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Year-end toolkit: Accounting and reporting reminders for 2025 · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_01: Hello, and welcome to PWC's Accounting Podcast and Happy 2025.
• 0:13
  SPEAKER_01: I'm Heather Horn, and today we're continuing our year-end toolkit series that will run throughout January, bringing you a range of topics designed to help you through the year-end close process.
• 0:24
  SPEAKER_01: Even if you're not currently at year-end or directly involved in the close, we think you'll find something in the series for everyone is that information is foundational to all finance teams.
• 0:34
  SPEAKER_01: Today we bring you an episode on year-end accounting and reporting reminders and timely insights with some of the top technical leaders from our national office.
• 0:43
  SPEAKER_01: Covering a variety of accounting and reporting topics, from segments to revenue to financing transactions, and many, many things in between, this episode is your one-stop shop for year-end.
• 0:54
  SPEAKER_02: Like registrants, right?
• 0:56
  SPEAKER_02: They're required to disclose these critical accounting estimates in MDNA.
• 0:59
  SPEAKER_02: And critical accounting estimates are really those areas that include a significant level of estimation uncertainty.
• 1:05
  SPEAKER_02: And they have to have an material impact on the financial statements, right?
• 1:08
  SPEAKER_02: And so there's a variety of areas where this can happen.
• 1:10
  SPEAKER_02: It can happen for goodwill impairments, PP ⁇ impairments, it could happen litigation estimates and income tax uncertainties, right?
• 1:16
  SPEAKER_02: So when you disclose the critical accounting estimates, it's really important to make sure you discuss the nature of the assumptions, the methodologies used, and the potential variability that can happen in the outcomes.
• 1:33
  SPEAKER_01: That was Beth Paul.
• 1:34
  SPEAKER_01: He's joined by Brett Julie and Pat Gerbin, each deputy chief accountants in our national office.
• 1:40
  SPEAKER_01: And I'm excited to announce that Kyle Moffitt's back as the guest host for the series.
• 1:45
  SPEAKER_01: Kyle's PwC's National Office Professional Practice Group Leader, and he brings his own perspective to some of these issues.
• 1:52
  SPEAKER_01: With that, let's kick off 2025 and start the episode.
• 1:57
  SPEAKER_05: Thank you for joining me today for this discussion, guys.
• 2:00
  SPEAKER_05: Really appreciate it.
• 2:01
  SPEAKER_05: I think we can just uh kick it off.
• 2:02
  SPEAKER_05: I thought I'd start first by talking about some of the uh, you know, certain economic conditions um and even specific events um that have occurred throughout the year and how that might impact financial reporting as companies are getting ready for year end.
• 2:16
  SPEAKER_05: You know, Beth, we'll start with you.
• 2:18
  SPEAKER_05: You know, several natural disasters um did you know took place during the year and obviously it seems to be almost a recurring thing every year.
• 2:25
  SPEAKER_05: Um some, of course, did happen in the fourth quarter, so companies need to be you know thinking about that.
• 2:30
  SPEAKER_05: Can you talk about the potential accounting considerations related to these types of events?
• 2:35
  SPEAKER_02: Yeah, certainly.
• 2:35
  SPEAKER_02: Thanks, Kyle.
• 2:36
  SPEAKER_02: I mean, natural disasters prevent unique challenges, and their accounting implications can be far reaching.
• 2:41
  SPEAKER_02: When assessing the impact, companies should think about both physical and operational effects.
• 2:45
  SPEAKER_02: For physical assets, there are three main considerations whether the assets are destroyed, whether they're damaged, or whether they're impaired.
• 2:52
  SPEAKER_02: For assets that are destroyed, they have to be written off.
• 2:54
  SPEAKER_02: For assets that are damaged, you got to write them down.
• 2:57
  SPEAKER_02: And for other assets, you have to think about the nature of the cash flows and whether those continue to be recovered.
• 3:02
  SPEAKER_02: And so you think about when you have a disaster, is my factory up and running?
• 3:07
  SPEAKER_02: Maybe it is, but maybe my customers are not buying.
• 3:09
  SPEAKER_02: Maybe my supply chain's been disrupted and I've got increased costs.
• 3:12
  SPEAKER_02: And so my projected cash flows have changed.
• 3:15
  SPEAKER_02: And therefore, I need to think about have I triggered the need to do an impairment test for my PPE?
• 3:20
  SPEAKER_02: It's also important to remember that different assets have different impairment tests.
• 3:23
  SPEAKER_02: So always make sure you're thinking about that appropriately.
• 3:25
  SPEAKER_05: So the the other point there, and and I just want to make sure we capture this, is the should companies be thinking about even the revisions to the useful lives of some of those assets as well?
• 3:36
  SPEAKER_05: You know, if you're potentially, right?
• 3:38
  SPEAKER_02: Yes.
• 3:38
  SPEAKER_02: I mean, and sometimes sometimes we have impairment triggers, we don't end up having an impairment, but we also think about the useful life in those situations as well.
• 3:44
  SPEAKER_02: So I think that's a great point.
• 3:46
  SPEAKER_02: The other thing that we often see, right, when you have those assets that are damaged and destroyed is you know, what kind of insurance do you have?
• 3:52
  SPEAKER_02: And so when we think about insurance, there's two models there's a loss recoverability model and a gain contingency model.
• 3:59
  SPEAKER_02: And so when we have things like PPE, we're usually in the loss recoverability model.
• 4:03
  SPEAKER_02: So that means when we've written down or written off the asset, we've got a loss in the PL, we're able to record that receivable for insurance when it's probable and we know the amount we're gonna get.
• 4:14
  SPEAKER_02: And so we do record that though limited to the amount of the asset.
• 4:18
  SPEAKER_02: So let's say you had insurance for property and casualty and it had a fair value instead of a replacement cost, you're gonna write down just your cost.
• 4:26
  SPEAKER_02: That excess above that that you're entitled to, you're gonna wait to record that under the gain contingency model.
• 4:31
  SPEAKER_02: And the gain contingency model is a realized or realizable model.
• 4:34
  SPEAKER_02: So realized is cash in hand, realizable is the insurance company said, This is what I'm gonna pay you, and this is the amount, and then you can record it.
• 4:40
  SPEAKER_02: Same thing with business interruption.
• 4:42
  SPEAKER_02: There's often different types of business interruptions.
• 4:44
  SPEAKER_02: So it's always careful, you know, make sure you're thinking about it appropriately.
• 4:47
  SPEAKER_02: There's lost, like profits and revenue.
• 4:50
  SPEAKER_02: Those are gonna follow the gain contingency model I just talked about.
• 4:53
  SPEAKER_02: But sometimes people have business interruption that covers ongoing costs.
• 4:56
  SPEAKER_02: So maybe I've got idle employees or rent for you know facilities that aren't being used.
• 5:01
  SPEAKER_02: If I've got losses in the PL because I'm recording those expenses, I'm following the loss recoverability model for those.
• 5:06
  SPEAKER_02: Whereas the revenue, like I said, those are usually not recorded as a loss, if you will, in the PL.
• 5:11
  SPEAKER_02: And so you're in the gain contingency model.
• 5:13
  SPEAKER_02: And then certainly when you have these areas, right?
• 5:15
  SPEAKER_02: I've just touched on a couple of areas, disclosure is gonna be key, right?
• 5:17
  SPEAKER_02: Because other things can be impacted.
• 5:19
  SPEAKER_02: Maybe your customers have been impacted and you've got Cecil items.
• 5:22
  SPEAKER_02: You just really want to think about disclosures on all of the impacts related to the disasters and any uncertainties you have.
• 5:28
  SPEAKER_02: And certainly for those, you know, you started by saying these seem to be a more regular occurrence, for those that are really impacted by climate risks, such as energy companies and agriculture, you're gonna want to make sure you've got those risk factors appropriately updated as well.
