March 5, 2024

The past several years have been a whirlwind of change in the accounting industry. To help you stay on track, we’ve compiled a short list of new GAAP accounting standards that are effective now (or can be early adopted), so you can make sure you’re set up for a smooth, GAAP-filled year.

1. Topic 842: Leases, ASU 2023-01

The “lease standard” went into effect for most entities reporting on a GAAP basis for calendar year 2022 and fiscal years ending in 2023. In 2023, an accounting standard update (ASU) was issued to help entities navigate how to treat leases between common control entities. ASU 2023-01 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

Important Features

These amendments provide private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease.

In addition, the ASU requires all entities to amortize leasehold improvements associated with common control leases over the useful life of the common control group.

Checklist

  • Identify any agreements between entities under common control and determine if those agreements may meet the definition of a lease. Consider drafting a lease agreement that will allow the lease to qualify as short-term (less than 12 months), which generally would exempt the lease from ASC 842, Leases.
  • We advise reviewing any new agreements on an annual basis to determine if those agreements could contain embedded leases, which would need to be accounted for under the lease standard.
  • Contact Clark Nuber if you have any questions about this amendment, or the lease standard in general.

2. Topic 326: Financial Instruments —Credit Losses (CECL)

The requirements of Topic 326 are effective for years beginning after December 15, 2022 for nonpublic entities. Therefore, the first financial statements impacted by this Topic are for calendar year 2023.

The topic allows for a modified retrospective transition approach with a cumulative-effect adjustment to equity at the beginning of the first reporting period for which the guidance is effective.

Important Features

The following are common balances that will be subject to allowance for credit losses under ASC 326:

  • Trade receivables
  • Financing receivables (e.g., loans, including programmatic investments)
  • Held-to-Maturity debt securities
  • Off-balance sheet credit exposures (e.g., guarantees and forward purchase commitments)
  • Net investments in finance leases

The following are common balances specifically outside the scope of ASC 326:

  • Contributions receivable
  • Available-for-sale debt securities
  • Loans and receivables between entities under common control
  • Receivables arising from operating leases accounted for under ASC 842

For many companies in the real estate and hospitality space, the main impact of CECL will be the need to reassess how the valuation allowance for trade receivables is analyzed and computed. A key change from prior accounting rules is the requirement to project future losses, which was explicitly prohibited under prior standards. The standard provides guidance on several common techniques that can be used to estimate the allowance for credit losses.

Checklist

  • Review your balance sheet for any accounts that may be subject to CECL (for most companies, this will be trade receivables).
  • For any balances subject to CECL, review how the valuation allowance is currently being calculated and consider the need to reassess the process, to ensure compliance with CECL.
  • Eliminate references on the balance sheet or footnotes to “allowance for doubtful accounts” or “allowance for bad debts” and replace with “allowance for credit losses.”

3.Topic 323: Equity Method and Joint Ventures: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, ASU 2023-02

This ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period.

Important Features

This update was issued to allow companies to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits.

Prior guidance limited use of the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit).

The amendments in this update permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. This change should provide investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits.

Checklist

  • Companies can make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis.
  • If you have tax equity investments, speak with your tax professional to determine if adoption of this guidance would be beneficial for you.

Please contact us if any of these new accounting standards will affect your organization and you have questions. Have a happy and productive 2024!

© Clark Nuber PS, 2024. All Rights Reserved.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.