The Financial Accounting Standards Board (FASB) issued only six accounting standards updates (ASUs) in 2022, with many of those new rules narrow in scope. Here are answers to some of the most common questions about the updates that were published in 2022, as well as projects that are on the FASB’s radar.
How many updates are typically issued?
Six ASUs were issued last year by the FASB, the developer of U.S. Generally Accepted Accounting Principles (GAAP). This represents a major reduction from the number of new rules issues during last five years.
Prior to the six ASUs in 2022, there were 10 in 2021, 11 in 2020, 12 in 2019, and 20 in 2018. The record-breaking year for the past two decades was 2010, when 29 new standards were issued.
For years, accountants have complained that too many accounting standards were being issued by the FASB, some suggesting it push pause for a while to enable the accounting profession to properly digest them.
Which rules have been recently updated?
The ASUs issued in 2022 were narrow in scope, and many amended broader, more complex updates that were previously issued. Specifically, the FASB issued the following updated guidance:
ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging — Portfolio Layer Method. This standard clarifies the updated guidance from 2017 on hedging transactions (ASU 2017-12). It expands the current last-of-layer method (now called the “portfolio layer” method) that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. Further, the guidance explains that:
- The portfolio layer method may include non-prepayable financial assets
- Eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot- or forward-starting amortizing-notional swaps
- The number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated
The updated guidance also specifies how to consider hedge basis adjustments when determining credit losses for the assets included in a closed portfolio. The changes go into effect in 2023 for public business entities and 2024 for all other entities. Early adoption is permitted for any entity that’s adopted the amendments in ASU 2017-12 for the corresponding period.
ASU No. 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This guidance addresses concerns related to updated guidance from 2016 on credit losses (ASU 2016-13). Specifically, it eliminates the accounting guidance for troubled debt restructuring while enhancing the disclosure requirements. It also requires disclosure of gross write-offs by year of origination to help financial statement users better understand changes in the credit quality of loan portfolios and underwriting performance.
The changes go into effect in 2023 for entities that have already adopted the amendments in ASU 2016-13. The effective dates for entities that haven’t yet adopted ASU 2016-13 are the same as the effective dates in ASU 2016-13.
ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This guidance clarifies how to measure the fair value of an equity security that’s subject to contractual restrictions that prohibit its sale. The update also amends an illustrative example and enhances the disclosure requirements for these securities. The changes go into effect in 2024 for public business entities and 2025 for all other entities. Early adoption is permitted.
ASU No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This guidance enhances the transparency of supplier finance programs. It expands the disclosure requirements to help financial statement users better understand the effect of those programs on working capital, liquidity and cash flows. The changes go into effect in 2023, except for the amendment on roll-forward information that goes into effect in 2024. Early adoption is permitted.
ASU No. 2022-05, Financial Services — Insurance (Topic 944): Transition for Sold Contracts. This guidance addresses the updated guidance from 2018 on long-duration insurance contracts (ASU 2018-12). It allows insurance providers to elect, on a transaction-by-transaction basis, to exclude contracts from applying ASU 2018-12 if two requirements are met. First, the insurance contracts must have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities. Second, the entity can’t have any significant continuing involvement with the derecognized contracts.
The effective dates for this update align with the deferred effective dates for ASU 2018-12: The changes go into effect in 2023 for public business entities that meet the definition of a Securities and Exchange Commission filer and aren’t smaller reporting companies. They’re effective in 2025 for all other entities. Early adoption is permitted.
ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This guidance alleviates stakeholder concerns during the transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates for affected contracts. It provides a two-year deferral for the transition guidance from December 31, 2022, to December 31, 2024. This is a year after LIBOR’s cessation date. The change went into effect on the date the ASU was issued in December 2022.
What’s on the FASB’s radar?
This year’s drop in rulemaking activities comes during a pivotal year for the FASB, which had been doing broad public outreach to set its five-year agenda for 2022 to 2026. As part of that effort, the FASB streamlined its technical agenda, dropping some projects and revising others.
Currently, the FASB’s main technical agenda includes three conceptual framework topics, segment expense disclosures, income taxes paid, cryptocurrencies and accounting for software costs. There are eight projects on its research agenda, such as:
- Government grants
- Financial instruments with environmental, social and governance-linked features
- Financial key performance indicators for business entities
In addition, a post-implementation review is being conducting on three major standards that were previously issued:
- Topic 326, Credit Losses
- Topic 606, Revenue from Contracts with Customers
- Topic 842, Leases
The FASB uses the post-implementation-review process to determine whether a standard worked as intended.
The FASB’s agenda consultation process was completed in June 2022. Its current agenda was designed to reflect the priorities of investors and other stakeholder groups, and the FASB expects to make “significant progress on priority projects” in 2023. Reach out to a KraftCPAs advisor to see how these changes might impact your 2023 plans.
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