• 5:40
  SPEAKER_05: I think that's a great point, right?
• 5:42
  SPEAKER_05: As we think about, you know, even the SEC's climate rule that they put you know put out there, adopted, it's you still have the obligation, irrespective of whether that applies or not, you have the obligation in your disclosures under GAAP to provide disclosures detailing all this.
• 5:58
  SPEAKER_05: I think it's very important to highlight that, whether it's climate or anything, any other condition.
• 6:04
  SPEAKER_05: Brett, I'll I'll turn to you for the next topic.
• 6:07
  SPEAKER_05: And obviously, as we think about the economic times, you know, there's a lot of discussion about interest rates, certainly inflation.
• 6:15
  SPEAKER_05: Inflation has been um up in the U.S., it's been up around the globe.
• 6:18
  SPEAKER_05: Can you talk a little bit about what that means for inflationary economies under U.S.
• 6:22
  SPEAKER_05: GAAP?
• 6:23
  SPEAKER_03: Yeah, like you mentioned, a number of countries around the globe have been seeing increasing inflation over the past several years, and there are financial reporting impacts to it.
• 6:32
  SPEAKER_03: Um this determination is important in the accounting literature because if a country's cumulative inflation rate over a three-year period exceeds 100 percent, that country is deemed to be highly inflationary under U.S.
• 6:44
  SPEAKER_03: GAAP.
• 6:45
  SPEAKER_03: What that means is uh for foreign entities in a highly inflationary economy, you must use a reporting currency as the functional currency for that entity.
• 6:55
  SPEAKER_03: So for most U.S.
• 6:57
  SPEAKER_03: companies, that reporting currency is going to be the U.S.
• 6:59
  SPEAKER_03: dollar.
• 7:00
  SPEAKER_03: So in 2024, uh we published that Nigeria and Egypt have recently reached that threshold, and so calendar year-end companies would start to use the reporting currency, the U.S.
• 7:12
  SPEAKER_03: dollar, uh, for those foreign operations uh effective in the fourth quarter.
• 7:17
  SPEAKER_03: There's a couple takeaways, I think, from this topic in general.
• 7:21
  SPEAKER_03: One, there is a clear qualit or quantitative test under U.S.
• 7:25
  SPEAKER_03: GAP.
• 7:26
  SPEAKER_03: It doesn't incorporate views about uh future projections or what you think is going to happen in the near term uh with inflation in those economies.
• 7:33
  SPEAKER_03: It's a it's a quantitative test.
• 7:36
  SPEAKER_03: And there's a quick turn to making these changes.
• 7:39
  SPEAKER_03: Uh reporting currency must be used in the reported period after the threshold has been met.
• 7:44
  SPEAKER_03: And so companies have a relatively short period of time to implement that change.
• 7:48
  SPEAKER_03: It starts the next quarter.
• 7:50
  SPEAKER_03: Uh and so I encourage people to look ahead and plan ahead.
• 7:54
  SPEAKER_03: The Center for Auto Quality publishes a document a couple times a year with good information and data that for countries that are trending high.
• 8:02
  SPEAKER_03: And so if you've got operations in these countries that are on, I call it the watch list, it's important to start monitoring these watch list countries, start to prepare your own data sources to calculate the inflation rate, and then be ready to implement those changes should the threshold be met.
• 8:17
  SPEAKER_05: That's great.
• 8:18
  SPEAKER_05: Uh great reminders there, Brett.
• 8:20
  SPEAKER_05: You know, switching gears to another topic that continues to be a topic of conversation, I think, every year, certainly is this year, um, and that's the the tax, the regulatory landscape.
• 8:30
  SPEAKER_05: And and Pat, this is the first year where companies have live Pillar two taxes to deal with.
• 8:35
  SPEAKER_05: Can you quickly recap for our listeners what they should be thinking about heading into year end?
• 8:40
  SPEAKER_04: Sure.
• 8:41
  SPEAKER_04: And I I think probably everyone is aware that broadly the OECD Pillar two framework is designed to harmonize the international tax landscape and essentially requiring multinational companies to pay a minimum level of tax, 15%, in each jurisdiction where they operate.
• 8:59
  SPEAKER_04: And obviously, that has to be then implemented in legislation in all the territories that the OECD member countries are responsible for.
• 9:07
  SPEAKER_04: So it's not just an automatic thing, it has to be implemented.
• 9:10
  SPEAKER_04: And we have seen a number of countries in 2024 uh come online, particularly in Europe and some other uh more significant territories around the world, but there's still a ways to go in terms of actual implementation of the legislation.
• 9:24
  SPEAKER_04: And the way in which the law is implemented is really what will potentially have the impact.
• 9:30
  SPEAKER_04: There's several different ways you can get at this 15%.
• 9:32
  SPEAKER_04: One is just a qualified domestic minimum tax, or what they call a QDMTT, in those territories.
• 9:39
  SPEAKER_04: But there's a couple of others that have more of a cross-border field to them, where it's called the income inclusion rule, where sort of any downstream subsidiary would be subject to that tax in the country where the legislation's passed, or the undertaxed profits rule, where it can actually result in tax being due to, again, that country where the legislation is passed for income earned by perhaps even like a sister subsidiary in another territory.
• 10:06
  SPEAKER_04: So the important thing to keep in mind is that even if you don't have significant operations in a territory that has implemented the Pillar 2 legislation, if that territory has implemented an income inclusion rule or the under-tax profits rule, you could potentially still have operations that are subject to that minimum tax just by association with that jurisdiction, you know, having an intermediate holding company or something like that in that jurisdiction.
• 10:34
  SPEAKER_04: And I guess the one other point I'd make here is I think a lot of the feedback we've been hearing is that perhaps in this initial year, and maybe just because not all the countries are online yet, that a lot of people have concluded the actual tax exposure from Pillar 2 at this point is not significant or maybe not even material.
• 10:52
  SPEAKER_04: But I do think it's really important that you have a handle on how are you capturing the data.
• 10:57
  SPEAKER_04: The computations themselves are pretty complex, and this is only going to increase as more countries come online.
• 11:03
  SPEAKER_04: So just making sure you have a handle on those processes and controls coming out of 2024 will be important.
• 11:09
  SPEAKER_05: Thanks.
• 11:10
  SPEAKER_05: Anything else that companies should be thinking about in the tax base?
• 11:13
  SPEAKER_04: Well, probably not for this year end in particular, but I do think we expect 2025 will be a pretty busy year for U.S.
• 11:20
  SPEAKER_04: tax legislation with the change in administration.
• 11:22
  SPEAKER_04: And then also in 2025, we will have at the end of the year for calendar year companies the uh implementation of the FASBE's new disclosure standard on income tax accounting, which includes a lot of additional disclosures.
• 11:37
  SPEAKER_04: So I think one of the things we've been recommending is maybe as you're coming out of the 2024 reporting cycle, perhaps while you have the information, everything's fresh, that you start kind of doing a dry run of that new FASBE standard and maybe a great idea.
• 11:52
  SPEAKER_04: You know, start socializing inside the organization some of that additional information that's going to end up in the footnotes, particularly around different countries, different movers of the effective rate, some of those things that haven't been publicly available before.
• 12:06
  SPEAKER_05: Great, great points there, Pat.
• 12:07
  SPEAKER_05: Um so let's go ahead and turn to some of our you know other year-end reminders.
• 12:12
  SPEAKER_05: And Beth, I know you you had a reminder about close calls on impairments or even other accounting estimates as as I kind of think about these topics myself.
• 12:20
  SPEAKER_05: There, these are certainly areas that investors and even the SEC will be expecting clear disclosures.
• 12:25
  SPEAKER_05: You can you talk a little bit about the Yeah, sure.
• 12:27
  SPEAKER_02: Like registrants, right?
• 12:29
  SPEAKER_02: They're required to disclose these critical accounting estimates in MDNA.
