FASB Incorporates SEC Directives in New Accounting Update

On October 9, 2023, the US Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) aimed at ensuring that financial reporting is in line with stock exchange regulations. These amendments are a response to an update from the U.S. Securities and Exchange Commission (SEC) in 2018, which highlighted 27 areas calling for more detailed information than what was present in the current accounting guidelines. The ASU incorporates 14 of the 27.

Background

The FASB and the SEC are central to U.S. financial reporting. The SEC both sets and enforces accounting standards, ensuring that public companies adhere to established regulations to maintain market transparency and protect investors. The FASB, an independent body endorsed by the SEC, creates these standards through its Accounting Standards Codification. Together, these two organizations are responsible for shaping and enforcing the Generally Accepted Accounting Principles (GAAP).

The GAAP serve as the benchmark for financial reporting in the U.S. Although GAAP are not a law, failure to follow them can result in significant penalties from the SEC. While GAAP are mandated for public companies, private firms often choose to comply with them as well, especially when seeking external funding or thinking about going public as they give credibility with lenders, investors, and other stakeholders.

Proposed Changes by FASB

In an effort to streamline the accounting landscape, the SEC’s disclosure mandates have now been incorporated into the FASB Accounting Standards Codification (ASC), making it easier for companies to navigate and comply with the combined standards. Overall, the modifications are narrow in scope, ensuring targeted improvements without overhauling existing frameworks.

Specific changes include:

• Alignment with Stock Exchanges: The changes align financial reports with stock exchange rules, simplifying the reporting process for listed companies for publicly listed companies.
• Enhanced Disclosure and Presentation: The new rules require financial data to be presented more clearly and disclosures to be more transparent.
• Improved Clarity around Derivatives: The news rules clarify the treatment of derivatives in cash flow statements and the methods for calculating earnings per share.

What the Changes Mean

The goal of the FASB changes is to simplify complex accounting topics, bringing clarity and uniformity to financial reporting. Once the changes are in place, anyone reviewing financials will find it easier to compare companies that are subject to SEC disclosures with those that are not, helping stakeholders make more informed decisions.

When the Changes Take Place

For publicly listed businesses or those presenting financial statements to the SEC for securities transactions, the enforcement date for each change will coincide with the date the SEC revokes the corresponding disclosure from its regulations.

For all other organizations, the implementation will be deferred by two years. However, a unique clause has been added: if the SEC hasn’t withdrawn the relevant disclosure from its guidelines by June 30, 2027, the respective amendments will be eliminated from the Codification, rendering them non-applicable for any organization.

What This Means for You

Although narrow in scope, the proposed changes have the potential to affect a large number of companies, both public and private. As always, it’s critical to stay informed. If you have questions or need guidance on any aspect of these proposed changes, reach out to the team at Tonneson today.

At Tonneson, we combine decades of experience with a forward-thinking approach to emerging technologies to keep our clients compliant while helping them optimize their financial strategies. Contact us today.