2021 Accounting Standard Updates

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Accounting is both an art and a science, but it may not be considered an exact science since it is constantly evolving. Because of its importance in the decision-making process of every business, accounting standards are constantly improved and updated.

Organizations need to sustain an awareness of these updates, find out what is effective and what is soon to come in the industry. This is to ensure that accounting continues to comply with the Generally Accepted Accounting Principles (GAAP).

Meanwhile, the Financial Standards Accounting Board, or FASB, continues to work with users of financial statements and other stakeholders to make accounting and financial reporting better.

Updates December 31, 2020, applicable for all entities

  1. 2019-08—Compensation-Stock Compensation and Revenue from Contracts with Customers: Codification Improvements—Share-Based Consideration Payable to a Customer

Summary:

This Accounting Standard Update requires businesses to measure and categorize share-based payments by applying the guidance in Topic 718 on the balance sheet. Thus, professionals would measure the amount recorded to reduce revenue according to the grant-date fair value of the share-based payment.       2. 2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

Summary:

This clarifies certain accounting factors related to credit losses, hedging activities, and financial instruments. The significant updates connected to financial instruments define:

  • that non-public business entities do not need to disclose a fair value for financial instruments not measured at fair value on the balance sheet
  • the measurement substitute for equity securities without readily determinable fair values is a nonrecurring measurement and involves the relevant disclosures,
  • that equity securities that do not possess identifiable fair values are subject to the measurement alternative at historical exchange rates and the rate applied should be the acquisition date.

    3. 2019-03—Not-for-Profit Entities: Updating the Definition of Collections

Summary:

This ASU revises the meaning of the term collections and demands that a collection-holding entity makes its policy transparent to use proceeds when removing collection items. An entity must disclose its description of direct care if a collection holding entity allows proceeds from removed items to use for immediate consideration.

  1. 2018-17—Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities

Summary:

This update supplants the private entity option for common control leasing arrangements and expands it to every qualifying typical control arrangement. A private organization may elect not to apply VIE guidance to legal entities under common control when criteria are met. On the other hand, a private company choosing the alternative needs to present detailed disclosures about its involvement to the legal entity under common control.

This ASU also updates guidance related to whether a decision-making fee is a variable interest. It demands that organizations consider indirect interests held through relative parties behind common control on a proportional basis instead of the equivalent of a direct interest as a whole.

  1. 2018-13—Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

Summary:

It includes essential disclosure changes for Level 3 investments. Other developments pertain to disclosures for differences between Level 1 and Level 2 investments and investments in particular entities that determine net asset value.

  1. 2018-08—Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

Summary:

This ASU presents a broader framework for accounting for contributions for resource providers and recipients. This ASU applies to all entities that make or receive any contributions.

  1. 2018-07—Compensation-Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting

This expands the scope of Topic 718 to include share-based payments given to non-employees for goods and services. It results in alignment of the accounting for share-based payments to employees and non-employees.

  1. 2017-11—Earnings Per Share; Distinguishing Liabilities from Equity; Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

Summary:

This update is intended to make accounting simpler for specific financial instruments with down round features.

  1. 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

Summary:

This update cuts the amortization period for specific callable debt securities held at a premium. It requires the amortization of the premium to the earliest call date.

  1. 2016-02—Leases 2020-05—Revenue from Contracts with Customers and Leases: Effective Dates for Certain Entities; 2019-10—Financial Instruments—Credit Losses

Summary:

This update is a complete alteration to the accounting for lease. It results in two types of leases: operating and financing. Organizations will see a substantial change related to operating lease accounting because they were “off-balance-sheet” under the previous guidance. Financing account leases, meanwhile, will be the same as capital leases under the previous direction.

List of effective dates

  1. IAS 1 amendment on classification – Effective January 1, 2023
  2. IFRS 17 amendments – Effective January 1, 2023
  3. Amendments on disclosure accounting policies – Effective January 1, 2023
  4. IAS 8 amendments on accounting estimates – Effective January 1, 2023
  5. IFRS 17 – Effective January 1, 2023
  6. IAS 16 amendments about proceeds before intended use – Effective January 1, 2022
  7. 2018-2020 annual improvements cycle – Effective January 1, 2022
  8. IAS 37 amendments concerning onerous contracts – Effective January 1, 2022
  9. IFRS 3 amendments updating a reference to the Conceptual Framework – Effective January 1, 2022
  10. IFRS 16 amendment – Effective April 1, 2021
  11. IBOR reform Phase 2 amendments – Effective January 1, 2021

Conclusion

For many organizations, the current crop of Accounting Standard Updates released in 2020 will not affect their financial statements. However, experts see some of these adjustments as helpful to institutions suffering from the effects of the COVID-19 pandemic. These updates also present clarity on items inside the codification.

Ensure you are updated with these changes so you are ready to incorporate them in your financing and accounting reports.  As noted, keeping an in-house accounting staff up-to-date on all current changes can be a time-consuming and costly endeavor.  This is part of the reason many small to mid-size businesses are transitioning to outsourced accounting solutions.

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