The Financial Accounting Standards Board decided at a meeting this week to add projects to its technical agenda on private credit disclosures, the fair value measurement of equity securities subject to contractual sale restrictions, and to specify that nonrefundable transferable tax credits should be accounted for in accordance with its income taxes standard. It also plans to draft a proposed accounting standards update on the equity method of accounting.
During Wednesday's meeting, FASB made a number of decisions, according to a
"The whole issue about private investment, private credit, net asset value, fair value and the interplay between those, Rich and I have a lot of lively discussions on those," said SEC chief accountant Kurt Hohl, referring to FASB chair Richard Jones.
Jones acknowledged those topics would be discussed at the FASB meeting. "The two items that we added: private credit, which we'll actually be talking about at next Wednesday's board meeting, with some discussion related to not only disclosures in that area, understanding the difference between registered and nonregistered funds, but also an agenda request we got on restrictions on equity and how they affect investment companies, and we'll do a little education session with our board on that and some challenges there," he said. "The other item that we added was data center arrangements. Interestingly enough, we have two EITF projects, one related to power purchase arrangements and one related to consideration paid to a customer."
During the meeting, FASB board member Marsha Hunt said she supported a disclosure project related to private credit, but believes the scope should focus on those entities for which the holdings are material, such as private credit funds and business development companies. "My concern with too broad of an approach is that I always realize that when we add disclosure requirements even on immaterial items to entities, we're adding cost, so I would focus on where the disclosures that we would be incorporating would be material," she added.
She agreed with FASB board member Joyce Joseph about understanding the cash flow from private credit transactions, as well as what is paid in kind and what is paid in cash. They both support taking a "medium approach," which Jones clarified as encompassing business development companies, including those subject to SEC disclosure requirements, and private funds, which are likely not subject to SEC disclosure requirements. The "broad approach" would include funds that also have to apply the SEC's disclosure requirements but aren't BDCs.
FASB also decided to add a project to its technical agenda on the fair value measurement of equity securities subject to contractual sale restrictions. But as with the private credit project, it decided that the scope of the project would be limited to investment companies within the scope of Topic 946, Financial Services—Investment Companies.
Tax credits
On the tax credit front, FASB discussed the feedback it received on the accounting for nonrefundable transferable tax credits in response to an invitation to comment on its agenda last year. It decided to add a project to its technical agenda to specify that nonrefundable transferable tax credits should be accounted for in accordance with Topic 740, Income Taxes. However, the board decided to not provide guidance on the derecognition of nonrefundable transferable tax credits.
"I think the gating issue really is nonrefundability," said FASB board member Fred Cannon. "If it's nonrefundable, by definition that's a tax issue. That's going to be in the tax line, so it's going to stay there. I don't think transferability is the gating issue."
FASB board member Christine Botosan said she supported the staff recommendation to add the project. "I think it's really important to clarify the income statement presentation," she added.
FASB board member Hillary Salo also expressed her support. "This question has come up from technical inquiries," she said. "It came up when we were talking about the government grants project. It came up during the environmental credits project, so I think it's fair to answer the question. I think that diversity in practice, we've heard that as concerns from all different stakeholders — preparers , practitioners and investors — so I think having clear guidance that can be followed is fantastic."
Equity method of accounting
FASB also discussed feedback on making targeted improvements in the equity method of accounting and decided to require a single threshold (significant influence) for applying the equity method, regardless of the type of entity.
The board decided to make a number of improvements to the significant influence guidance in Subtopic 323-10, Investments—Equity Method and Joint Ventures—Overall. Those include changing the 20% presumptive threshold to remove the presumption that an entity does not have significant influence when it holds less than 20% of an investee. FASB also plans to amend the board of directors indicator to include functionally equivalent governing bodies, as well as add a requirement that a noncontrolling general partner (or functional equivalent) has significant influence. The board members also decided to make changes in other areas, including adding illustrative examples to Topic 323 of the Accounting Standards Codification to show a possible method that could be used to allocate equity in earnings in complex allocation structures.
The board directed the staff to draft a proposed accounting standards update for vote by written ballot and decided that the proposed update should have a 75-day comment period.