• 12:32
  SPEAKER_02: And critical accounting estimates are really those areas that include a significant level of estimation uncertainty.
• 12:38
  SPEAKER_02: And they have to have an material impact on the financial statements, right?
• 12:41
  SPEAKER_02: And so there's a variety of areas where this can happen.
• 12:43
  SPEAKER_02: It can happen for goodwill impairments, PPE impairments, it could happen litigation estimates and income tax uncertainties, right?
• 12:49
  SPEAKER_02: So when you disclose the critical accounting estimates, it's really important to make sure you discuss the nature of the assumptions, the methodologies used, and the potential variability that can happen in the outcomes.
• 13:01
  SPEAKER_02: And here I think auditors play a role as well, because auditors in their audit report have to disclose critical audit matters, sometimes called CAMS for short, right?
• 13:10
  SPEAKER_02: And these often overlap with your critical accounting estimates.
• 13:14
  SPEAKER_02: And so companies really want to make sure they're aligned and they're having those discussions early with their auditors.
• 13:19
  SPEAKER_02: And they also want to note that this is an area of frequent SEC staff comment, and especially the disclosures here, but also elsewhere in the filing and making sure you're not kind of including overly optimistic assumptions as it relates to these items without sort of clear support.
• 13:34
  SPEAKER_05: Yeah, I think the as I think about this space, right, it's it's one where obviously the SEC is very focused on it.
• 13:43
  SPEAKER_05: You know, I think you know investors say that they look at that information as well.
• 13:46
  SPEAKER_05: And I think the feedback to the SEC over the years has been that it's an area that that you know investors find very useful and important.
• 13:54
  SPEAKER_05: So I think it's a good reminder for for people really to take a step back, right, and and think about those estimates and reflect, update, uh, update those disclosures every year.
• 14:03
  SPEAKER_05: And obviously all these economic conditions and things that are going on are going to impact it.
• 14:08
  SPEAKER_05: So um I think a great reminder there.
• 14:10
  SPEAKER_05: Um always take a fresh look at those disclosures.
• 14:13
  SPEAKER_05: Um, Pat, I'll turn to you.
• 14:15
  SPEAKER_05: As one of our national office experts on revenue recognition, I know you spent a lot of time uh analyzing operating contracts, especially in the revenue and procurement space.
• 14:23
  SPEAKER_05: Um, any thoughts there?
• 14:25
  SPEAKER_04: Well, I do spend a lot of time in revenue, but as you know, inventory is really my favorite topic, Kyle, right?
• 14:30
  SPEAKER_04: I do, I do.
• 14:31
  SPEAKER_04: I thought I thought I'd uh throw you an inventory reminder.
• 14:34
  SPEAKER_04: Yeah.
• 14:35
  SPEAKER_04: So um and one of the things we have seen a little bit more, and and hard to say if it's kind of just general supply chain disruption, just cost of financing, right, being uh persistently high lately.
• 14:47
  SPEAKER_04: We've started to see more in the space of what I would call inventory or product financing arrangements, where there's some third party out there who's essentially functioning like a procurement agent for a company, but sort of um offering to you know go and work directly with the company suppliers, buy the inventory, sort of hold it until the company needs it.
• 15:12
  SPEAKER_04: And I think the sort of the business motivation here is maybe we can keep working capital off of our balance sheet.
• 15:20
  SPEAKER_04: I would say generally speaking, a lot of those arrangements end up being some sort of financing arrangement.
• 15:26
  SPEAKER_04: It's effectively just, you know, borrowing uh to procure inventory.
• 15:30
  SPEAKER_04: Um so I just say proceed with caution there.
• 15:34
  SPEAKER_04: There's some specific guidance in uh ASC 470-40 on product financing arrangements, but I think even if you look at the substance of some of these arrangements, they're really more akin to debt than just sort of uh an agreement to have somebody help you um with your procurement cycle.
• 15:50
  SPEAKER_05: No, that's that's definitely a bit of a sleeper issue, but I think it's a good one.
• 15:54
  SPEAKER_05: Um and certainly wasn't expecting to leave with that.
• 15:56
  SPEAKER_05: So, you know, any anything else in the revenue space that the company should be thinking about.
• 16:00
  SPEAKER_04: Yeah.
• 16:00
  SPEAKER_04: So uh another one that I think we're seeing uh maybe again, it's a little bit of a pitfall or uh trap, if you will, is embedded leases.
• 16:09
  SPEAKER_04: Um, and that can show up in contract manufacturing type arrangements.
• 16:13
  SPEAKER_04: Either way, you know, this is one that could affect both the you know person selling or the person buying, or in some of these as-a-service arrangements, uh, more likely than for the person procuring the service, but potentially could also be a consideration for the person providing the service.
• 16:30
  SPEAKER_04: And that's when, for whatever reason, the nature of the arrangement is such that the output or the delivery of the service depends primarily on a single asset or you know, some uh set of integrated assets.
• 16:44
  SPEAKER_04: And so you could end up in a situation concluding there's a specified asset, then you have to get into the lease considerations and figure out if there's a uh transfer of control of that asset to sort of the counterparty, which would kick you into the leasing guidance.
• 16:58
  SPEAKER_04: The more significant differences are probably gonna be when you're the sort of buyer slash you know recipient of the uh of the service, you're gonna have probably a you know potential right-of-use asset and a lease liability to recognize.
• 17:11
  SPEAKER_04: The timing of your PL recognition can change.
• 17:14
  SPEAKER_04: Um, so it's important to pay attention in both of those contexts to whether or not the arrangement contains a lease.
• 17:21
  SPEAKER_04: And and this is one where there is a lot of judgment potentially, particularly when you start assessing like who really has the ability to direct the use of the asset, which is kind of the key criterion around control.
• 17:32
  SPEAKER_04: So documenting some of those key judgments is going to be important as well.
• 17:36
  SPEAKER_04: And maybe one final one on revenue, um, and maybe not the traditional kind of consideration payable to a customer, like we usually think of like incentives or discounts or maybe payments on behalf of a customer.
• 17:50
  SPEAKER_04: It really is in the space of disputes with customers and maybe disputes that rise to the level of even some sort of litigation or arbitration or threatened litigation.
• 18:01
  SPEAKER_04: Um, I think there's a tendency sometimes to view those as well, those are now legal issues.
• 18:07
  SPEAKER_04: If I have to make a payment to the customer, it's just some sort of a legal expense and I move on.
• 18:13
  SPEAKER_04: I think the reality is if your relationship with that party is as a customer and you make a payment to them, I think you generally have to run that through the consideration payable to a customer framework in ASC 606.
• 18:26
  SPEAKER_04: And if you're not getting anything in return, in most cases, that means you should report that payment as a reduction of revenue rather than as an expense.
• 18:35
  SPEAKER_04: So it's the relationship between the parties rather than the event, if you will, that gives rise to the payment that's important.
• 18:42
  SPEAKER_04: And lastly, and I know we've talked a lot about this one in other forums, is contract modifications.
• 18:47
  SPEAKER_04: Um, you know, that's another area where we have a very specific framework now and gap for how to evaluate those.
• 18:54
  SPEAKER_04: I think the natural intuition sometimes is to think, well, if there's a payment associated with the modification, that's usually intended to kind of reset the economics.
• 19:04
  SPEAKER_04: I'll just kind of take that to the PL, either, you know, as a debit or as a credit, depending on which way it's going, and then we'll sort of be reset going forward.
• 19:13
  SPEAKER_04: That, as we've talked before, is not how the modification framework generally works.
• 19:17
  SPEAKER_04: And in most cases, that payment will get applied to the ongoing arrangement.
• 19:22
  SPEAKER_04: So you'll have sort of prospective recognition of that payment, either as additional revenue or as reduction of revenue.
