TMT insights: Financial reporting and accounting quarterly - Q1 2023

Beginning in Q1 of 2023, calendar year-end companies will be required to provide new disclosures about supplier finance programs under ASU 2022-04. While the new standard does not address the accounting for these arrangements, it does require disclosures intended to enhance transparency regarding the key terms and amounts subject to the program.

Background on supplier finance programs

When a reporting entity (buyer) purchases goods or services from a supplier, the buyer often recognizes its payment obligation as a trade payable. It has become increasingly popular for buyers to establish a supplier finance program with a bank or other financial intermediary. In a typical program, the buyer validates the invoice received from the supplier, and the intermediary may offer an early payment option (typically a discounted amount) to the supplier. The buyer will generally make its payment according to the terms of the original invoice, but it’s important to understand that the terms of various arrangements can vary significantly.

When accounting for supplier finance programs, a key judgment involves determining whether invoices in the program should be presented as trade payables or as debts. A range of factors and evidence should be considered when deciding whether the substance of the obligation is more akin to a trade payable or a debt. These considerations include:

• Has the buyer’s obligation been modified so significantly that it should be considered a new arrangement (i.e., debt)? Examples include significantly extending the payment terms, requiring the buyer to post collateral, changing the payable’s seniority, charging interest or permitting the buyer to earn a fee based on vendor participation.
  
• Has the supplier agreed to atypical invoice terms because a supplier finance program is in place? Extended payment terms may indicate that the buyer’s obligation is more akin to debt because the program offers payment terms that are well beyond what it would get with a typical trade payable.
  

New disclosure requirements

Some of the disclosure requirements are effective for fiscal years that begin after December 15, 2022, for all entities. Early adoption is permitted. Disclosures required for calendar year-end companies are summarized below:

For more information

For more details, refer to Section 11.3.1.5 of our Financial statement presentation guide. Also, listen to our recently released podcast, Supplier finance: New disclosures aim to enhance transparency

In addition to new disclosures about supplier finance obligations (discussed above), new accounting standards related to business combinations, hedge accounting and credit losses are effective for many public companies in 2023.

Accounting for acquired contract assets and contract liabilities

ASU 2021-08 requires that contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, rather than measuring these assets and liabilities at fair value. Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. For more information, refer to our Accounting for acquired contract assets and contract liabilities. 

Fair-value hedging – portfolio layer method

ASU 2022-01 replaces the recently added last-of-layer hedging guidance and provides the ability to hedge the benchmark interest rate risk of a closed portfolio of fixed-rate, fixed-income securities with multiple hedging relationships. For more information, refer to our Derivatives and hedging guide. 

Troubled debt restructurings and vintage disclosures

ASU 2022-02 eliminates the troubled debt restructuring guidance for creditors that have adopted the new credit loss guidance (commonly referred to as CECL) and adds new disclosure requirements. This guidance does not impact the accounting for borrowers. For more information, refer to our Amendments to CECL eliminate TDRs and add disclosures.

For a complete list of recently issued accounting standards and their effective dates, including links to PwC resources, refer to the Guidance effective for calendar year-end public companies and Guidance effective for calendar year-end nonpublic companies pages on Viewpoint.

With TMT companies continuing to navigate a challenging economic environment, many are making adjustments to their organizational structure or business strategy. Below are some timely reminders about when these changes could require reassessing a company’s reportable segments and the resulting accounting and reporting implications.

Factors that could result in a change to reportable segments 

The segment standard does not provide specific guidance on when a company should reassess its reportable segments, so whether a reassessment is needed will depend on a company’s specific facts. Typically, segment conclusions need to be reassessed upon significant acquisitions or dispositions and changes to the organizational structure, such as a different individual or group being identified as the chief operating decision-maker (CODM). Changes to reportable segments can also occur if there are changes to the individuals that report to the CODM, the information reviewed by the CODM, or how the CODM allocates resources, assesses performance or determines budget. 

Potential accounting implications

If there are changes to a company’s reportable segments, management should also assess whether the company’s reporting units have changed. Reporting units are defined as the same as, or one level below, the operating segments. This is important because goodwill is tested for impairment at the reporting unit level.

If the composition of one or more reporting units changes, the company’s assets and liabilities should be reassigned to the reporting units affected before allocating goodwill. Then, goodwill should be reassigned using a relative fair-value approach. Changes to the composition or carrying amount of a reporting unit’s net assets may trigger the need to perform a goodwill impairment test. It would not be appropriate, however, for a company to reorganize its reporting structure simply to avoid an impairment charge. 

Presentation and disclosure considerations

A change to reportable segments is reflected in the period of change by recasting the segment footnote for all periods presented, unless it is impracticable to do so. Outside of the financial statements, the company will also need to update any information in the management discussion and analysis (MD&A) about the results of operations of its individual reportable segments.

Changes that occur after period end, but before issuing the financial statements, are treated as unrecognized subsequent events. That is, the information in the segment footnote is not recast to reflect the change. However, companies should consider disclosing that a change will occur in the subsequent period.

When a change to reportable segments occurs during an interim period, a company is not required to immediately recast either the current year’s earlier interim periods or the prior years’ annual segment footnotes. Recasting of the prior period information is typically done in the next filing that presents those periods. However, the issuance of a registration statement may accelerate the need to recast prior period annual financial statements.

Additional considerations for changes in an interim period

When a company changes its reportable segments in an interim period, there are reporting implications if those interim financial statements are included or incorporated by reference into a new or amended registration statement before the company’s next annual filing.

In this situation, the company is required to recast its prior period annual financial statements to reflect the segment information on a comparable basis, assuming that the effect on previously issued annual financial statements is material. If the company presents three years of financial statements, this requires recasting three years of segment information, rather than just the two historical years that would be required if the segment footnote was not recast until the next annual filing after the change. MD&A may also need to be updated.For more information

For more guidance on changes to reportable segments, refer to Section 25.7.8 of our Financial statement presentation guide.

