Proposed Accounting Standards Updates: FASB Comment Letters by Our Technical Accounting Team
Riveron’s technical accounting advisors provide comments on proposed GAAP changes to actively shape accounting principles and make recommendations on behalf of the office of the CFO.
In recent months, Riveron (as Effectus Group) submitted comment letters to the Financial Accounting Standards Board (FASB) on a variety of amendments to Generally Accepted Accounting Principles (GAAP) proposed by the FASB. The FASB’s comment process is designed to ensure transparency and inclusivity in the standard-setting process and Riveron’s team is a proud stakeholder in the process and monitors all proposed changes and amendments on behalf of its clients. The FASB relies on the input of advisory professionals because we are familiar with the day-to-day accounting challenges and opportunities faced by CFOs and accounting leaders.
After thoroughly reviewing comments and making any necessary revisions, the FASB will issue the final accounting standards updates. These final standards are published in the FASB Accounting Standards Codification (ASC), which provides the official text for GAAP. The final standards will also include a detailed explanation of the changes and their effective dates.
Please take a moment to browse our comment letter summaries. Full-text responses to FASB interrogative questions are linked beneath each summary. See comments on such proposed changes to GAAP for Internal Use Software, Stock Compensation to Customers, Induced Conversions of Convertible Debt Instruments, Accounting for Government Grants, and more.
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software
We express our support for the Board’s efforts to modernize the accounting for internal-use software. We, however, explain that a different approach should be taken than the one set forth in the Exposure Draft. We also offer suggestions to improve the clarity of the proposed update in the event the Board proceeds with the proposed amendment.
Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) File Reference No. 2024-ED300
We generally support the Board’s efforts to clarify the framework of applying ASC 718 to share-based consideration payable to a customer. In our view, a different approach should be taken than the one set forth in the Exposure Draft. In particular, we encourage the Board to consider keeping the constraint on estimates of variable consideration for share-based consideration payable to a customer as we believe the core principles of revenue recognition should be consistent, regardless of the form of variable consideration issued to customers.
Exposure Draft, Induced Conversions of Convertible Debt Instruments (EITF Issue No. 23-A)
We generally support the Board’s efforts to provide further clarity in accounting for induced conversions, including in instances when certain conversion mechanics are eliminated or modified as part of an inducement offer. We expect the proposed amendment to reduce diversity in practice in accounting for transactions where the debtor offers incremental consideration to induce settlement or conversion of convertible debt instruments. However, we encourage the FASB to consider clarifying whether the proposed amendments also apply to conversions of preferred stock and whether the number of accounting models for debt modifications and exchanges could be reduced.
Accounting for Government Grants by Business Entities
We believe the FASB should add a project to its technical agenda related to the accounting for government grants into US GAAP for business entities. We had the following observations that we believe are necessary to improve the operability, consistency and understandability of any FASB standard for grants that starts with IAS 20 as its base:
- The scope of any standard should not be restricted to government grants but should also include non-government grants such as those from philanthropic organizations to biotechnology companies.
- The recognition threshold should be anchored to concepts that are well-understood in US GAAP such as probable or more likely than not rather than the auditing notion of reasonable assurance.
- GAAP should require an entity to identify the activity (i.e., analogous to a performance obligation under ASC 606) the respective grant is intended to incent and then recognize the grant in income as the activity is satisfied or completed using an appropriate measure of progress. In addition, a standard should provide unit of account guidance for grants that have multiple incentives or triggers to grant entitlement embedded in them. The presentation of grant income should be separately presented from the asset or expenses the grant is intended to subsidize. For cash flow statement purposes, a perspective that should be considered by the Board is that grants are a source of financing for an entity.
Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement
We support the Board’s efforts to provide a framework for accounting for joint venture formations but do not support requiring that a joint venture recognize and initially measure its assets and liabilities upon formation at fair value using purchase accounting. In the event the FASB proceeds with the proposed accounting standards update, we also offer observations that we believe are necessary to improve the operability, consistency and understandability of the guidance.
Stock Compensation (Topic 718): Scope Application of Profits Interest Awards
We support the FASB’s efforts to clarify the scope application for profits interest awards. We expect the proposed amendments will enhance comparability across entities and reduce complexity in determining whether profits interest awards should be accounted for under ASC 718 or other topics. We believe the following observations would be helpful to improve the operability of the proposed updates:
- In the proposed illustrative examples, FASB should also clarify that the legal form of an award is not determinative of the scope application, provided that other facts and circumstances are the same.
- The proposed updates should clarify whether profits interest awards should be accounted for under ASC 718 if any part of the award is indexed to the entity’s share price, regardless of the magnitude, predominance or likelihood that entity’s share price or other factors may have on the value conveyed to the grantee.
- For retrospective adoption of the proposed updates, we proposed that the FASB should allow certain practical expedients to better enable entities to assess cost, benefits and preferability of each of the adoption methods.
Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) Disaggregation of Income Statement Expenses
We generally support the Board’s efforts to provide investors with more detailed and decision-useful information about the types of expenses within cost of sales, SG&A, research and development, and similar captions, that allow for a better understanding and assessment of companies’ performance. We observe in our comment letter though that the proposed Update, if adopted, will impose significant incremental costs on preparers and within our responses to the Board’s questions we recommend that the Board consider approaches to mitigate the burden.