• 19:29
  SPEAKER_03: And Pat, I think the complexities around those types of modifications aren't limited to revenue arrangements.
• 19:35
  SPEAKER_03: We see this similar dynamic uh with lease modifications, for example.
• 19:39
  SPEAKER_03: Uh we're seeing a number of lessees in the market who are looking at their real estate needs and they're just downsizing uh their real estate space, uh.
• 19:51
  SPEAKER_03: Similar in the revenue space, I think the accounting can get complex.
• 19:55
  SPEAKER_03: Um think through an example where you have a company that's leasing five floors in an office building, all under one lease contract.
• 20:03
  SPEAKER_03: Um it decides it doesn't need two of the floors, so it negotiates a termination agreement to leave two floors early and it's gonna pay a termination fee.
• 20:12
  SPEAKER_03: Um they're gonna leave 30 days after signing that agreement, and the remaining floors, three floors, though, remain unchanged.
• 20:19
  SPEAKER_03: Both lessees and lessors often think of this as a termination of the two floors, and you know, maybe I should just reduce the lease liability by removing 40 percent of the future payments, two out of the five floors, and take the adjustment through the lease liability and the ROU asset.
• 20:36
  SPEAKER_03: Um they'd also expect to expense that termination penalty uh when the modification is agreed to.
• 20:42
  SPEAKER_03: But if you followed that framework, you would be wrong.
• 20:45
  SPEAKER_03: Uh because even though it's only ending the lessee thinks it's only ending its use to use the whole two floors, under the lease model, the change is assessed at the whole contract level, all five floors.
• 20:57
  SPEAKER_03: And it's determined to be a modification because it's all part of just one single master lease.
• 21:03
  SPEAKER_03: That's the case for both lessees and lessors.
• 21:05
  SPEAKER_03: And so what that means as a modification is that all payments, including that termination payment, are consideration allocated to all contract components, and it's actually going to be recognized over the entire lease term.
• 21:16
  unknown: Trevor Burrus, Jr.
• 21:17
  SPEAKER_05: So to recap, the the termination penalty is not 100 percent expensed with the termination of those two floors, and the entire lease liability has to be remeasured.
• 21:27
  SPEAKER_05: Any other kind of restructuring of contracts that we have been seeing lately?
• 21:32
  SPEAKER_03: Yeah, we also see a lot in the in the debt space and liabilities, um, specifically syndicated debt restructurings.
• 21:39
  SPEAKER_03: This is where a company issues uh new syndicated debt, you know, debt among a number of uh lenders, usually banks, and they use those proceeds to repay existing syndicated debt.
• 21:52
  SPEAKER_03: And this has always been an area where preparers that preparers consider really complex, and we always get a lot of questions.
• 21:58
  SPEAKER_03: The first reminder I give people.
• 22:00
  SPEAKER_03: Is that legal form is not the driver of the accounting.
• 22:03
  SPEAKER_03: You look at the substance over the form.
• 22:05
  SPEAKER_03: And these arrangements, often new debt is issued and old debt is legally paid off.
• 22:10
  SPEAKER_03: But the debt restructuring guidance has to be assessed for any lenders that were in the old debt that come over to the new debt.
• 22:17
  SPEAKER_03: We call them rollover lenders.
• 22:19
  SPEAKER_03: And so then in these arrangements, you need to do a lender-by-lender assessment because some lenders will be these rollover lenders they remain in, but other lenders get paid off entirely and new lenders can come in.
• 22:32
  SPEAKER_03: So when doing this whole analysis, you start with a troubled debt restructuring assessment.
• 22:38
  SPEAKER_03: If a company is experiencing financial difficulties, you may need to go down a whole path, a whole separate path than I'm talking about here.
• 22:45
  SPEAKER_03: But if it's not a TDR, then you use what we call this 10% test to determine whether that modification is going to be accounted for as a modification or is an extinguishment.
• 22:56
  SPEAKER_03: This 10% test is a test of whether the future cash flows under the new arrangement are more than 10% different than the cash flows under the old arrangement.
• 23:06
  SPEAKER_03: And in doing this 10% test, there's a few areas that we often see missed in an initial evaluation.
• 23:13
  SPEAKER_03: First is whether it's a cash principal change when doing the 10% test.
• 23:18
  SPEAKER_03: You know, lenders often increase or decrease their principal balances in the new debt.
• 23:22
  SPEAKER_03: You need more financing or less.
• 23:25
  SPEAKER_03: And that principal change must be included in the 10% test as a day one new debt cash flow.
• 23:31
  SPEAKER_03: The second is considering prepayment options and specifically overlooking a prepayment option because most syndicated debt in the market is variable rate and is actually prepayable at any time.
• 23:43
  SPEAKER_03: And so these prepayment features need to be looked at when I'm doing the cash flows under my new debt and the old debt under the 10% test.
• 23:51
  SPEAKER_03: If both the old debt and the new debt are prepayable, it's usually best to start by assuming immediate prepayment of the debt when doing the 10% test, because that's the scenario where you're going to get the smallest change and looking for the smallest change is what U.S.
• 24:06
  SPEAKER_03: GAAP requires.
• 24:07
  SPEAKER_03: And so if you can get to under a 10% change in that scenario, you can stop.
• 24:11
  SPEAKER_03: It's going to be a modification.
• 24:13
  SPEAKER_05: So the one thing to kind of layer in there, and I think you probably have seen it a lot.
• 24:18
  SPEAKER_05: I know I've seen it a lot, at least in the last like year or two, significant uptick in the staff looking at these modifications and issuing comments, asking a lot of pointed questions.
• 24:28
  SPEAKER_05: So I think it it's great for companies really to be thinking and being mindful of these points, because it it this is an area that they're always it's always been a favorite area.
• 24:40
  SPEAKER_05: I used to issue comments on it all the time.
• 24:41
  SPEAKER_05: I imagine you see a lot of staff comments right now on this topic.
• 24:46
  SPEAKER_03: Sure.
• 24:47
  SPEAKER_03: The good news is that there may be some relief in sight from this, from all this complexity.
• 24:52
  SPEAKER_03: In November, uh the FASBE just added a project to its technical agenda to address these syndicated uh debt transactions.
• 24:59
  SPEAKER_03: And they've made some tentative uh conclusions that would dramatically simplify the accounting in this area.
• 25:05
  SPEAKER_03: Uh expect uh exposure draft on this uh probably in early 2025.
• 25:10
  SPEAKER_03: And like I say, I think that'll be welcome relief, but companies will want to make sure to comment on it.
• 25:14
  SPEAKER_03: Yeah, absolutely.
• 25:15
  SPEAKER_05: Stay tuned uh for more details on on that ED.
• 25:18
  SPEAKER_05: So that's very helpful, Brett.
• 25:19
  SPEAKER_05: Um lot lots to be thinking about as it relates to contract modifications, from you know, both from what Pat covered um as well as what you just uh mentioned, Brett.
• 25:28
  SPEAKER_05: Um you know, it's obviously similar in that it's something you need to be monitoring.
• 25:31
  SPEAKER_05: You know, then it's different in that the accounting guidance differs depending on which guidance is applicable, but certainly um something to always have at top of mind um when there is a restructuring.
• 25:41
  SPEAKER_05: Um, any other areas that you wanted to touch on, Brett?
• 25:44
  SPEAKER_03: Yeah, I wanted to talk about capital raising uh transactions uh because we've seen a continued uh high number of difficulties that clients have in determining the appropriate accounting for everyday capital raising transactions and non-controlling interest that are created in business combination transactions.
• 26:03
  SPEAKER_03: I think we see that investor appetites continue to involve or continue to evolve, and we see increasing involvement of private equity and private credit, and that has increased the complexity of the instruments.
• 26:16
  SPEAKER_03: We see a lot more very bespoke negotiations of key terms and provisions than we had seen in um in past years.