Various jurisdictions have made significant advancements in enacting domestic legislation based on the minimum tax described in the Global Anti-Base Erosion rules ("GloBE minimum tax" or “Pillar Two tax”), raising questions about the related accounting impact. At the FASB’s February 1, 2023 meeting, the FASB staff provided their view that the GloBE minimum tax is an alternative minimum tax as discussed in ASC 740, Income Taxes. Based on this conclusion, reporting entities would not recognize or adjust deferred tax assets and liabilities for the estimated future effects of Pillar Two taxes as long as enacted legislation is consistent with the OECD’s GloBE Model Rules and associated commentary. Rather, the tax would be accounted for as a period cost impacting the effective tax rate in the year the GloBE minimum tax obligation arises.

Concurrent with these developments from the FASB, the International Accounting Standards Board (IASB) issued an Exposure Draft proposing amendments to guidance from the International Financial Reporting Standards (IFRS) to introduce a temporary, but mandatory, exception to the accounting for deferred taxes arising from the implementation of the Pillar Two rules, along with extensive disclosure requirements.

The number of companies expected to be impacted by Pillar Two continues to expand as more jurisdictions introduce and advance domestic legislation based on the Pillar Two rules. While the majority of Pillar Two legislation is anticipated to be effective in 2024 and beyond, enactment in 2023 would likely trigger disclosure requirements. Multinational entities should continue to monitor developments of Pillar Two legislation and assess the potential accounting and disclosure implications.

For more information

For more details on the FASB staff’s views, refer to our In brief, FASB staff weighs in on tax accounting for OECD Pillar Two taxes. For more background on the OECD’s international corporate tax reform and Pillar Two’s Model Rules, read our publication, In the loop: The OECD minimum tax: What US companies need to know.

In March, the FASB issued a new proposal that would require a number of additional income tax disclosures, primarily focused on the disclosure of (a) income taxes paid and (b) the rate reconciliation table.

Companies would need to disaggregate the disclosure of income taxes paid (net of refunds received) by federal, state, and foreign taxes, both on an interim and annual basis. On an annual basis, companies would disclose income taxes paid disaggregated by individual jurisdiction using a quantitative threshold of 5% of total income taxes paid.

Public business entities would also be required to provide, on an annual basis, rate reconciliation information by specific categories (including state and local income tax), the effect of cross-border tax laws, foreign tax effects, and tax credits, among others. Additionally, some categories would then require disaggregation based on a quantitative threshold of 5%. The foreign tax effect category would require disaggregation by both jurisdiction and nature. The proposal also requires additional qualitative disclosures.

The proposed amendments would be applied on a retrospective basis upon adoption. Comments on the proposal are due May 30.

In February, the FASB completed its initial deliberations on the accounting for and disclosure of crypto assets, with an exposure draft expected potentially as soon as the end of this month. The scope of the proposed guidance would include crypto assets that meet the definition of an intangible asset and that: 

• do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets; 
  
• are created or reside on a distributed ledger or blockchain; 
  
• are secured through cryptography; and 
  
• are fungible. 
  

In addition, the FASB decided to exclude from the scope of the proposed guidance crypto assets created or issued by the reporting entity or their related parties, as well as assets commonly referred to as “wrapped tokens.”

All crypto assets in scope would be measured at fair value, applying ASC 820, Fair Value Measurement. Changes in fair value would be recognized in net income each reporting period and would be separately presented from the income statement effects of other intangible assets, such as amortization or impairments. The FASB considered, but decided against, pursuing a measurement alternative for crypto assets with inactive markets. 

The proposal is expected to include a number of required disclosures for each reporting period, including the name, fair value, units held and cost basis for each significant crypto asset holding, as well as information about crypto assets that are restricted from sale. For annual periods only, required disclosures would also include a reconciliation of activity for crypto asset holdings and the difference between the sale price and cost basis for crypto asset dispositions. Additionally, in-scope crypto assets would be required to be presented separately from other intangible assets on the balance sheet.

Based on tentative FASB decisions, an entity would be required to recognize a cumulative-effect adjustment to retained earnings as of the beginning of the annual period in which the guidance is adopted. Early adoption is expected to be permitted. 

Once issued, the proposal will be available for public comment for 75 days. For more information, refer to the FASB’s project page. To learn more about the accounting for crypto assets under the current accounting framework, read our Crypto assets guide.

The FASB continues to make headway on its project on disaggregation of income statement expenses. In January, the FASB reached a number of tentative decisions, providing a preview of new disclosures that could be proposed later this year. 

The FASB tentatively decided to require footnote disclosure that disaggregates each income statement expense line item into four categories: (1) employee compensation, (2) inventory expenses, (3) depreciation of fixed assets and (4) amortization of intangibles. Companies would provide a qualitative description of the remaining amount not covered by these categories. Similar disaggregation would also be required for costs incurred that are capitalized into inventory during the reporting period. Lastly, companies would be required to separately disclose total “selling expenses” for the reporting period. 

We expect the FASB to make additional decisions at an upcoming meeting before moving the project to the proposal stage. For more information, including example disclosures reflecting the FASB’s tentative decisions, refer to the FASB’s project page.

In December 2022, the FASB issued ASU 2022-06, which defers the sunset date of ASC 848, Reference Rate Reform, from December 31, 2022 to December 31, 2024. ASC 848 provides temporary relief relating to the potential accounting impact relating to the replacement of LIBOR or other reference rates expected to be discounted as a result of reference rate reform. The standard is effective immediately for all entities. Refer to Section 4.1.4 of our Reference rate reform guide for further details.