With the ever-changing landscape of accounting standards, it's crucial to stay on top of the latest updates. This article will provide an overview of fundamental changes businesses need to be aware of from the first quarter of 2022.
Among the notable changes are Financial Accounting Standards Board (FASB) accounting standard updates (ASUs) to guidance on hedge accounting and credit losses. In addition, entities have been grappling with changes to state income tax laws and regulations.
Enhanced Guidance of Fair Value Hedging
In early March, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. This new guidance aims to align hedge accounting with an entity's risk management, expanding on the last-of-layer designation method contained in ASU 2017-12.
The now renamed portfolio layer allows the designation of multiple hedges within a "closed portfolio," a portfolio of, for example, debt instruments, for which no more debt instruments are being added. In addition, it expands hedging options within the portfolio by including non-repayable financial assets instead of exclusively prepayable assets.
The new guidance specifies that the eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps or spot-or-forward-starting amortizing-notional swaps. In addition, the number of hedged layers—single or multiple—corresponds with the number of hedges designated.
Early adoption of this update is permitted for entities that have already adopted ASU 2017-12. Otherwise, a calendar year public business entities must adopt it for the year ended Dec. 31, 2023 (including interim periods within), with all other calendar year entities adopting for year end Dec. 31, 2024 (including interim periods within).
FASB Eliminates Accounting Guidance for TDR
In late March, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates troubled debt restructurings (TDRs) because the lifetime losses of a loan are already incorporated into the current expected credit losses (CECL) model under ASU 2016-13.
With the amendment, public entities are now required to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20 Financial Instruments—Credit Losses—Measured at Amortized Cost.
Early adoption of this update is permitted for entities that have already adopted CECL, or the amendments are effective for the calendar year ending Dec. 31, 2023 (including interim periods within). For entities that have not yet adopted CECL, the effective date is at the time of adoption of CECL, which is required to be adopted Dec. 31, 2023 (including interim periods within) for calendar year entities that are not public business entities (i.e. private companies).
SALT Cap Workaround and Accounting for Income Tax
When the 2017 Tax Reform and Jobs Act was enacted, it limited itemized deductions for state and local taxes (SALT) to $10,000 through 2025. Called the SALT cap, the provision creates a disadvantage for taxpayers in high-tax states. As a workaround, an increasing number of states are embracing the creation of elective taxes on pass-through entities (PTEs) to help business owners pay state and local income taxes (SALT) at the entity level rather than through personal income tax returns.
So far, 22 states offer PTE tax regimes, and 15 of those states became effective for tax years 2021 and 2022. Electing into a PTE tax regime may have an impact on accounting under ASC Topic 740, Income Taxes. There are a few common features within the PTE tax regimes to watch for when evaluating for ASC 740 impact, including whether:
- Elections are made annually or one time, permanently
- Elections are made by individual partners or by the entity itself
- Whether PTE’s income is excluded or included in the state return of the partners Whether credits for taxes paid included in the state return of the partners of the PTE and how those credits are allocated to the partners
In addition, to be within the scope of ASC 740, a PTE tax regime’s tax must be owed by the entity and based on the entity's taxable income.
- Entities participating in PTE tax regimes will generally find it necessary to evaluate each states PTE program individually. The evaluation may also require considering the elections made by the PTE to determine if their participation is in the scope of ASC 740. Although these programs are not directly addressed in Topic 740, the accounting guidance includes three relevant examples (ASC 740-10-55-227 through 229) that include circumstances when the owner includes income and tax payment on their personal return, when the PTE pays taxes on behalf of the owner, and when the owners do not include the income and tax on their personal return.
If these tax payments are not within the scope of ASC 740, they should be accounted for as equity distributions. If accounted for as equity, you should evaluate when the declaration of distribution has occurred in substance and accrue if appropriate. If accounted for as a tax expense, the guidance within ASC 740 for voluntary elections should be followed which will generally require recording income tax either upon filing date with the taxing authority or when required by law or regulation, upon approval from the taxing authority of the election is received.
If you need guidance on these accounting considerations or have questions, please contact us.
Published on April 26, 2022