By Gina Witherington, CPA, and Mhalou Abadiano, CPA  

The Financial Accounting Standards Board (FASB) released its updated agenda for Q2 2023, with three proposals added on April 17, 2023. These proposals cover acquired financial assets, income statement expenses, and a conceptual framework for future accounting standards.

Financial Instruments - Credit Losses (Topic 326) - Acquired Financial Assets 

This proposal aims to expand the scope of the purchased credit deteriorated (PCD) accounting model to all loans acquired in a business combination and to modify the presentation of expected credit losses for acquired financial assets.

The proposal also includes a requirement to use a single accounting model for all acquired financial assets, a change to the current expected credit losses (CECL) standard that currently requires two different models, depending on a borrower’s creditworthiness.

In addition, the FASB proposes to expand the scope of purchased financial assets with a PCD to include high-quality loans and account for all loans under a new term, “purchased financial assets.” This would eliminate the non-PCD model, which has been deemed unintuitive and is seen as leading banks to double count losses.  

Disaggregation - Income Statement Expenses 

This proposal aims to improve the usefulness of business entities’ income statements by disaggregating certain expense captions. The proposal includes required categories, such as employee compensation, depreciation, amortization, and inventory expense. Expense lines subject to disaggregation requirements include cost of sales, selling, general and administrative expenses, and research and development. This proposal may be costly for companies to apply and might require companies to revamp their enterprise resource planning systems to accommodate it.

While the FASB continues to debate whether the rule will also apply to private companies, the current proposal only applies to public companies.

Conceptual Framework: The Reporting Entity 

This proposal aims to develop an improved Conceptual Framework that provides a sound foundation for developing future accounting standards. The proposal, however, does not describe the term “reporting entity” in the Conceptual Framework. Tentative decisions suggest that a reporting entity has three features:

• It has conducted economic activities.
• Those activities can be distinguished from the activities of other entities.
• The financial information faithfully represents the economic activities conducted within the circumscribed area and is useful in making decisions about provided resources to the entity.

Potential Future Updates

The FASB’s updated agenda also signals that three new accounting standard updates could be issued in the next six months, including an overhaul to segment reporting, how to recognize and measure contributions made to a joint venture upon formation, and disclosure improvements in response to the Securities and Exchange Commission’s release on disclosure updates and simplification.

These proposals aim to improve financial reporting and decision-making by providing better information to investors and other stakeholders.

Gina Witherington, CPA, is a director in the accounting and reporting advisory practice in Stout’s Charlotte, N.C., office. She can be reached at gwitherington@stout.com. Mhalou Abadiano, CPA, is a director in the accounting and reporting advisory practice in Stout’s Philadelphia office. She can be reached at mabadiano@stout.com.

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