Accounting changes coming for privately-held companies: Upcoming new accounting pronouncements under U.S. GAAP

By James Boissonneault November 4, 2024

Several new accounting pronouncements under Generally Accepted Accounting Principles (GAAP) will take effect for privately held companies in the United States over the next few years. The Financial Accounting Standards Board (FASB) received comments from preparers, readers, and auditors asking for clarification on how to account for transactions where there has been diversity in practice or the users of the financial statements requesting additional information.  These updates, issued by the FASB, aim to enhance the clarity, consistency, and relevance of financial reporting.  Here are some of the key updates:

ASU 2023-01: Leases (Topic 842)

This Accounting Standards Update (ASU) addresses the accounting for leases between entities under common control, for example a manufacturing company leasing a building from a lessor with common ownership. Effective for fiscal years beginning after December 15, 2023, it provides a practical expedient for private companies and nonprofit organizations to use the written terms and conditions of a common control arrangement to determine whether a lease exists and how to classify and account for that lease. This update also requires all entities to amortize leasehold improvements associated with common control leases over the useful life of the common control group.

ASU 2023-08: Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60)

This update addresses the accounting and disclosure of crypto assets.

The amendments in this ASU improve the accounting for and disclosure of crypto assets that meet all the following criteria:

• Are defined as an intangible asset within the Accounting Standards Codification;
• Are not provided to the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets;
• Are created or reside on a distributed ledger based on blockchain or similar technology;
• Are secured through cryptography;
• Are fungible; and
• Are not created or issued by the reporting entity or its related parties.

This ASU provides guidance on how to measure and disclose crypto assets held by an entity, aiming to improve the consistency and comparability of financial statements. This is particularly relevant as the use of crypto assets becomes more widespread across industries, including many privately-held entities.

Crypto assets will be measured at fair value with the change in value recorded through the income statement. For non-public entities, this is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance).

ASU 2023-09: Income Taxes (Topic 740)

This update improves income tax disclosures, requiring entities to provide more detailed information about income tax expense, income tax paid, deferred tax assets and liabilities, and the effective tax rate reconciliation. The goal is to enhance transparency and provide users of financial statements with better insights into an entity’s tax positions and the potential impacts on future cash flows.

For non-public entities, this is effective for fiscal years beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.

ASU 2024-01: Compensation—Stock Compensation (Topic 718)

This update focuses on stock compensation and addresses the accounting and reporting for profits interest and similar awards. Here are the key points:

1. Scope Clarification: The update clarifies when profits interests should be accounted for under ASC 718. This includes situations where a grantor acquires goods or services from a third party by issuing shares, options, or other equity instruments.
2. Illustrative Examples: ASU 2024-01 includes four illustrative examples to provide authoritative guidance on the application of these rules.

This update seeks to provide clearer guidance on the accounting for profits interests awards, ensuring consistency and transparency in financial reporting.

ASU 2024-01 becomes effective for non-public entities for annual periods beginning after December 15, 2025, and early adoption is permitted.

ASU 2023-05: Business Combinations—Joint Venture Formations (Topic 805-60)

This update provides guidance on the recognition and initial measurement of joint ventures formed through business combinations. It aims to improve the consistency and comparability of financial reporting for joint ventures by clarifying how to account for the assets and liabilities contributed to the joint venture at the time of formation.

The key changes in ASU 2023-05 are focused on the accounting for joint venture formations. Here are the main updates:

1. New Basis of Accounting: Joint ventures must now measure their assets and liabilities at fair value on the formation date.
2. Recognition of Goodwill: Any excess of the fair value of the joint venture over the net assets contributed will be recognized as goodwill.
3. Measurement Period: Joint ventures can establish a measurement period similar to the guidance for business combinations under ASC 805-10.
4. Consistency in Reporting: This update aims to reduce diversity in practice by providing clear guidance on how to account and report for the contributions made to a joint venture at its establishment.

ASU 2023-05 is effective prospectively for all joint venture formations occurring after January 1, 2025.

Conclusion
These new accounting pronouncements reflect the FASB’s ongoing efforts to improve financial reporting standards, reduce diversity in practice in accounting for similar transactions, and ensure that financial statements provide relevant and reliable information to users. Privately held companies should carefully review these updates and assess their impact on their financial reporting processes to ensure compliance and enhance the quality of their financial statements.

If you would like to discuss these matters further, please contact James Boissonneault or your BNN advisor.

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