This report gives investors the scoop on what’s happening at the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) and how newly issued accounting standards updates (ASUs) affect fundamental research.
Each of the below ASUs will affect how companies report financial information, but they have minimal or no impact on our financial models. Get more details on other recent ASUs, and their impact on our models, here.
ASU 2021-07 – Compensation – Stock Compensation (Topic 718) Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards
This update allows a nonpublic entity to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees using the reasonable application of a reasonable valuation method. Characteristics of the reasonable application of a reasonable valuation method include:
- Date on which a valuation’s reasonableness is evaluated
- Factors that a reasonable valuation should consider
- Scope of information that a reasonable valuation should consider
- Criteria that should be met for the use of a previously calculated value to be considered reasonable
The amendments in this update are effective for fiscal years beginning after December 15, 2021 and create no changes to our models.
ASU 2021-08 – Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
This update requires an entity to recognize and measure contract assets and liabilities acquired in a business combination in accordance with a previous accounting standard (Topic 606). At the acquisition date, an acquirer should account for the revenue contracts as if it had originated the contracts. Generally, this update should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements.
Before this update, acquirers recognized these assets and liabilities at fair value during a business combination.
The amendments in this update improve the comparability by specifying for all acquired revenue contracts regardless of their timing of payment:
- The circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and
- How to measure those contract assets and liabilities
The amendments in this update are effective for fiscal years beginning after December 15, 2022. This update requires no changes to our models.
ASU 2021-09 – Leases (Topic 842): Discount Rate for Leases That are Not Public Business Entities
This update affects lessees that are not public business entities, including not-for-profit entities. These entities can now elect as an accounting policy to use a risk-free rate as the discount rate for all leases. Lessees can now make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. The entity will also be required to disclose which asset classes it has elected to apply a risk-free rate.
This amendment also requires that when the rate implicit in the lease is readily determinable for any individual lease, the lessee uses that rate rather than making a risk-free rate election.
The amendments in this update are effective after December 15, 2022. This update requires no changes to our models.
ASU 2021-10 – Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance
This update increases the transparency of government assistance by requiring companies to disclose:
- The types of assistance
- An entity’s accounting for the assistance
- The effect of the assistance on the entity’s financial statements
Currently, there is a lack of specific authoritative guidance regarding government assistance in GAAP. This update will greatly improve the transparency and comparability of information to financial statement users.
The amendments in this update are effective for all entities beginning December 15, 2021. This requires no changes to our models. We applaud FASB for increasing the transparency around these transactions.
This article originally published on December 16, 2021.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.
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