Jan 17, 2024

Implementing New Accounting Standards:  Are You Prepared?

In today’s ever evolving world of accounting guidance and regulatory compliance, it’s more important than ever to stay on top of what standards have been issued by the Financial Accounting Standards Board (FASB) and when implementation should begin for your organization. Below we have listed a few standards that have gone into effect over the past few years. This list is, by all means, not all-inclusive but touches on some of the more pertinent standards that may be applicable to you.

New Lease Standard

Initially introduced in 2016, ASC 842, Leases, provides the financial accounting and reporting requirements for lessees and lessors. This standard establishes the right-of-use asset model, which shifts from the risk-and-reward approach to a control-based approach. Under the new standard, lessees will recognize an asset on the balance sheet, representing their right to use the leased asset over the lease term and recognizing a corresponding lease liability to make the lease payments. The lease liability is based on the present value of future lease payments using a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or the lessee’s incremental borrowing rate. As a result, a lessee’s operating lease accounting model will change significantly. Additional complexity of the new standard requires the lease arrangements to be classified as either finance leases or operating leases.

There has been much discussion on this topic because of the impact it will have on financial reporting for a majority of businesses. Even though the deadline was pushed back several times, it is now here to stay. If you have not already prepared for the new lease standard, don’t delay as it went into effect for private companies with fiscal years beginning after December 15, 2021.

Current Expected Credit Losses (CECL)

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 (ASC “326” or “Topic 326”) which significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model which will be based on an estimate of current expected credit loss; and provides targeted improvements on evaluating impairment and recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The standard also requires incremental disclosures.

While banks and other traditional financial institutions will be most affected by the FASB’s new credit impairment model, all entities with balances due or that otherwise have a credit exposure will be impacted. These include companies in the consumer industry, manufacturing entities and other non-financial institutions. As such, these entities are also subject to disclosure requirements of ASC 326.  These disclosures include qualitative and quantitative information about the allowance for credit losses, the entity’s methodology for determining the allowance, amounts recognized in the financial statements, and several other disclosures.

Topic 326 is effective for fiscal years beginning after December 15, 2022.

Business Combinations

If you have completed a material business acquisition this year or are planning to complete one in the near future and you believe it will qualify as a business combination, you will need to consider ASC 805 when preparing your accounting reporting. Under ASC 805, any business combinations are to be accounted for by the acquisition method. What this means is that you will need to identify the following criteria:

  • Who is the acquirer,
  • What is the acquisition date,
  • What are the assets and liabilities assumed, including noncontrolling interests,
  • How are those assets and liabilities measured, and
  • What goodwill or gain was achieved through the acquisition?

Determining the answers to the criteria above demands that complex and specific accounting methods be used. In addition, determining the value of assets and liabilities requires quite a bit of estimation that may be subject to bias and, therefore, needs to be substantiated by solid accounting practices.

If your organization is unsure about implementing any of the above accounting standards, BMSS can help. We have an extremely talented and knowledgeable assurance team that studies and works with these accounting standards every day. They attend hours of continuing professional education so that they can stay on top of pronouncements and standards and can pass that knowledge on to you. For any questions or, if you would like a BMSS professional to reach out to you to discuss your unique circumstances, please contact us at (833) CPA-BMSS or visit our website.