FASB developments that could impact your institution in 2025 and beyond

By Joseph Jalbert December 6, 2024

The end of the year is a time not only to reflect on the events of the past year but also to think about what is to come in the next year. Banks and financial institutions are wise to focus on the latter so they can understand the implications of various new laws, regulations, and standards and begin strategizing not only for the next year, but 3-5 years in the future.

Consideration of new accounting standards should be part of an institution’s planning to ensure its systems and processes can accommodate reporting changes and to think about how such changes need to be communicated to the institution’s various stakeholders.

As of the date of this writing, the Financial Accounting Standards Board (FASB) has issued a mere four Accounting Standards Updates (ASUs) in 2024, with only weeks remaining in the year. This is considerably fewer than in years past, suggesting possible acknowledgment from the FASB that institutions needed to catch their breath following the recent adoption of the expected credit losses (CECL) standard and new standards for leases and revenue recognition, among others.

Does this mean that institutions can expect the FASB to only issue a few new ASUs annually going forward? That’s unlikely given the current number of technical projects the FASB is working on. While we don’t yet know how many of these projects will result in the issuance of a new standard, and the impacts can vary widely, let’s take a look at some of the FASB’s more significant projects that could impact your institution in 2025 and beyond.

Purchased Financial Assets

Note: BNN previously published an article on the following proposed guidance, a link to which can be found here. This provides a good primer on the topic and I encourage you to refer to it for additional background and context.

Following the issuance of ASU 2016-13, which required institutions to measure all expected credit losses for financial instruments held at the reporting date, the FASB received feedback from stakeholders that the accounting for purchased financial assets remained complex and that there were potential consequences of the accounting model in place under ASU 2016-13. As a result, the FASB staff began conducting research and outreach to various stakeholders on possible amendments to the accounting for purchased financial assets.

Under the current guidance, institutions are required to identify any assets that would be considered purchased credit deteriorated (PCD) assets. For any such PCD assets, institutions will apply the “gross-up” method whereby the asset is grossed up for the amount of the allowance for credit losses with no impact to expense. For non-PCD assets, expected credit losses would need to be recorded through an allowance for credit losses with an offset to expense upon acquisition. Many stakeholders expressed concern that this form of recognition of expected credit losses for non-PCD assets, along with the credit discount that is required to be measured and recorded, results in a double counting of expected credit losses.

Based on further deliberations to date, the FASB is considering expanding applications of the gross-up method to other purchased financial assets, which would eliminate the need to recognize a credit loss expense for those assets on day one. An exposure draft was issued by the FASB in June 2023, and it received  mixed feedback. One of the bigger sticking points with certain stakeholders was the FASB’s tentative decision to require the new standard to be applied on a modified retrospective basis. In other words, institutions that acquired another institution prior to the issuance of the new standard but subsequent to adoption of ASU 2016-13 would need to retroactively apply this guidance to all purchased financial assets subject to the gross-up method. The FASB has agreed to redeliberate on this point and consider whether the benefits of prospective application are expected to outweigh the costs.

The timing of when we might see a final ASU on purchased financial assets remains uncertain. It was initially anticipated that a final ASU would be issued by the end of this year, but that now appears unlikely.

Software Costs

 While companies’ use of software has evolved rapidly, the accounting guidance for software transactions has failed to evolve similarly and has led to diversity in practice. Recognizing a need for modernization, in October 2024 the FASB issued a proposed ASU that, if finalized, would update the guidance on accounting for internal-use software. Comments are due by January 27, 2025.

Under the current guidance, institutions are required to follow a prescriptive and sequential process when determining which software costs can be capitalized and which costs need to be expensed. By moving through these project “stages” – preliminary project, application development, and post-implementation operation – users are guided through a somewhat rigid process in determining how to account for the various software development costs they incur. Many companies’ software development projects today, however, do not follow such a rigid process. The proposed ASU aims to align the accounting guidance with more modern software development methods by:

• Removal of references to the above-mentioned project stages and introduction of a more flexible approach; and
• Requiring institutions to start capitalizing software costs when:
  • Management has authorized and committed to funding the software project; and
  • It is probable that the project will be completed and the software will be used to perform the function intended (referred to as the “probable-to-complete recognition threshold”)

Under the proposed ASU, institutions can elect to either implement the new guidance on a prospective or retrospective basis, the latter requiring a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the first period presented as well as a recast of comparative periods.

BNN Note: In evaluating the “probable-to-complete” recognition threshold, institutions may need to determine whether there is significant uncertainty associated with the development activities of the software, which could require the use of significant professional judgment. Certain stakeholders have also expressed concern that the proposed guidance could result in more costs being expensed than capitalized as compared to current guidance; however, it should be noted that the proposed guidance would not change which internal-use software costs can be capitalized (for example, data conversion, training, and software maintenance costs would still need to be expensed as incurred).

 Coming Soon

Beyond the various ongoing technical projects the FASB has in process are standards recently issued by the FASB that will become effective in future years (or, in certain cases, became effective for public business entities (PBEs) during 2024). These standards include the following which will, or could, impact institutions’ financial reporting:

• ASU 2023-02, Investment – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This standard expands application of the proportional amortization method to certain qualifying tax equity investments beyond low-income housing tax credit structures. This standard became effective for PBEs in fiscal years beginning after December 15, 2023 and will become effective for non-PBEs in fiscal years beginning after December 15, 2024, though early adoption is permitted.
• ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This standard requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and incomes taxes paid and eliminates certain existing disclosure requirements that are no longer considered cost beneficial or relevant. This standard becomes effective for PBEs in fiscal years beginning after December 15, 2024 and for non-PBEs in fiscal years beginning after December 15, 2025, with early adoption permitted.
• ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This standard, applicable to PBEs only, requires disclosure in the notes to the financial statements of specified information about certain costs and expenses, including certain qualitative information. Specifically, institutions will be required to disclose the amounts of employee compensation, depreciation, and intangible asset amortization, and include certain amounts that are already required to be disclosed under GAAP in the same disclosure as the other disaggregation requirements. This standard becomes effective in annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted.

A comprehensive list of recent ASUs can be found in Appendix A to our recently issued illustrative financial statements for financial institutions which can be found here.

Lessons from History

As your institution prepares for the adoption of these new accounting standards, consider the lessons learned from the recent adoption of other standards. Are data collection systems and processes adequate? Have internal controls been updated accordingly? Are financial reporting personnel prepared for modified disclosures within these standards? Thoughtful up front planning, as well as thorough discussions with your financial auditors and accountants, will help to ensure your institution is prepared to implement these new standards in the coming years.

If you have any questions or if you would like to further discuss any of these items in more detail, please contact Joseph Jalbert or your BNN advisor at 800.244.7444.