There are several important updates that are expected to be made to the accounting rules in 2020. These updates could include changes to hedge accounting guidance, additional guidance for business combinations, and updates to debt classification rules. Additionally, a proposal from the Financial Accounting Standards Board may make convertible instruments simpler to use. This would reduce the complexity and cost associated with the instruments.
COVID-19 accounting and reporting concerns
The COVID-19 pandemic has caused some local governments to suspend their normal operations. The federal government is offering resources to help local governments deal with the situation. These resources are outlined in the COVID-19 BARS Coding Alert issued October 1, 2020. The BARS Alert covers topics ranging from COVID-19 vaccines to personal protective equipment purchased with COVID-19 federal financial assistance.
Financial reporting and disclosure considerations will be affected by the outbreak of COVID-19. Companies will need to disclose how the outbreak has affected their financials and what measures they have taken to mitigate the risks. Specifically, five topics will be emphasized: going concern and liquidity, impairment assessment, contract modifications, fair value measurement, and government assistance.
The COVID-19 pandemic has affected almost every aspect of business operations. In addition to accounting and reporting concerns, the impact of the disease may also impact the recoverability of inventory balances. Therefore, businesses will need to use their best judgment when assessing the impact of the COVID-19 outbreak on their operations.
Regardless of the size of your organization, it is important to understand COVID-19’s implications for your company. Because COVID-19 is subject to a lot of uncertainty, it may prompt your company to adjust its contracts and reassess the probability of collecting consideration in the future. Furthermore, businesses will need to update their revenue recognition estimates and disclosures, especially for variable consideration such as discounts, price concessions, performance bonuses, and penalties.
In addition to the implications for financial reporting, COVID-19 may also impact how the economy performs. The impact of the new regulations could impact share-based compensation awards. Since the effects of the new rules will take effect in 2020, companies should consider how they will deal with the impact on their financial statements. For example, the changes in the economic climate could affect the value of their assets. If there is a significant drop in market prices, share-based payments may also be redeemed or modified.
Leasing changes in ASC Topic 842
Leasing under the new standard requires lessees to recognize a right-of-use asset and a lease liability at lease inception. The liability equals the present value of future lease payments and is measured using an implicit lease rate. The asset is based on the right-of-use asset and initial direct costs.
In addition to removing the lease component from the lease liability, the new lease standard also eliminates the need to classify all leases as leveraged leases. Leases that start on or after the new standard are accounted for using the lessor’s accounting rules, which are described in ASC Topic 842-30. The new standard also includes practical expedients for lessors, such as grandfathering the lease classification, combining lease and nonlease components, and not restating prior year’s financials.
New lease accounting rules, ASC 842, were published by the Federal Accounting Standards Board (FASB) in January. These changes affect leases for both public and private companies. The new standard aims to make leases more transparent and easier to understand, as well as to provide a better picture of the financial health of businesses.
Before ASC Topic 842 was issued, most leases were not included on the balance sheet. But with the new standards, lessees must report right-of-use assets and liabilities for almost all leases, making them easier to compare between organizations. As an added benefit, the new standard aligns with the new international lease accounting standard (IFRS 16).
The new lease accounting standards have a major impact on companies. This standard changes the classification of leased assets into two categories: finance leases and operating leases. The new standard also replaces the previous lease guidance, ASC 840. The new lease standard also eliminates the “capital lease” term, thereby eliminating the need to account for capital leases.
Companies that lease assets are required to recognize them as an asset and a liability for future lease payments. Moreover, they must have separate physical assets. These assets must be clearly identifiable. Some leases of physical assets are embedded in service or vendor contracts.
Tax law changes in 2022
In 2022, the government is considering changes to the tax code that will affect everyone. The new tax legislation, referred to as the “Build Back Better Act,” would increase taxes on large corporations and wealthy individuals, and change regulations for the health care industry. It will also change the way that businesses can make money, including the ability to deduct research and experimental expenditures.
Under the new tax laws, the amount of income that is tax deductible should not exceed a certain amount. The current limit for a tax-deferred exchange is $500,000 for a single taxpayer. For couples filing jointly, this limit jumps to $1 million. Any gains above the limit are taxable during the year of transfer.
The new tax laws will also impact how small businesses can make money. For example, if you run a restaurant, your business meals are tax-deductible. However, you need to keep in mind that the deduction for business meals will go from 50% to 100% for 2021-2022. The new law also allows businesses to use the same deduction as restaurants.
In addition to these tax changes, the Green Book does not include any proposals to reduce the estate tax exemptions or to increase the rates. It also does not include any changes to the step-up in basis rule or to eliminate the valuation discounts for passive assets. This is good news for those who want to avoid paying taxes after they pass away.
Another change to the tax code is the introduction of the new tax credit. Foreign companies that provide services to Korean customers should now report their income to the Korean government. The tax credit is capped at KRW 1 million per year and is available to those who earn income through this type of business. The new tax law will also increase the capital gains exemption threshold from KRW 900 million to KRW 1.2 billion. If you run a business, this new tax law will affect your profits in 2022.
In addition to the new federal tax law, several states will also make tax law changes in 2022. The most significant state tax changes will occur at the start of the calendar year. Individual income and corporate income tax rates will change. Sales tax laws will change as well. In New Mexico, for example, the hybrid sales tax will be reduced from 5.125 percent to 5.0 percent, and Indiana will enact a 15 percent wholesale tax on vapor products.
Non-GAAP metrics related to the pandemic
A company must present its non-GAAP financial measures in a way that is meaningful and reasonable for investors to understand its situation. This should be done by demonstrating how the change impacts the company’s financial position. As such, companies should clearly disclose how these metrics have been affected by the pandemic.
Non-GAAP measures remove the impact of one-time expenses and show performance in a way that official accounting rules do not capture. The most commonly used non-GAAP metric is Earnings Before Interest, Taxes, and Depreciation (EBITDA). Some companies are adjusting their EBITDA to take into account the impact of the pandemic.
Although non-GAAP measures are considered non-GAAP, they are subject to SEC rules on the disclosure of financial information. According to the SEC, non-GAAP measures can include amounts that are not comparable to a comparable GAAP measure. In addition, if the company discloses them publicly, they may be subject to liability under SEC regulations.
Non-GAAP metrics related to the pandemonium can be misleading. These measurements exclude certain non-recurring charges and gains that should be added back to earnings. The resulting adjusted metric may not be meaningful to investors if the company does not explain why these expenses are non-recurring and should be excluded.
The SEC’s Division of Corporation Finance has made it clear that non-GAAP metrics related to the pandemmic are not acceptable. It is also clear that adjusting revenue to the pandemic is an inappropriate measure. The company should disclose only the non-GAAP metric that is most closely comparable.
In addition to adjusting for the impact of the pandemic, companies should also consider the impact on their revenue, including the revenue that would have occurred in the absence of the pandemic. If these costs exceed revenues, companies should be more cautious. In addition, they must disclose their costs associated with the pandemic in a separate disclosure.
