Reviewing Proposed ASUs as We Begin 2025

By: Dr. Amelia Hart, CPA, and Steve Sledge, CPA

In line with the timeline in its evolving technical agenda, FASB has recently completed the proposal of several Accounting Standards Updates (ASUs). This article sheds some light on proposed ASUs released during the latter half of 2024 that readers should be aware of as we begin 2025.

We include a broad overview of nine proposed ASUs that may be finalized during the upcoming year. Several of the proposed updates are currently in board redeliberation following comment period closures in the fourth quarter of 2024 and the first quarter of 2025. We always encourage impacted and interested stakeholders’ participation in the standard-setting process. The full scope and current status of FASB projects and ASUs are available on the FASB website, https://www.fasb.org/.

Proposed Accounting Standards Update on Environmental Credits and Environmental Credit Obligations (Topic 818)

On Dec. 17, 2024, the FASB issued a proposed ASU to provide guidance on accounting for environmental credits and environmental credit obligations (Topic 818) with comments due on April 15, 2025.¹ More entities are subject to environmental-related compliance mandates or programs, while others are voluntarily committing to reducing emissions through a net zero or carbon-neutral goal.

These entities may also have environmental credits, which represent enforceable rights. Examples of environmental credits:

1. Emissions allowances from domestic and global cap-and-trade programs
2. Corporate Average Fuel Economy (CAFE) credits from U.S. CAFE Standards
3. Renewable identification numbers from the U.S. Renewable Fuel Standard
4. Renewable energy certificates originating from U.S. State Renewable Portfolio Standards

This proposed update will provide recognition, measurement, presentation and disclosure guidance for entities that purchase, hold, or generate environmental credits or have regulatory compliance obligations settled with these credits.

1. Environmental credits should be recognized as assets when probable to be used for settling obligations or transferred in exchange transactions.
2. Compliance credits should be measured at cost and not tested for impairment.
3. Noncompliance credits should be measured at cost less impairment losses, with an option to measure certain classes at fair value.
4. Environmental credit obligations should be recognized when events result in compliance requirements and are tied to regulatory programs, not voluntary initiatives. These must be recognized when emissions or other events occur. If insufficient credits are held to meet obligations, the unfunded portion will be measured at fair value.
5. Environmental credit assets and obligations disclosures require that compliance credit assets be presented separately from obligation liabilities, with disclosure details on significant credit holdings, cash flows, gains/losses from sales, impairment expenses, and how credits are obtained and used.

The proposed ASU would apply to entities involved with environmental credits or obligations and require retrospective application, with an adjusted retained earnings at the beginning of the adoption period. Comments are expected through April 15, 2025.

Proposed Accounting Standards Update on Accounting for Government Grants

On Nov. 1, 2023, a project to create recognition, measurement and presentation requirements for government grants was added to the FASB’s technical agenda. On Nov. 19, 2024, the FASB released this proposed ASU2 to establish authoritative guidance on the accounting for government grants. Comments are due March 31, 2025.

The proposed amendments would apply to all business entities (i.e., entities excluding not-for-profit entities and employee benefit plans). This ASU would establish authoritative guidance for accounting for government grants received by businesses including:

1. Grants Related to Assets: A grant where the entity is required to purchase, construct or otherwise acquire a long- term asset including a direct grant of a tangible nonmonetary asset from a government, and
2. Grants Related to Income: A grant that is not a grant related to as assets (e.g., a grant reimbursing for operating expenses).

A government grant would be recognized initially when it is probable that 1) the entity will comply with the conditions attached to the grant and 2) the grant will be received.

After initial recognition, business entities would recognize a grant related to an asset either as 1) deferred income or 2) a part of the cost basis of the respective asset (i.e., the cost accumulation approach) on the balance sheet. Grants related to income, and grants related to assets for which the deferred income approach is applied, would be recognized in earnings on a systematic and rational basis. For grants related to assets for which an entity elects the costs accumulation approach, the entity would recognize the grant amount as part of determining the carrying value of the asset.

Amounts recognized would either be under a separate heading (e.g., other income) or be deducted from the related expense and would require disclosures about the nature of the grant, accounting policies used, and significant terms and conditions in addition to any other disclosure requirements.

Proposed Accounting Standards Update To Improve Interim Reporting

On Nov. 13, 2024, the FASB issued the proposed ASU³ to improve the guidance on interim disclosure requirements. The proposed ASU includes a list of Questions for Respondents. Comments are due March 31, 2025.

The proposed ASU provides amendments related to the following:

1. Disclosure Requirements: The proposed ASU clarifies interim disclosure requirements and the applicability of Topic 270, Interim Reporting.
2. Comprehensive List of Interim Disclosures: The proposed amendments would result in a comprehensive list of interim disclosure requirements.
3. Disclosure Principle: The proposed amendments would also include a disclosure principle requiring entities to disclose events or changes from the end of the last annual reporting period which have a material impact on the entity. The objective of the amendments is to provide clarity about the current disclosure requirements and would result in amendments to Interim Reporting (Topic 270). The amendments in this ASU would be applied prospectively to interim financial statements and notes for interim periods after the effective date, which will be determined by the FASB, as well as whether early adoption will be permitted based on the consideration of stakeholder feedback and any resulting amendments to the proposed ASU.