• 26:24
  SPEAKER_03: What we see investors focused on are getting things um preferential terms in the event of a liquidation, uh often seeking participation in common stock appreciation, and also looking at the ability and seeking the ability to exit or monetize uh their investments either at specific points in time or over time.
• 26:43
  SPEAKER_03: And we find that many reporting entities start to underestimate the accounting complexities that can result when they enter into certain types of these arrangements.
• 26:51
  SPEAKER_03: First of all, they tend to be non-recurring transactions, right?
• 26:54
  SPEAKER_03: They don't tend to be something that a company is doing every month and gets very used to the arrangements themselves and also the literature.
• 27:03
  SPEAKER_03: But also the accounting standards uh for these arrangements, both balance sheet classification, subsequent measurement, and EPS, is very complex.
• 27:12
  SPEAKER_03: Uh US GAAP doesn't have an integrated model to look at for all of these capital raising transactions.
• 27:18
  SPEAKER_03: And so effectively we have a collection of a number of standards issued over a number of years that dealt with very specific instruments and issues at the time without reassessing a holistic framework.
• 27:32
  SPEAKER_03: And so we've seen we see situations that reporting entities get surprised by the accounting for transactions, even including the issuance of common shares or preferred equity or non-controlling interest, also warrants for the purchase of common or preferred equity, and sometimes even debt transactions.
• 27:50
  SPEAKER_03: In these complexities, I start with balance sheet classification.
• 27:53
  SPEAKER_03: You know, determining that classification is more complex than you realize.
• 27:58
  SPEAKER_03: When an entity issues equity shares, for example, preferred stock, common stock, or non-controlling interest, those shares could be classified as liabilities in some cases.
• 28:10
  SPEAKER_03: They could be temporary or mezzanine equity for SEC registrants, or they could be what we refer to permanent equity, you know, the classic uh classification of equity.
• 28:21
  SPEAKER_03: And I think when dealing with instruments other than issued shares, for example, contracts to issue shares such as warrants, that accounting analysis becomes even more complex.
• 28:31
  SPEAKER_03: And often those instruments are these liability classified instruments that need to be measured at fair value through earnings.
• 28:38
  SPEAKER_03: In a lot of cases, the balance sheet classification is going to impact subsequent measurement.
• 28:42
  SPEAKER_03: It's not just a day one analysis.
• 28:45
  SPEAKER_03: So think of in addition to contracts to issue shares like warrants, instruments classified as liabilities and mezzanine may need to be remeasured over time and can also have earnings impacts as well as EPS impacts.
• 28:59
  SPEAKER_03: What makes this area complex, I think, for companies is that the distinctions between the contracts and the drivers of these different accounting classifications can be very nuanced.
• 29:12
  SPEAKER_03: Oftentimes there are provisions that are remote of being exercised.
• 29:16
  SPEAKER_03: They may not have a huge amount of economic value, but because of the accounting framework we have, they can have impacts on the accounting.
• 29:24
  SPEAKER_03: And also, you can't just stop at the title or the legal form of the issuance.
• 29:30
  SPEAKER_03: Sometimes instruments are titled or labeled in a manner that's inconsistent with the underlying economics.
• 29:36
  SPEAKER_03: Something may be labeled a preferred stock, but actually when you dig into it, it has no preference rights at all, maybe peripassue with common shares.
• 29:44
  SPEAKER_03: So you really have to dig into the arrangement and understand what's going on.
• 29:47
  SPEAKER_03: And I wish we could stop at balance sheet classification, but but it's just a starting point, even for equity classified instruments.
• 29:54
  SPEAKER_03: And like dig into mezzanine equity, for example.
• 29:58
  SPEAKER_03: If the mezzanine equity shares are redeemable currently or probable of becoming redeemable, they need to be subsequently be remeasured.
• 30:06
  SPEAKER_03: And it's not consistent with the with the instrument.
• 30:09
  SPEAKER_03: If they're currently redeemable, they must be recorded at that redemption price.
• 30:14
  SPEAKER_03: If they're probable of becoming redeemable, but not yet redeemable, you've got a policy option.
• 30:20
  SPEAKER_03: You can either immediately adjust that carrying value to the redemption price each period, or you can accrete to that redemption value using an effective interest rate method over time.
• 30:30
  SPEAKER_03: And all of these accretions, whether they're, you know, however they're determined, are considered to be deemed dividends.
• 30:38
  SPEAKER_03: And so then we go over to EPS implications.
• 30:40
  SPEAKER_03: Because you can have an EPS adjustment to income available for common shareholders for both basic and diluted EPS.
• 30:48
  SPEAKER_03: And the amount of that adjustment is going to, and the nature of it is going to depend on whether the measurement equity are preferred or common.
• 30:56
  SPEAKER_03: So go back to that classification discussion I just had.
• 31:00
  SPEAKER_03: And you need to understand because the EPS impact is going to be different depending on whether these are counted for as preferred or common.
• 31:07
  SPEAKER_03: If in the form of preferred shares, you're always going to have an EPS adjustment.
• 31:11
  SPEAKER_03: All that accretion will adjust EPS.
• 31:14
  SPEAKER_03: But if in the form of common shares, you need to think about the nature of that redemption provision and whether it's at fair value or other than fair value.
• 31:23
  SPEAKER_03: If it's at fair value, there's actually no EPS impact because there's a view that if a common share is being redeemed at fair value, it's kind of not a right that's different than any than any shareholder has.
• 31:36
  SPEAKER_03: But if it's not at fair value, if it's at a predetermined price or a calculated price, then there is an EPS impact.
• 31:44
  SPEAKER_03: And that area is actually very complex, and there's a lot of policy decisions that that need to be made.
• 31:50
  SPEAKER_03: So I boil all that back.
• 31:52
  SPEAKER_03: What's the message for our listeners?
• 31:55
  SPEAKER_03: First, get an expert involved.
• 31:57
  SPEAKER_03: Don't do this alone the first time by yourself.
• 32:00
  SPEAKER_05: And you said at the beginning, right?
• 32:02
  SPEAKER_05: These are non-routine transactions, right?
• 32:04
  SPEAKER_05: So as you were kind of going through that, I was sitting here and thinking to myself, how do you recap that, right?
• 32:09
  SPEAKER_05: Like it's it's a lot to go through.
• 32:11
  SPEAKER_05: And I think the complexities there really, to your point, highlight the need to involve people early, right?
• 32:19
  SPEAKER_05: Early before, okay, now we've already accounted for it.
• 32:22
  SPEAKER_05: And then you know, you start to look and say, okay, this is just wrong.
• 32:26
  SPEAKER_05: Um, because the lat the impacts, the downstream impacts, right, even on EPS uh need to be evaluated.
• 32:32
  SPEAKER_05: Um so definitely an area you don't want to go at it alone.
• 32:34
  SPEAKER_05: Um so so one one area, Brett, that that I just kind of wanted to talk to you a little bit about, um, also a statement of cash flows, and we've heard from the SEC, it's been an area of focus.
• 32:44
  SPEAKER_05: You know, obviously Paul Munter um has has made a number of statements on it.
• 32:48
  SPEAKER_05: I think his he stated publicly his preference is the direct method.
• 32:51
  SPEAKER_05: Uh are you gonna tell me that the direct method is your preference as well?
• 32:54
  SPEAKER_05: Or any any reminders uh or things that companies should be thinking about this show.
• 32:58
  SPEAKER_03: I'm not gonna get into personal views on the direct method here.
• 33:01
  SPEAKER_03: Um we don't see it very often in practice.
• 33:04
  SPEAKER_03: Um I I will I will say that.
• 33:06
  SPEAKER_03: Um But you know, we keep talking about cash flow issues.
• 33:10
  SPEAKER_03: Um we talk about them on podcasts, webcasts, um, we've updated our guide for them.
