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During 2021, the (FASB) continued to gather feedback and perform outreach activities to make improvements to and reduce the complexity of its guidance. The following is a summary of the 10 different Accounting Standards Updates (ASUs) issued in 2021 and their effective dates.

ASU 2021-01 — Reference Rate Reform (Topic 848)

Scope clarification

The FASB issued ASU 2020-04, Reference Rate Reform, in March 2020 to provide guidance and ease the potential burden in accounting upon adoption of reference rate reform. The intent of ASU 2020-04 was to provide relief to all entities that had “contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.”

As regulators and global financial markets have begun transitioning away from the London Interbank Offered Rate (LIBOR) and other reference rates that are expected to be discontinued, FASB stakeholders identified a broad population of derivative instruments that do not reference a rate that is expected to be discontinued but do use an interest rate for margining, discounting, or contract price alignment that is modified as part of the market-wide transition to new reference rates (commonly referred to as the “discounting transition”).

The amendments in ASU 2021-01 clarify the scope of Topic 848, allowing derivatives affected by the discounting transition to apply certain optional expedients and exceptions for contract modifications and hedge accounting. Exhibit 1, which you can find at the end of this article, provides a summary of the amendments to the codification included in the update.

The amendments are elective and apply to all entities with derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receivable-variable-rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are also modified as a result of reference rate reform.

The amendments in this update are effective immediately for all entities. An entity may elect to apply the amendments in this update as follows:

• On a full retrospective basis of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or
• On a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update (currently January 7, 2021), up to the date that financial statements are available to be issued.

If an entity elects to apply any of the amendments in this update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election.

The amendments in this update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022).

ASU 2021-02 — Franchisors — Revenue from Contracts with Customers (Subtopic 952-606)

Practical expedient for pre-opening services

After the issuance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), private company stakeholders in the franchise industry raised concerns about the cost and complexity of applying Topic 606 to determine the amount and timing of revenue recognition for initial franchise fees, especially for franchisors that are startups or that have a small number of franchise units.

Concerns were also raised that private company franchisors (a franchisor that is not a public business entity) would not identify performance obligations under the Topic 606 model and instead presume that pre-opening services would not be distinct from the franchise license, recognizing the initial franchise fee over the license term.

ASU 2021-02 provides a practical expedient to simplify the analysis of certain activities when determining the performance obligations in a franchise agreement. The practical expedient permits private company franchisors to account for certain pre-opening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. The pre-opening services in the guidance consist of the following:

• Assistance in the selection of a site
• Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural and engineering services, and lease negotiation
• Training of the franchisee’s personnel or the franchisee
• Preparation and distribution of manuals and similar material concerning operations, administration and record keeping
• Bookkeeping, information technology and advisory services, including setting up the franchisee’s records and advising the franchisee about income, real estate and other taxes or about regulations affecting the franchisee’s business
• Inspection, testing and other quality control programs

Additionally, the FASB provided an accounting policy election to recognize the pre-opening services as a single performance obligation.

If an entity has not yet adopted Topic 606, the practical expedient is effective for annual reporting periods beginning after December 15, 2019 and for interim reporting periods beginning after December 15, 2020, as per the existing transaction provisions and effective date in paragraph 606-10-65-1, adopted with either modified retrospective transition or full retrospective transition.

If an entity has already adopted Topic 606, the amendments in the update are effective in interim and annual periods beginning after December 15, 2020, with early application is permitted, applied retrospectively to the date that Topic 606 was adopted.

ASU 2021-03 — Intangibles — Goodwill and Other (Topic 350)

Accounting alternative for evaluating triggering events

Due to the increased complexity of private companies evaluating triggering events and measuring of goodwill impairment being caused by continuing uncertainty in the economic environment during the COVID-19 pandemic, the FASB issued this update for private companies and nonprofit entities to provide an accounting alternative for performing the goodwill impairment triggering event evaluation as required in Subtopic 350-20.

Under the current guidance in Subtopic 350-20, an entity is required to identify and evaluate goodwill impairment triggering events when they occur (during the reporting period) to determine whether it’s more likely than not that the fair value of a reporting unit (or entity, if election has been made) is less than its carrying amount. If it’s more likely that not that goodwill is impaired, the entity must test goodwill for impairment using the triggering event date as the measurement date.

The amendments in this update allow a private company or nonprofit entity to elect to evaluate the facts and circumstances at the end of the reporting period to determine whether it’s more likely than not that goodwill is impaired, instead of during the reporting period. This will result in the alignment of the triggering event evaluation date with the reporting date, whether that date is an interim or annual reporting date.

