There are various accounting standards employed in the United States. These standards are upheld and enforced by various agencies and government parastatals. Keeping all of the information relating to these agencies in line can be daunting in most cases. The knowledge of these standards, their operations, and the agencies in charge of implementing them impact the success of any business.
This article discusses the Accounting Standard Updates for 2021. The idea is to provide information that will help businesses stay compliant with these standards in the 2021 fiscal year and stay afloat in the coming years.
What are Accounting Standard Updates (ASU)?
Accounting Standard Updates provide information regarding accounting standards in the United States. They reveal changes to FASB (Financial Accounting Standards Board) codes within a specified period. Apart from that, an update can summarize all of the projects that served as a run-up to the particular standard update.
Also, in the instance where there are changes to the FASB codification, an update will also explain the rationale behind such changes, informing adherents of the paths to take in order to steer clear of running afoul of the law. It is important to note that regardless of the primacy that individuals or corporations may place on updates, they are not regarded as authoritative sources of information in their own right. They simply serve as guidelines.
A Brief History of the Accounting Standard Updates?
Generally, two sets of accounting standards govern accounting in the United States. One set governs public businesses while the other regulates privately owned businesses. The distinction between the two is important as two separate agencies govern the two standards, known as Governmental Accounting Standards Board (GASB) and Financial Accounting Standards Board (FASB) respectively.
The FASB was established in 1973 and has the mandate of establishing accounting standards and policies for public companies and Nonprofit Organizations in the United States. It is overseen by the Financial Accounting Foundation (FAF). To ensure compliance with international best practices, FASB follows Generally Accepted Accounting Principles (GAAP).
Despite the acclaimed fantastic work FASB did since its inception in 1973, there were complaints in some quarters that the standards it set did not sufficiently cover local and state governmental agencies. This led to the inception of the Governmental Accounting Standards Board (GASB) in 1984. Thus, while GASB sets standards for government agencies, both state and local, FASB does the same for public companies and nonprofits.
However, the two agencies share some striking similarities. For one, the FAF oversees both agencies. Also, the two agencies are composed of experts that set up the standards and enforce them. Apart from a slight jurisdictional issue that arose a decade after both agencies were created, the two agencies have managed to run smoothly, with each managing its area comfortably.
Accounting Standards Update for 2021
Below is a breakdown of the accounting standards updates for entities in the United States beginning from January 2021.
ASU 2021-01 – Reference Rate Reform. Issued January 7, 2021
The amendments discontinue the London Interbank Offer Rates (LIBOR) and poise towards adopting transaction-based rates that are less susceptible to manipulations. This reform covers all the entities that have derivative instruments that use an interest rate for activities, including margin, discounting, or contract price alignment. These activities will need to have been modified due to the reference rate reform. The amendments were issued with effect immediately.
ASU 2021-02 – Franchisors (Revenue From Contracts with Customers). Issued January 28, 2021
The amendments permit franchisors that are not publicly listed businesses to differentiate the cost of services rendered to franchisees prior to the franchisee’s opening from the franchise license purchased by the franchisee. Therefore, this amendment affects every non-public business that falls under the category of a franchisor. A business is considered a franchisor if it sells its rights of business operation to another entity that will operate the business in a different location.
ASU 2021-03 – Goodwill and Other (Issued March 30, 2021)
This amendment allows private companies and nonprofits to escape the rigors of evaluating and monitoring goodwill impairment triggering events. Rather, they are only required to report the occurrence of these events at the end of an accounting period. This, therefore, saves these businesses the crushing cost of evaluating the exact cause and cost of these goodwill impairment triggering events. However, entities who have elected the accounting alternative to write off goodwill can still perform an evaluation of triggering events at the end of an accounting period.
ASU 2021-04 – Debt Modification and Extinguishments (Issued May 3 2021)
This amendment offered a comprehensive adjustment to how the effect of debt modification should be evaluated. The FASB documented a full detail of this update. In summary, however, it clarifies the effect of an equity’s modification to be the difference between the fair market value of its current form from the fair market value of its previous state before the modification. In this update, stock options were mainly discussed as the debt instrument although it encompasses all other debt instruments and corporate equities.
This year’s Accounting Standards Updates were crafted to serve as directions for businesses to make appropriate plans and informed decisions. They smoothen the bumpy accounting standards to allow private and not-for-profit companies to navigate the rapidly changing post-pandemic markets with relative ease. We believe that controllers should stay up to date so as to enjoy the full benefits of benevolent industry standards.
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