• 33:15
  SPEAKER_03: It continues to be a difficult area.
• 33:18
  SPEAKER_03: Um maybe a couple things to mention.
• 33:21
  SPEAKER_03: I often talk about when you're dealing with a transaction, deal with a transaction and flow it all the way through to the cash flow statement.
• 33:28
  SPEAKER_03: So we talked about debt restructurings.
• 33:30
  SPEAKER_03: I'll follow my own example and I'll say that in a debt restructuring, the borrower often uses an investment bank to facilitate all of those cash flows.
• 33:39
  SPEAKER_03: So you have a transfer agent that collects the proceeds from a new debt issuance, repays the original debt on the borrower's behalf, and the borrower only receives this net difference between the proceeds received and the amounts paid.
• 33:52
  SPEAKER_03: So, for example, the new debt proceeds were a million dollars, the old debt repaid at$800,000, the borrower just receives the$200,000.
• 34:00
  SPEAKER_03: And since the agent is moving cash on the borrower's behalf, the borrower should apply what we call the constructive receipts and disbursements concept.
• 34:09
  SPEAKER_03: So all cash that the transfer agent receives should be reflected in the cash flow statement as if it was received or paid directly by the borrower.
• 34:17
  SPEAKER_03: So in my example, it's not appropriate for the borrower just to record a financing inflow for that net amount of$200,000.
• 34:25
  SPEAKER_03: The borrower should look through to the agent to determine the cash flows and again look at a lender-by-lender basis.
• 34:32
  SPEAKER_03: And there may be a financing inflow from new lenders, there may be a financing outflow from old lenders that exit the new debt.
• 34:41
  SPEAKER_03: And then you've got these rollover lenders where you've just got to determine is it accounted for as a modification or as an extinguishment.
• 34:49
  SPEAKER_03: And that cash flow statement presentation is going to depend on your accounting for the transaction.
• 34:54
  SPEAKER_03: Again, it's helpful to see an example.
• 34:57
  SPEAKER_03: We have a good one in our financial statement presentation guide, Chapter 6, that has all the full details.
• 35:03
  SPEAKER_05: Love the plug.
• 35:04
  SPEAKER_05: I love the plug.
• 35:05
  SPEAKER_03: I always get the plug in.
• 35:06
  SPEAKER_03: That's got that's got a good example in there to go through those details.
• 35:09
  SPEAKER_05: Great, great.
• 35:10
  SPEAKER_05: Um any other cash flow reminders?
• 35:12
  SPEAKER_03: Aaron Powell I'll give I'll give one other um, and that's uh an area that's been coming up lately with presenting cash collected on behalf of others.
• 35:21
  SPEAKER_03: It's very common in fintech companies, uh.
• 35:24
  SPEAKER_03: But we're also seeing other types of companies just starting to collect cash on behalf of their customers.
• 35:28
  SPEAKER_03: And so we're getting more of these of these questions on these types of transactions.
• 35:33
  SPEAKER_03: The common transaction we see is where a company is facilitat payments between two parties for the sale of goods or services.
• 35:40
  SPEAKER_03: Maybe they're operating an app to do this uh with some technology, and the entity is going to earn a fee for the service.
• 35:47
  SPEAKER_03: So when the cash is collected, a liability for the amount to be paid to that other party is set up, and when cash is dispersed to that other party, the liability is relieved.
• 35:57
  SPEAKER_03: The balance sheet is relatively simple.
• 35:59
  SPEAKER_03: On the cash flow statement, you know, the fee earned uh actually impacts net income, and so any cash received for that fee is classified in operating cash flows.
• 36:09
  SPEAKER_03: The question comes up and what do you do with these amounts that impact the liability?
• 36:14
  SPEAKER_03: Our view is that these cash flows should be generally presented as financing transactions.
• 36:19
  SPEAKER_03: The company is receiving cash that has to be repaid in the future, albeit to a different party, that's akin to a borrowing.
• 36:26
  SPEAKER_03: In some cases, netting could be appropriate to net those inflows and outflows because the cash flow guidance has some netting provisions in them if the cash is collected and be as required to be repaid within 90 days of receipt.
• 36:40
  SPEAKER_03: But look at that netting guidance and then consider your actual contractual obligations.
• 36:45
  SPEAKER_05: So we will have a full cash flow podcast that's gonna come out this month.
• 36:50
  SPEAKER_05: And I know you're getting to more detail on these topics and much more.
• 36:54
  SPEAKER_05: Um certainly look forward to that.
• 36:56
  SPEAKER_05: The the last category that I wanted to touch on is standard setting.
• 37:01
  SPEAKER_05: And Beth, you've been awfully quiet over here, so I want to I'm gonna turn back uh to you.
• 37:05
  SPEAKER_05: Um you know, the the new segment reporting standard is probably one of that is the most impactful, or at least the ones that that I think you, your team, I'm even getting a lot of questions on.
• 37:15
  SPEAKER_05: But um any reminders, um things companies should be thinking about uh for the for the year end.
• 37:20
  SPEAKER_02: Yeah, I mean, what's new is there's a number of new disclosure requirements, right?
• 37:24
  SPEAKER_02: The the actual fundamental principles of how you determine your operating segments and what they are and whether you can aggregate, those haven't changed.
• 37:32
  SPEAKER_02: But the new disclosures do require a lot of judgment.
• 37:34
  SPEAKER_02: So, right, there's a couple of that are more challenging than others.
• 37:38
  SPEAKER_02: Certainly the first disclosure requirement, maybe not too challenging, but you have to disclose the title and position of your CODM.
• 37:44
  SPEAKER_02: But then when we get into the new expense disclosures, those are an area where there's going to be some judgment, right?
• 37:50
  SPEAKER_02: So you have to disclose significant segment expenses.
• 37:53
  SPEAKER_02: So these are expenses that meet three criteria.
• 37:56
  SPEAKER_02: They're significant to the segment's operations, they're regularly provided or easily recomputable from information that the CODM is provided, and they are included in the segment measure of profit or loss.
• 38:09
  SPEAKER_02: So when we think about that, let's always take a little quick example.
• 38:12
  SPEAKER_02: If the measure of profitability is gross margin and the expense provided to the CODM regularly is research and development, well, that expense is not in gross margin.
• 38:23
  SPEAKER_02: It's sort of below that line.
• 38:24
  SPEAKER_02: And so we don't need to disclose that.
• 38:26
  SPEAKER_02: However, if my segment measure of profitability is, you know, a segment operating income, then RD is in that, and I will need to disclose that.
• 38:34
  SPEAKER_02: I also need to think about, you know, is it significant, the expense itself, right?
• 38:39
  SPEAKER_02: And so I think about that in context of the overall expenses for the segment.
• 38:44
  SPEAKER_02: I think about it as it relates to the company.
• 38:48
  SPEAKER_02: So I do have to kind of go through that analysis.
• 38:51
  SPEAKER_02: I also have to think about whether or not the information is regularly provided.
• 38:57
  SPEAKER_02: And so that's an area that we get questions on, right?
• 38:59
  SPEAKER_02: And so, you know, the standard itself uses regularly provided in other areas.
• 39:05
  SPEAKER_02: So today you need to disclose things like depreciation expense and income tax expense if they're regularly provided.
• 39:11
  SPEAKER_02: And so we have a framework, right?
• 39:13
  SPEAKER_02: We're we're starting with what information does the CODM get, and then we're saying if that information is in there, we need to think about disclosing those significant expenses.
• 39:22
  SPEAKER_02: And then the last thing we really need to think about with the new standard is this multiple measures concept.
• 39:27
  SPEAKER_02: So maybe it was debatable whether under the old standard you could have multiple measures, but I think there was a long-standing view that you couldn't.
• 39:34
  SPEAKER_02: And so the new guidance is very clear that you can provide multiple measures of segment profitability.