The amendments in this update are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued for made available for issuance as of March 30, 2021. An entity should not retroactively adopt the amendments in this update for interim financial statements already issued in the year of adoption.

This update also includes an unconditional one-time option for entities to adopt the alternative prospectively after its effective date without assessing preferability under Topic 250, Accounting Changes and Error Corrections.

ASU 2021-04 — Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40)

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force)

The FASB issued ASU 2021-04 in response to the diversity in practice accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange that was resulting from a lack of explicit guidance in the FASB codification.

Stakeholders requested the FASB provide guidance to clarify whether an issuer should account for a modification or an exchange of freestanding equity-classified written call option that remains equity classified after modification or exchange as 1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or 2) an expense and, if so, the manner and pattern of recognition.

An entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate for goods or services in accordance with the guidance in Topic 718, Compensation — Stock Compensation.

For a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another topic, the update provides the following guidance:

1. An entity should treat such a transaction as an exchange of the original instrument for a new instrument.
2. An entity should measure the effect of such a transaction as follows:
   1. For a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements (hereinafter, referred to as a “debt” or “debt instrument”), as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged. Specifically, an entity should consider:
      1. An increase or a decrease in the fair value of the modified or exchanged written call option in applying the 10% cash flow test and/or calculating the fees between debtor and creditor in accordance with Subtopic 470-50, Debt — Modifications and Extinguishments.
      2. An increase (but not a decrease) in the fair value of the modified or exchanged written call option in calculating the third-party costs in accordance with Subtopic 470-50.
   2. For all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged.
3. An entity should recognize the effect of such a transaction on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration, as follows:
   1. A financing transaction to raise equity. The effect should be recognized as an equity issuance cost in accordance with the guidance in Topic 340, Other Assets and Deferred Costs.
   2. A financing transaction to raise or modify debt. The effect should be recognized as a cost in accordance with the guidance in Topic 470, Debt, and Topic 835, Interest.
   3. Other modifications or exchanges that are not related to financings or compensation for goods or services or other exchange transactions within the scope of another Topic. The effect should be recognized as a dividend. For entities that present EPS in accordance with Topic 260, that dividend should be an adjustment to net income (or net loss) in the basic EPS calculation.

In a multiple-element transaction (for example, one that includes both debt financing and equity financing), the total effect of the modification should be allocated to the respective elements in the transaction.

This update is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.

ASU 2021-05 — Leases (Topic 842)

Lessors — Certain Leases with Variable Lease Payments

The FASB continues to assist with stakeholder inquiries and proactively seeks feedback on potential implementation issues that have arisen as public business entities implement Topic 842. This update is the sixth update issued to assist with implementation issues and addresses an issue related to a lessor’s accounting for certain leases with variable lease payments. It affects lessors with lease contracts that 1) have variable lease payments that do not depend on a reference index or a rate and 2) would have resulted in the recognition of a selling loss at lease commencement if classified as a sales-type or direct financing.

Under Topic 842, a lessor is not permitted to estimate most variable payments and must exclude variable payments that are not estimated and do not depend on a reference index or a rate. Those excluded variable payments are recognized entirely as lease income when the changes in facts and circumstances on which those variable payments are based occur. The net investment in the lease for a sales-type or direct financing lease with variable payments may be less than the carrying amount of the underlying asset derecognized at lease commencement, resulting in a selling loss at lease commencement even if the lessor expects the arrangement to be profitable overall.

The amendments in this update will require lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if both of the following criteria are met:

• The lease would have been classified as a sales-type lease or a direct financing lease under paragraphs 842-10-25-2 through 25-3.
• The lessor would have otherwise recognized a day-one loss.

When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset and, therefore, does not recognize a selling profit or loss. The leased asset continues to be subject to the measurement and impairment requirements under other applicable GAAP before and after the lease transaction.

Transition is either 1) retrospective to each prior period presented in the financial statements with the cumulative effect of transition recognized at the beginning of the earliest period presented or 2) retrospective to the beginning of the period of adoption with a cumulative effect of transition recognized at the beginning of the period of adoption.

Entities that have adopted Topic 842 before the issuance date of this update have the option to apply the amendments in this update either 1) retrospectively to leases that commenced or were modified on or after the adoption of update 2016-02 or 2) prospectively to leases that commence or are modified on or after the date that an entity first applies the amendments.

ASU 2021-06 — Presentation of Financial Statements (Topic 205), Financial Services — Depository and Lending (Topic 942), and Financial Services — Investment Companies (Topic 946)

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants

This ASU was issued to align SEC paragraphs contained in the codification in response to the issuance of SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.

