to have planning completed, management approval of a plan, and authorization of funding, and you feel it is probable the project will be completed for its intended function. Under the proposed changes, companies are required to evaluate if “novel, unique, unproven functions and features or technological innovations” or uncertainties related to significant performance requirements make completion of the project improbable.

Transition would be prospective, with the retrospective option permitted. Comments on this exposure draft are due by 1/27/25.

Share-Based Consideration Payable to a Customer

This project was undertaken by the FASB to reduce diversity in practice regrading share-based consideration granted to a customer by revising the definition of “performance condition” and by eliminating the forfeiture policy election. Current guidance for share-based consideration payable to a customer requires that the grant-date fair value of such consideration reduce the revenue in the contract with the customer unless the consideration is a fair-value payment for a distinct good or service (it would then fall under ASC 718). This accounting can be impacted by whether the award contains a performance or service condition, but there is diversity in practice in how entities interpret whether the award contains a performance or service condition. Determining if a service or performance condition exists can impact the timing and amounts of revenue recognized depending on an entity’s forfeiture policy. To address these concerns, the FASB has proposed the following changes:

1. A revised definition of “performance condition,” which would expand the definition to explicitly include conditions based on a volume of purchases. This would make it clearer as to which awards are subject to the performance condition guidance and reduce the types of conditions characterized as service conditions.
2. The entity would need to estimate forfeitures for share-based consideration payable with a service condition (rather than allowing the election to account for forfeitures as they occur).
3. Variable consideration guidance in ASC 606 would not apply to share-based consideration payable to customers. Rather, an entity would be required to apply ASC 718 to evaluate conditions that affect the vesting and fair value of the share-based consideration payable to customers.

The modified retrospective basis should be applied but the retrospective option is permitted. The FASB Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The FASB Board also decided on a 45-day comment period for the proposed update.

If you would like further information on any of the above topics, please reach out to Katy Al-Khalidi. Katy is a principal at Clark Nuber in the Real Estate and Hospitality group and also leads the firm’s advisory practice. She is a member of the AICPA’s Technical Issues Committee (TIC).

This is the first of two articles covering the 2024 GAAP updates. To read the second part, follow this link.

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