• 39:40
  SPEAKER_02: If you want to do that, you need to be cautious of a couple of things.
• 39:43
  SPEAKER_02: So you're not required to.
• 39:49
  SPEAKER_02: But if you want to include multiple, you need to be careful whether or not those additional metrics are non-gap measures.
• 39:56
  SPEAKER_02: And so, for instance, you know, if you're disclosing um, you know, operating income in EBITDA, EBITDA is not calculated in accordance with gap.
• 40:03
  SPEAKER_02: It's a second measure.
• 40:04
  SPEAKER_02: So therefore it's non-gap because it's not required to be disclosed in the standard.
• 40:08
  SPEAKER_02: And so what you're gonna need to do is also follow reg G and item 10E.
• 40:14
  SPEAKER_02: And those disclosures require, you know, information about why it's being used, how it's being calculated, and a reconciliation to a GAP measure.
• 40:22
  SPEAKER_02: So if you had EBITDA for you know segment X, you're then gonna need to disclose a reconciliation of EBITDA for segment X to net income for segment X.
• 40:31
  SPEAKER_02: And we do recommend those types of disclosures are outside of the financial statements.
• 40:36
  SPEAKER_02: So you know, put those in MDNA because they're not required by the ASC280 or the segment standard.
• 40:41
  SPEAKER_02: And so really they belong probably elsewhere, is probably the best place to put them.
• 40:45
  SPEAKER_02: So there's clarity around that.
• 40:47
  SPEAKER_02: I think that really the questions that we're getting, just to kind of level set, are really around though the significant expenses.
• 40:55
  SPEAKER_02: I think that is the area we're seeing the most questions.
• 40:58
  SPEAKER_02: And I think that's because companies really are questioning like this recomputable nature and like what that means.
• 41:05
  SPEAKER_02: The standard has sort of the two examples, you know, gross margin.
• 41:09
  SPEAKER_02: And so you can recompute cost of goods sold.
• 41:11
  SPEAKER_02: It has for the FS companies not to be left out, you know, um, if you have net interest margin, you should, you know, think about the components of interest income and interest expense.
• 41:20
  SPEAKER_02: Um, you know, but sometimes that's not so clear, like even the cost of goods sold one, right?
• 41:25
  SPEAKER_02: If your gross margin is in total, but you've got revenue by product and revenue by service, you know, services, then you don't really have one cost of goods sold number, you have two.
• 41:34
  SPEAKER_02: But if you only have one margin number, maybe it's not recomputable.
• 41:37
  SPEAKER_02: Um, there are other issues in that notion that people are thinking through.
• 41:41
  SPEAKER_02: And then I think this notion of significant is is causing people consternation, right?
• 41:45
  SPEAKER_02: Like, you know, the standard itself, though, I just want to caution people, does start with that presumption that's significant segment expense or that segment expenses are significant, right?
• 41:56
  SPEAKER_02: If the CODM got them.
• 41:57
  SPEAKER_02: And so there is that presumption, you can overcome it, um, but it is going to require a lot of analysis as to why it's appropriate to overcome it.
• 42:05
  SPEAKER_02: I think the one that we've seen in practice that maybe is the easiest is, you know, let's say RD expense is given for one segment because it's material, but then, you know, the way the pack was put together, that expense has been shown for all the segments, but is quite, you know, de minimis or maybe not as relevant.
• 42:20
  SPEAKER_02: That might be a way to get over it.
• 42:22
  SPEAKER_02: But in most instances, I think you want to start with that presumption.
• 42:25
  SPEAKER_05: Any so you were talking previously about an additional measure.
• 42:29
  SPEAKER_05: Uh have we seen companies?
• 42:31
  SPEAKER_05: I I know that that early on, I think I heard a lot of companies were like, we're not, we're just not going to do an additional measure.
• 42:37
  SPEAKER_05: And I and I've also heard some considering it, but I've not seen it or seen anyone opt to do it.
• 42:43
  SPEAKER_05: Um, what are you hearing?
• 42:45
  SPEAKER_05: What are you expecting to see?
• 42:47
  SPEAKER_05: Do you do you think you'll see we'll see a good number of companies that are disclosing an additional measure of profit or loss?
• 42:53
  SPEAKER_02: Or you know, you you never know, but I I do think that at least based on the discussions we're having, most companies are going to stay with just sort of a single measure of segment profit or loss.
• 43:02
  SPEAKER_02: Yeah.
• 43:02
  SPEAKER_05: Yeah.
• 43:02
  SPEAKER_05: I mean, and I know I know you've talked to the SEC about this issue too a a number of times.
• 43:07
  SPEAKER_05: So it certainly is an area companies need to be paying attention to.
• 43:10
  SPEAKER_05: And um we obviously have a lot of material out there.
• 43:13
  SPEAKER_05: So and Brett, you were talking previously about our financial statement presentation guides, but we also have this information.
• 43:18
  SPEAKER_05: We we published um some thought leadership in this space.
• 43:21
  SPEAKER_05: So encourage folks to look at that.
• 43:24
  SPEAKER_05: Um, we've talked a lot about segments, we've talked about a lot of topics.
• 43:28
  SPEAKER_05: Um, Pat, I want to turn to you and talk about the new disclosures uh for supplier finance program obligations.
• 43:35
  SPEAKER_04: Sure.
• 43:35
  SPEAKER_04: And I would put this one back squarely in the category of maybe year-end reminders.
• 43:39
  SPEAKER_04: Uh I feel like we've had some pretty uh deep, deep content here.
• 43:42
  SPEAKER_04: But this one's one that may be a little bit uh off the radar and maybe for good reason, but it's on supplier finance obligations.
• 43:50
  SPEAKER_04: And maybe just to distinguish from what we were talking about earlier with some of these product financing obligations, you know, that's more on the, I'll say on the front end where before the entity.
• 44:00
  SPEAKER_04: Receive the goods there may be involving an intermediary that's sort of stepping in, providing some sort of financing.
• 44:07
  SPEAKER_04: This is a case where I've gone and procured my goods from my suppliers, and I've got some facility.
• 44:14
  SPEAKER_04: We sometimes refer to them as structured payables programs.
• 44:17
  SPEAKER_04: The FASB calls them supplier finance obligations.
• 44:20
  SPEAKER_04: The standard was actually issued back in 22.
• 44:23
  SPEAKER_04: Some of the disclosures kicked in in last year end's reporting cycle.
• 44:27
  SPEAKER_04: So you had to describe kind of the nature of the program, some of its terms, and you did have to disclose the amount of obligations you had subject to these arrangements.
• 44:37
  SPEAKER_04: The new disclosure requirement that kicks in for the first time this year is a roll forward of those obligations from the beginning of the period to the end of the period.
• 44:47
  SPEAKER_04: So the new borrowings that were taken out, the amounts that were repaid, and then the borrowings at the end of the year.
• 44:53
  SPEAKER_04: So just sort of a reminder that that's out there effective for the first time for this year-end cycle.
• 44:58
  SPEAKER_05: Yeah, and I guess it's just important to also highlight that you really can't be ignoring the future standards, right?
• 45:05
  SPEAKER_05: So there will be new standards effective in 2025 and beyond.
• 45:10
  SPEAKER_05: Companies still need to evaluate and think about potential impacts there.
• 45:13
  SPEAKER_05: And so there's there's kind of this uh the comment we typically see the staff issue regarding staff accounting bulletin 74, which requires disclosure of the impact of the recently issued accounting standards to have on the financial statements when adopted in a future period.
• 45:27
  SPEAKER_05: So um those material impacts must be disclosed to the extent they're material, obviously.
• 45:33
  SPEAKER_05: And and look, some some of these standards are you know footnotes, requirements, disclosure only.
• 45:39
  SPEAKER_05: Um may not warrant SAP 74 disclosures, but it's still something to evaluate and consider.