Proposed Accounting Standards Update on Determining the Acquirer in the Acquisition of a VIE

On Oct. 30, 2024, the FASB issued a proposed ASU⁴ related to determining the accounting acquirer for acquisitions of a variable interest entity (VIE). Comments were received through Dec. 16, 2024. The FASB is in redeliberations in consideration of stakeholder comments.

The current guidance requires the primary beneficiary to be the accounting acquirer of a VIE, which results in a lack of comparability between reverse acquisitions involving a VIE and those not involving a VIE. Under current guidance, the primary beneficiary of a VIE is always the accounting acquirer, but for acquisitions not involving a VIE, the accounting acquirer may not be the legal acquirer (i.e., a reverse acquisition).

The proposed amendments would revise current guidance for determining the accounting acquirer for a transaction involving the exchange of equity interest if a legal acquiree is a VIE that meets the definition of a business and would require an entity to consider the factors that are currently required for determining which entity is the acquirer in acquisitions not involving VIEs (see ASC 805-10-55-11 through 55-1).

Proposed Accounting Standards Update on Accounting for and Disclosure of
Software Costs

On Oct. 29, 2024, the FASB issued a proposed ASU⁵ related to the criteria for capitalizing internal-use software development costs for all internal-use software development. The comments due date was Jan. 27, 2025.

This ASU would update Subtopic 350-40 and would require capitalizing software costs when:

1. Management has authorized and committed to funding the respective software project, and
2. It is probable that the project will be completed and used as intended (i.e., the “probable-to-complete recognition threshold”).

This new capitalization threshold would differ from the current method of assessing whether to capitalize such costs based on “project stages.” Many companies have shifted from using a more prescriptive and sequential development method, referred to as the “waterfall” method, based on project stages, to a more flexible, iterative and incremental method, referred to as the “agile” method. This ASU is intended to address the resulting challenges in applying the current guidance.

This approach would require consideration of whether there is a significant uncertainty regarding development under the probable- to-complete recognition threshold and would require the respective cash flow to be presented as investing cash flows. In evaluating the probable-to-complete recognition threshold, the entity would consider whether:

1. The software being developed has novel, unique, unproven functions and features or technological innovations, and
2. The entity has determined what the software is intended to do (e.g., functions or features), including whether it has determined or continues to substantially change the significant performance requirements of the respective software.

The proposed amendments would supersede the website development costs guidance in Subtopic 350-50.

Proposed Accounting Standards Update Related to Purchased Financial Assets

On Oct. 16, 2024, the FASB added a project related to the application of Topic 326, Financial Instruments—Credit Losses (CECL), to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers, for private companies and certain not-for-profit entities (NFPs) to the technical agenda. On Dec. 3, 2024, the FASB issued a proposed ASU.⁶ The comments due date was Jan. 17, 2025.

The amendments in the proposed ASU would provide private companies and certain not-for-profit entities with the following:

1. Practical expedient: An entity may elect a practical expedient which assumes that current conditions as of the balance sheet date will persist throughout the forecasted period in developing reasonable and supportable forecasts.
2. Accounting policy election: An entity that elects this practical expedient would be eligible to make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.

The proposed amendments are expected to reduce the time and effort necessary to estimate credit losses for current accounts receivable and current contract assets without reducing the decision usefulness of this information.

Proposed Accounting Standards Update on Share-Based Consideration Payable to a Customer

On Sept. 30, 2024, the FASB issued a proposed ASU to revise the definition of performance conditions and clarify how companies should account for stock-based compensation provided as part of a customer contract. The FASB received comments through Nov. 14, 2024.⁷

The proposed ASU addresses several key issues:

1. Vesting Conditions: The proposed ASU distinguishes between service conditions as earned over time and performance conditions as dependent on specific purchase targets or metrics. These conditions affect the timing of revenue recognition related to stock- based payments.
2. Revenue Recognition: Depending on the vesting conditions, companies may need to adjust the transaction price of the contract, potentially delaying revenue recognition until performance criteria are met.
3. Topic 718: Companies should use guidance from Topic 718 to assess the fair value of share-based consideration and determine the probability of meeting vesting conditions.

This proposed ASU was issued because stakeholders indicated that current guidance leads to delays in revenue recognition and inconsistencies in financial reporting. All entities that issue share-based consideration within the scope of Topic 606 will be affected by these amendments, and the proposed update would allow for either a modified retrospective or retrospective application. The FASB is currently in redeliberations over the feedback received as of November 2024. The effective date and provisions for early application will be determined after considering stakeholder feedback.

