Centri’s Bridging the GAAP newsletter highlights this month’s news, developments, and emerging issues in the accounting and financial reporting world.

FASB Standard Setter Updates

Financial Accounting Standards Board

FASB Proposes Changes to Accounting for Purchased Financial Assets

On June 27, the FASB issued an exposure draft of a proposal that would require all financial assets acquired in a business combination and all “seasoned” financial assets acquired in an asset acquisition to follow the “gross-up approach” in ASC 326, with no credit loss recorded upon acquisition. The amendments would remove the requirement for entities to determine whether purchased financial assets have experienced a more-than-insignificant deterioration in credit quality since origination but would introduce seasoning criteria to determine whether an acquired financial asset is an in-substance origination.

The proposal does not amend the accounting for originated financial assets or acquired financial assets that are not “seasoned.” The amendments would be applied on a modified retrospective basis. Comments are due by August 28, 2023.

FASB Issues ASU Amending Certain SEC Guidance in Codification

The FASB issued Accounting Standards Update (ASU) 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 120, among other things.

CAQ Standard Setter Updates

Center for Audit Quality

The CAQ SEC Regulations Committee and its International Practices Task Force (IPTF) issued a discussion document describing recent inflation data for certain countries that the IPTF discussed at its May 2023 meeting. Haiti was added to the list of countries with three-year cumulative inflation rates exceeding 100% at December 31, 2022.

ASC 830, Foreign Currency Matters, requires a foreign entity to change its functional currency when the local economy becomes highly inflationary (considered as such when it has a cumulative inflation rate of approximately 100% or more over a three-year period). The financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency of the parent as of the beginning of the reporting period, including interim periods, following the period in which the economy becomes highly inflationary.

Given global inflation trends, entities with foreign operations should monitor inflation in countries in which they operate that have high levels of inflation.

IASB Standard Setter Updates

International Accounting Standards Board

The IASB has published a request for information seeking input for review of the IFRS Accounting Standard on IFRS 15, Revenue from Contracts with Customers. IFRS 15 was developed jointly with the FASB and came into effect in 2018. It was created to improve the quality and comparability of revenue information provided to investors globally. Comments are due by October 27, 2023.

Effects of Climate-Related Matters on Financial Statements

The IFRS Foundation republished educational material to remind stakeholders of the long-standing requirements in IFRS Accounting Standards to report on the effects of climate-related matters in the financial statements when those effects are material. Consideration of the ISSB’s Standards may help companies better identify matters, including climate change, that affect the financial statements and help companies apply IFRS Accounting Standards.

ISSB Standard Setter Updates

International Sustainability Standards Board

On June 26, 2023, the ISSB issued its first two IFRS Sustainability Disclosure Standards: (1) IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and (2) IFRS S2 Climate-related Disclosures. IFRS S1 sets out general requirements for the content and presentation of an entity’s sustainability-related financial disclosures, while IFRS S2 requires an entity to provide information about its exposure to climate-related risks and opportunities. The standards are effective for annual reporting periods beginning on or after January 1, 2024. However, they would need to be adopted by authorities in local jurisdictions before compliance would be mandatory in any jurisdiction.

The ISSB also published a request for information seeking feedback on its priorities for its next two-year plan, including strategic direction and balance of the ISSB’s activities; criteria for assessing which sustainability-related matters to prioritize, such as topics, industries and activities; and scope and structure of potential new research and standard-setting projects. Comments are due by September 1, 2023.

IPSASB Standard Setter Updates

International Public Sector Accounting Standards Board

Respondents to the IPSASB May 2022 consultation paper, Advancing Public Sector Sustainability Reporting, agreed that the public sector needs its own sustainability reporting standards. Public sector specific sustainability reporting standards will equip governments and other public sector entities to provide better transparency, accountability and comparability of their efforts to combat the climate crisis and other sustainability challenges.

Following a scoping and research phase, the IPSASB has decided to move forward with the development of a public sector specific Climate-Related Disclosures standard. More information on the project brief and outline can be found on the IPSASB’s website.

SEC Regulatory Updates

Security and Exchange Commission

SEC Amends Certain Rules Governing Money Market Funds

On July 12, 2023, the SEC amended certain rules that govern money market funds under the Investment Company Act of 1940. The amendments are designed to improve the resilience and transparency of money market funds primarily by:

• Removing provisions that previously permitted a money market fund to temporarily suspend redemptions and tied the imposition of liquidity fees to a fund’s liquidity level
• Increasing the daily and weekly minimum liquidity requirements to 25% of a fund’s total assets and 50% of a fund’s total assets, respectively
• Requiring institutional prime and institutional tax-exempt money market funds to impose liquidity fees when they experience daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are de minimis
• Allowing retail and government money market funds to handle a negative interest rate environment by either converting to a floating share price or reducing the number of shares outstanding to maintain a stable net asset value per share
• Requiring additional information about large private liquidity funds on Form PF

The rule amendments will be effective 60 days after publication in the Federal Register, with a tiered transition period for compliance. The reporting form amendments will be effective June 11, 2024.

SEC Proposes Amendments to the Broker-Dealer Customer Protection Rule

On July 12, 2023, the SEC proposed amendments to the customer protection rule (Rule 15c3-3 under the Exchange Act) to require carrying broker-dealers with average total credits of $250.0 million or more to perform their customer and reserve computations, and make any required deposits into their reserve bank accounts, on a daily rather that weekly basis. The SEC is also seeking comment on whether similar daily reserve computation requirements should apply to broker-dealers and security-based swap dealers with respect to their security-based swap customers.

Comments are due the later of 30 days following publication in the Federal Register or September 11, 2023 (which is 60 days after date of issuance).

SEC Staff Issues Letter to Companies Regarding China-Specific Disclosures

The SEC’s Division of Corporation Finance released a sample comment letter regarding China-specific disclosures. The letter expands on prior staff guidance for China-based companies and focuses on three specific areas of disclosure: (1) requirements under the Holding Foreign Companies Accountable Act, (2) material risks arising from the role of the Chinese government in China-based operations, and (3) the impact of specific statutes.

SEC to Vote on Final Cybersecurity Rules

On June 26, 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The SEC also adopted rules requiring foreign private issuers to make comparable disclosures. The new rules:

• Require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident’s nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant;
• Add Regulation S-K Item 106, which will require registrants to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, as well as the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents; and
• Require comparable disclosures by foreign private issuers on Form 6-K for material cybersecurity incidents and on Form 20-F for cybersecurity risk management, strategy, and governance.

The final rules will become effective 30 days following publication of the adopting release in the Federal Register. The Form 10-K and Form 20-F disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023. The Form 8-K and Form 6-K disclosures will be due beginning the later of 90 days after the date of publication in the Federal Register or December 18, 2023. Smaller reporting companies will have an additional 180 days before they must begin providing the Form 8-K disclosure.

ESMA Regulatory Updates

European Securities and Markets Authority

The ESMA announced the release of its publication on expectations for sustainability-related disclosures in equity and non-equity prospectuses. The guidance is aimed at (1) supporting investors’ ability to make informed investment decisions, (2) providing issuers with an understanding of disclosures regulators will expect them to provide, and (3) ensuring a coordinated approach towards scrutinizing sustainability-related disclosures by national competent authorities.

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