• 45:44
  SPEAKER_05: Um so I'll turn to each of you, and I'll start with you, Beth, and and then kind of go to Brett and then Pat um and ask each of you to respond to this.
• 45:52
  SPEAKER_05: As we focus, you know, on kind of 2025 and beyond, you know, 2025 is right around the corner.
• 45:59
  SPEAKER_05: Anything that you want to draw our listeners' attention to?
• 46:02
  SPEAKER_02: Yeah, I mean, I'll start.
• 46:03
  SPEAKER_02: You mentioned SAB 74.
• 46:04
  SPEAKER_02: So certainly the FASB did issue a new standard on accounting for certain crypto intangible assets, and that's effective in 25 for calendar year on companies.
• 46:12
  SPEAKER_02: Although you can early adopt it, and there are some companies that are considering early adopting it here in the fourth quarter of 24.
• 46:18
  SPEAKER_02: But for those that are, you know, looking forward, this is an area where SAB 74 might be important because what the new standard does is that certain in-scope crypto assets will now be recorded at fair value with sort of that mark to mark at each period.
• 46:32
  SPEAKER_02: And if we think about the recent run-up in Bitcoin, which would be in scope of this new standard, um, that could have pretty sizable impacts in the PL.
• 46:41
  SPEAKER_02: Um, certainly the the first run-up will be in your QM catch, but then that volatility will be running through the PL.
• 46:47
  SPEAKER_02: If you're wondering, hey, I have some of these cryptos or do I have some of these cryptos, like what's in scope?
• 46:52
  SPEAKER_02: To be in scope of the new standard, you have to be in an intangible asset.
• 46:57
  SPEAKER_02: So certain stable coins would be out of scope because certain stable coins, and I'm careful there to say certain, but certain do provide a right to a financial asset, so they'd be out of scope.
• 47:06
  SPEAKER_02: But if you have an intangible asset, it's fungible.
• 47:09
  SPEAKER_02: So NFTs are probably out of scope because again, not fungible, but fungible.
• 47:13
  SPEAKER_02: They reside on a distributed ledger on a blockchain or similar technology, but they use cryptographic technology to encrypt them.
• 47:21
  SPEAKER_02: And they don't give the asset holder an enforceable right or claim to an underlying goods, service, or other asset.
• 47:28
  SPEAKER_02: And then finally, they're not created or issued by the reporting entity, right?
• 47:31
  SPEAKER_02: So you can't create your own crypto, have it out there trading, and start market-to-market through your PL.
• 47:37
  SPEAKER_02: But if you meet those six criteria or that the intangible that you have meets those six criteria, then you will start to market-to-market that next year.
• 47:44
  SPEAKER_02: And that will be material for certain entities.
• 47:46
  SPEAKER_03: Absolutely.
• 47:47
  SPEAKER_03: Right.
• 47:47
  SPEAKER_03: You know, in the areas I cover, um we don't have a lot of significant issued standards that would be subject to SAB 74.
• 47:56
  SPEAKER_03: I'd point readers to or listeners to the agenda.
• 48:00
  SPEAKER_03: There's a lot of financial instrument topics coming out in 2025, from derivatives to um some Cecil amendments and others that'll that'll be important to a lot of companies.
• 48:10
  SPEAKER_03: But all of those um will be exposed are either exposure drafts already or will be exposure drafts in 2025.
• 48:16
  SPEAKER_03: Okay?
• 48:17
  SPEAKER_04: Yeah, I guess we we touched on the income tax disclosure standard a little bit earlier.
• 48:22
  SPEAKER_04: Um, if we talk about SAB 74, I mean to your earlier point, disclosure only.
• 48:26
  SPEAKER_04: I mean, there is a lot of work potentially involved in pulling the standard together, but not really something that you'd expect to have a material impact on the company's financial position, results of operations, et cetera.
• 48:35
  SPEAKER_04: But as we mentioned earlier, I think getting a head start on that, particularly kind of socializing inside the organization, some of that new information that's going to be out in the public domain, making sure anybody who's involved in sort of the investor communication space or perhaps even broader public relations folks understand, you know, there may be questions about, you know, countries oper companies' operations in certain countries, you know, that level of transparency.
• 49:00
  SPEAKER_04: Um and then the the big standard, there's a little bit more of a horizon on this one.
• 49:04
  SPEAKER_04: It's not required to be implemented until 2027, but it's the disaggregated income statement expense standard, or what we sometimes uh shorten to DICE.
• 49:14
  SPEAKER_04: Um, that has gotten quite a bit of airplay.
• 49:17
  SPEAKER_04: There will be quite a bit of work involved in implementing that standard.
• 49:21
  SPEAKER_04: So again, not for this year-end cycle, but certainly something I think you want to get a head start on to sort of identify: do I have the ability to gather all the information I need?
• 49:30
  SPEAKER_04: Where is it?
• 49:31
  SPEAKER_04: Do I have the right systems and processes and controls in place to uh or identify the gaps that I may need to close before I'm ready to implement in in 2027?
• 49:41
  SPEAKER_05: Well, that's uh that's that's a lot to think about, a lot to digest.
• 49:45
  SPEAKER_05: I think um as as we kind of as we move forward, we'll obviously have a lot of of commentary, thought leadership on that project or you know the final standard.
• 49:55
  SPEAKER_05: So um, and obviously, you know, it's gonna evolve over time, but should be uh it's gonna be a heavy lift, as you said, for a lot of companies.
• 50:02
  SPEAKER_05: So um just to close things out, in any final words of of wisdom you each want to give our listeners before uh they head into year end?
• 50:11
  SPEAKER_03: Aaron Powell Maybe I'll I'll start.
• 50:12
  SPEAKER_03: I talked about some non-recurring or unusual transactions and maybe struck some fear or or boredom into people.
• 50:20
  SPEAKER_03: Um I would go I would go think about going back and inventoring those, whether they're really complex or whether they're, on the face of it, simple.
• 50:27
  SPEAKER_03: Transactions that you don't normally see that that are non-recurring, and make sure you have the right expertise in place, the right controls in place, and always you know flow that all the way through the cash flow statement and make sure that's considered as well.
• 50:41
  SPEAKER_04: Yeah, I guess from from my side, uh I would say just make sure you've really focused on some of these arrangements that might contain embedded leases, uh, make sure you've thought about any significant contract modifications, that you've gotten that you know framework applied correctly.
• 50:56
  SPEAKER_04: Um, you know, sort of that's you know kind of your last shot, if you will.
• 51:00
  SPEAKER_04: Um, and then a couple of disclosures we talked about again, not for this year end, but just sort of you know getting an early head start on those as we head into uh 2025.
• 51:09
  SPEAKER_04: Beth, you have the final word.
• 51:11
  SPEAKER_02: I I'd probably pick up on what Brett said, right?
• 51:13
  SPEAKER_02: He he talked about really engaging with experts on your non-recurring or unusual transactions.
• 51:19
  SPEAKER_02: I'd say also get your auditors involved early, right?
• 51:22
  SPEAKER_02: Because really, these are going to be the areas when they're unusual, they usually have significant estimation or they're just very complex.
• 51:29
  SPEAKER_02: Um, you might be seeing them for the first time.
• 51:31
  SPEAKER_02: And so really having that dialogue early as opposed to close to the filing deadline will will make that process much more efficient and effective.
• 51:40
  SPEAKER_05: Well, Beth, Brett, Pat, thank you all.
• 51:44
  SPEAKER_05: Um, really appreciate you spending the time.
• 51:46
  SPEAKER_05: And and I know we have a lot of great content for our listeners um as they head into year end.
• 51:51
  SPEAKER_05: Thank you.
• 51:51
  SPEAKER_05: You're welcome.
• 51:52
  SPEAKER_05: Thanks for having us.
• 51:53
  SPEAKER_01: Thanks.
• 51:54
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• 52:16
  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
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