GAAP Changes Effective for Calendar Year 2024

As companies prepare to issue their 2024 financial statements, it’s an excellent time to review new Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) and effective for annual reporting periods beginning after December 15, 2023.

GAAP Updates Effective for 2024

Many organizations have already implemented these changes, but we’ll highlight the updates to ensure you don’t overlook anything before issuing 2024 year-end financial statements.

ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

The primary update from this ASU is that it requires using Topic 606 for contract assets and liabilities in business combinations.

At the acquisition date, the acquirer should account for the related revenue contracts in accordance with Topic 606 as if they had originated the contracts themselves.

ASU 2021-08 is effective for non-public entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method

This ASU introduced updates to make hedging strategies more flexible for businesses. It builds on the previously known “last layer method,” which allowed only one hedged layer in a portfolio, and now permits multiple hedged layers within a single closed portfolio. The method has been renamed the “portfolio layer method” to reflect this expanded approach.

With this update, businesses can use a variety of hedging tools, such as constant-notional or amortizing-notional swaps, whether they start immediately (spot-starting) or at a future date (forward-starting). The number of hedges you set up will determine the number of layers that can be hedged.

This update is effective for non-public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

This ASU helps clear up confusion about how to measure the fair value of equity securities with contractual restrictions on their sale. The update makes it clear that these restrictions shouldn’t factor into the value of the equity security itself. In other words, the restriction isn’t treated as part of the security or separately measured as its own item.

To ensure transparency, companies must also disclose certain details about restricted equity securities in their financial statements. This includes:

• The fair value of restricted securities as reflected in the balance sheet.
• The type and length of the restriction.
• Conditions that could lift the restriction.

The new rules take effect for public companies for fiscal years beginning after December 15, 2023, and for all other entities in fiscal years beginning after December 15, 2024. Early adoption is permitted.

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

This ASU introduces a more streamlined way for companies to account for their investments in tax credit structures. The update allows companies to use the proportional amortization method for these investments, regardless of the specific tax credit program, as long as it meets certain conditions.

Here’s how it works: The initial cost of the investment is amortized proportionally to the income tax credits and other related benefits the company receives. The net amortization and the tax benefits are then recorded as part of the income tax expense (or benefit) on the income statement.

In addition to these changes, companies must disclose critical details in their annual and interim reports, including:

• The nature of their tax credit investments.
• How these investments and related tax benefits affect their financial position and operating results.

This ASU is effective beginning in 2024 for calendar-year-end public companies, while private companies have an additional year.

ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures

This ASU focuses on improving segment reporting by requiring more detailed and consistent disclosures. Investors and stakeholders had emphasized the importance of enhanced segment expense information to better understand a public company’s business activities.

This update doesn’t change how companies identify, group, or evaluate their operating segments. Instead, it expands disclosure requirements, ensuring the same level of detail provided annually about a segment’s profit or loss and assets is also included in interim reports.

Key changes include:

• Interim disclosures. Companies must now provide all annual segment disclosures—such as profit or loss and asset details—in their interim financial statements.
• Multiple performance measures. If a company’s chief operating decision maker (CODM) uses more than one metric to evaluate a segment’s performance, the company may disclose one or more of those additional measures. However, at least one disclosed measure must align closely with how the company measures performance in its consolidated financial statements.

These updates apply to all public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.

ASU 2022-06, Deferral of the Sunset Date of Topic 848

This ASU extends the timeline for temporary accounting relief under Topic 848, originally introduced in ASU 2020-04. This guidance was designed to ease the financial reporting challenges during the transition away from LIBOR to alternative reference rates like SOFR.

Initially, Topic 848’s relief measures were set to expire on December 31, 2022, aligning with LIBOR’s expected phase-out by the end of 2021. However, when the UK Financial Conduct Authority extended USD LIBOR for certain tenors through June 30, 2023, the original sunset date no longer matched the extended transition period. In response, the FASB deferred Topic 848’s sunset date to December 31, 2024, giving entities additional time to apply the optional guidance as they adapt to new reference rates.

ASU 2020-06, Debt with Conversation and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

This ASU aims to make it easier for entities to account for financial instruments with characteristics of both liabilities and equity. The key changes include:

• Streamlining convertible debt and preferred stock accounting. The update reduces the number of accounting models by removing certain separation models previously included in Subtopic 470-20.
• Clarifying derivative guidance. The standard adjusts the scope exceptions for contracts in an entity’s own equity, focusing on substance over form to improve consistency.
• Enhancing earnings per share (EPS) guidance. The amendments refine how companies calculate and present EPS to ensure greater accuracy and clarity.
• Updating disclosure requirements. Companies must provide more detailed information to improve transparency around these financial instruments.

The changes are effective for all entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

ASU 2023-01, Leases (Topic 842); Common Control Arrangements

FASB issued this ASU to simplify how entities under common control handle related party lease arrangements. The updates address two primary issues:

• Practical expedient for private companies and nonprofits. Private companies and not-for-profit organizations (not conduit bond obligors) can now rely on a common control arrangement’s written terms and conditions to determine whether a lease exists and how to classify and account for it. This practical expedient allows for flexibility, meaning the terms don’t need to meet strict formality standards as long as they are documented.
• Leasehold improvement amortization for all entities. All entities, including public companies, must amortize leasehold improvements related to common control leases over their useful life to the common control group. This ensures a consistent approach to accounting for these improvements.

The guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is allowed.

What Should You Do Now?

Before finalizing 2024 year-end financial statements, review your accounting policies and processes to ensure your organization has implemented all applicable ASUs correctly.

Some of these new standards require adjustments to systems, internal controls, and reporting processes, which can be complex and resource-intensive. If you need help reviewing your compliance or implementing these changes, Percipio Business Advisors can help. With expertise in financial reporting and GAAP compliance, we can confidently help you navigate these updates.

Contact us today to schedule a consultation and ensure your 2024 financial statements are accurate and GAAP compliant.

Connect with us today