The adopted amendments to the financial statement disclosures in Regulation S-X relate to acquisitions and dispositions of businesses, including adding Rule 6-11 to cover financial reporting for fund acquisitions by investment companies and business development companies, as well as updating the disclosures that investors receive and eliminating certain industry guide disclosure items that overlap with SEC rules and U.S. GAAP or IFRS (specifically those in Regulation S-X Rules 9-01 and 9-03).

ASU 2021-06 is effective immediately.

ASU 2021-07 — Compensation — Stock Compensation (Topic 718)

Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (a consensus of the Private Company Council)

ASU 2021-07 offers a practical expedient for nonpublic companies on determining the current price of an underlying share for equity-classified, share-based awards subject to ASC 718.

The new practical expedient allows a nonpublic entity to determine the current price input of equity-classified, share-based awards issued using the reasonable application of a reasonable valuation method. The practical expedient is not allowed for liability-classified awards.

For further details on this ASU and the characteristics of a reasonable valuation method and additional insights, read our article ASU 2021-07: Understanding new stock compensation standards.

ASU 2021-07 is effective prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for financial statements that have not yet been issued or made available for issuance as of October 25, 2021.

ASU 2021-08 — Business Combinations (Topic 805)

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

ASU 2021-08 provides guidance for acquired revenue contracts in a business combination. Under current GAAP, prior to adoption of ASU 2021-08, if you were to acquire a company that has a liability for deferred revenue on their balance sheet, that deferred revenue may not make it to the acquirer's balance sheet. That is because the way ASC 805 is currently structured (prior to 2021-08), if there is no legal obligation to provide additional services to satisfy that liability, then it is not recognized as a liability in the acquirer's books post-acquisition. Rather, it decreases goodwill. Therefore, that revenue is technically never recognized on the books of the acquiree or the acquirer. Additionally, if it is determined that a contract asset or liability should be recorded on the acquirer's books, they should be recorded at fair value on the acquisition date.

The new ASU will require the acquirer to record contract assets and liabilities on the acquisition date using topic 606 to recognize and measure these assets and liabilities, not fair value.

The FASB identified this issue after adoption of ASC 606. This ASU will align the accounting for these acquired contracts to the accounting for revenue contracts originated in the future and will provide more comparability for financial statement users when evaluating these acquisitions.

The ASU amends topic 805, and the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in an interim period. Adopting this ASU early should save time and money preparing the valuation at the acquisition date and will provide consistency in reporting and tracking these amounts with standard company policies.

ASU 2021-09 — Leases (Topic 842)

Discount Rate for Lessees That Are Not Public Business Entities

The FASB issued ASU 2021-09 to improve discount rate guidance for lessees that are not public business entities, including private companies, nonprofit organizations and employee benefit plans. The amendments in the ASU are intended to reduce the cost of implementing the lease standard (Topic 842) while retaining the expected benefits for users of financial statements.

Lessees that are not public business entities are provided with a practical expedient that allows them to make an accounting policy election to use a risk-free rate as the discount rate for all leases. This relieves those lessees from the cost and complexity of having to calculate an incremental borrowing rate.

Using a risk-free rate election for all leases can increase an entity’s lease liabilities and right-of-use assets because a risk-free rate is low compared with an expected average incremental borrowing rate. The FASB addressed this issue by allowing lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level.

When the rate implicit in the lease is readily determinable for any individual lease, the guidance still requires a lessee use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

The effective date varies for entities that have not yet adopted Topic 842 as of November 11, 2021, and those that have.

ASU 2021-10 — Government Assistance (Topic 832)

Disclosures by Business Entities about Government Assistance

The last ASU issued in 2021, ASU 2021-10 intends to increase transparency in financial reporting by requiring business entities to disclose, in notes to their financial statements, information regarding certain types of government assistance they receive. Examples of government assistance include cash grants and grants of other assets.

Business entities that receive government assistance are now required to provide annual disclosures about transactions with a government that are accounted for applying a grant or contribution model by analogy to other accounting guidance such as a grant model within FASB Accounting Standards Codification Topic 958, Not-for-Profit Entities, or International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosures of Government Assistance:

1. Information about the nature of the transactions and the related accounting policy used to account for transactions.
2. The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item.
3. Significant terms and conditions of the transactions, including commitments and contingencies.

The amendments in the ASU are effective for all entities within their scope, which excludes nonprofit entities and employee benefit plans, for financial statements issued for annual periods beginning after December 15, 2021. Early adoption is permitted.