Proposed Accounting Standards Update on Derivatives and Share-Based Payments

In response to feedback from its June 2021 Invitation to Comment, the FASB added a project to its technical agenda to address challenges related to the definition and scope of derivatives and share-based payments received from customers as part of revenue contracts. On July 23, 2024, the FASB issued a proposed ASU8 to refine the scope of derivative accounting for certain contracts and clarify the applicability of Topic 606 for share-based payments received from customers. Comments received through Oct. 21, 2024, are being considered. The primary takeaways on derivatives and share-based payments are broadly presented below:

1. Derivatives: The ASU proposes excluding contracts with underlyings based on operations or activities specific to one of the parties from derivative accounting. Variables based on financial metrics, such as EBITDA or net income, or specific operations are included in the scope exception. However, contracts with single underlyings based on market rates or prices do not qualify for the scope exception. Contracts with multiple underlyings will be evaluated based on the predominant characteristics, focusing on the largest expected effect on fair value changes.
2. Share-Based Payments: The ASU clarifies that entities should apply Topic 606 guidance, including noncash consideration, to share-based payments from customers. Share-based payments should be recognized as assets measured at estimated fair value at contract inception when no longer contingent on performance obligations. Guidance in Topic 815 and Topic 321 should not be applied until share-based payments are recognized as assets under Topic 606.

The proposed ASU is under redeliberations and an effective date will be determined after stakeholder feedback. Proposed amendments would be applied prospectively to new contracts after adoption; however, entities would be able to apply guidance to existing contracts through a cumulative-effect adjustment at the beginning of the fiscal year of adoption. If approved, early adoption is permitted.

Proposed Accounting Standards Update on Hedge Accounting

On Aug. 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to improve and simplify hedge accounting guidance. Since that time, stakeholders’ concerns prompted ongoing deliberation from the FASB to address continuing concerns. On Sept. 25, 2024, the FASB proposed ASU Derivatives and Hedging (Topic 815): Hedge Accounting Improvements to address concerns as well as address the global reference rate reform initiative related to the cessation of LIBOR.

The ASU addresses five issues:

1. Issue 1: Similar Risk Assessment for Cash Flow Hedges - The ASU expands hedged risks in cash flow hedges by changing the requirement from shared risk exposure to similar risk exposure, improving operability and consistency.
2. Issue 2: Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments - The proposed ASU facilitates the application of hedged risk guidance for variable-rate debt instruments, reducing diversity in practice and improving consistency.
3. Issue 3: Cash Flow Hedges of Nonfinancial Forecasted Transactions - The proposed ASU expands hedge accounting for forecasted purchases and sales of nonfinancial assets, allowing designation of variable price components that meet clearly-and- closely-related criteria.
4. Issue 4: Net Written Options as Hedging Instruments - The proposed ASU permits compound derivatives composed of a written option and a non-option derivative to qualify as hedging instruments, accommodating differences post-LIBOR cessation.
5. Issue 5: Foreign-Currency- Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge) - The proposed ASU eliminates recognition and presentation mismatches in dual hedge strategies involving foreign-currency-denominated debt instruments, reflecting economic offsets for interest rate and foreign exchange risks.

The FASB is currently in redeliberations after receiving comments as of Nov. 25, 2024. The effective date for the proposal will be determined after stakeholder feedback. Early adoption would be permitted.

We exist in a regulatory-active environment, and standards are revised and updated
to reflect changes in the environment or stakeholder demands. Readers should visit the FASB website for complete information on FASB projects and ASUs, accessible at https://www.fasb.org/.

About the Authors

Dr. Amelia Hart, CPA, serves on the faculty of the Haslam College of Business in the Department of Accounting and Information Management at the University of Tennessee, Knoxville. She can be reached at ihart@utk.edu.

Steve Sledge, CPA, is a retired KPMG LLP partner. He can be reached at sdsledge@outlook.com.

References

¹FASB proposed Accounting Standards Update titled “Environmental Credits and Environmental Credit Obligations (Topic 818),” currently available at https://bit.ly/pasu818.

²FASB proposed Accounting Standards Update titled “Government Grants (Topic 832),” currently available at https://bit.ly/pasu832.

³FASB proposed Accounting Standards Update titled “Interim Reporting (Topic 270),” currently available at https://bit.ly/pasu270.

⁴FASB proposed Accounting Standards Update titled “Business Combinations (Topic 805) and Consolidation (Topic 810),” currently available at https://bit.ly/pasu805810.

⁵FASB proposed Accounting Standards Update titled “Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40),” currently available at https://bit.ly/pasu35040.

⁶FASB proposed Accounting Standards Update titled “Financial Instruments—Credit Losses (Topic 326),” currently available at https://bit.ly/ pasu326.

⁷FASB proposed Accounting Standards Update titled “Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share- Based Consideration Payable to a Customer,” https://bit.ly/pasu718606.

⁸FASB proposed Accounting Standards Update titled “Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for a Share-Based Payment from a Customer in a Revenue Contract,” https://bit.ly/pasu815606.

This article was originally published in the January/February 2025 Tennessee CPA Journal.