For years, there was talk of converging U.S. Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting Standards (IFRS). While the formal convergence project lost steam about a decade ago, Financial Accounting Standards Board (FASB) Chair Richard Jones assured stakeholders at a recent Financial Accounting Foundation meeting that convergence discussions are still regularly taking place behind the scenes.

Working together

Multinational companies have routinely asked for converged solutions for U.S. and international accounting rules. They often complain that it’s expensive to implement two sets of rules. Plus, it’s difficult to compare companies that follow different accounting standards, and convergence would improve comparability globally. The FASB’s website says, “More comparable standards have the potential to reduce costs for both users and preparers of financial statements and make worldwide capital markets more efficient.”

Most countries around the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting regulators to use global accounting standards.

In 2007, the Securities and Exchange Commission (SEC) allowed foreign companies to report under IFRS without reconciliation to U.S. GAAP. A year later, the SEC floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies. Then the financial crisis hit, and U.S. interest in IFRS waned.

In 2012, the SEC released a much-awaited report on IFRS in the United States. However, the report described the challenges of adopting IFRS, rather than making recommendations on whether international accounting standards should be used for domestic companies.

Current projects

A decade later, informal meetings continue between U.S. and international accounting rulemaking bodies. FASB Chair Jones and his counterpart on the International Accounting Standards Board (IASB) meet quarterly to discuss ways to improve the quality of accounting standards used around the world and reduce differences among those standards.

Jones provided two specific examples of convergence projects currently in the works: rate regulation and government grants. The IASB proposed Exposure Draft No. 2021-1, Regulatory Assets and Regulatory Liabilities, last year to replace International Financial Reporting Standard (IFRS) 14, Regulatory Deferral Accounts. Meanwhile, the FASB published Invitation-to-Comment (ITC) No. 2022-002, Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles, in June 2022. The FASB is currently considering comment letters it received on the ITC.

Minimizing differences, maximizing value

While there might never be a one-size-fits-all global financial reporting solution, many businesses operate in more than one country. So, it’s beneficial for the standard-setting bodies to align the rules as much as possible. Doing so improves comparability and lowers compliance costs. Contact us for help implementing the appropriate standards based on where you do business.

Timely, accurate financial information is essential to running a successful business. There are a number of accounting methods you can use to record and track your business’s financial performance. Here’s an overview of cash, tax and accrual basis accounting to help you choose a method that’s appropriate for your situation.

Cash basis

Often startups and sole proprietorships default to the cash method of accounting because it’s simple and provides an immediate picture of available funds. This may suffice for small businesses with uncomplicated financial affairs.

Under cash-basis accounting, you record transactions only when money changes hands. While this record keeping is easy, it can be challenging to get an accurate picture of your business’s financial situation. This method also isn’t suitable for tax purposes.

Telltale signs that a company is using cash-basis accounting can be found on the balance sheet: The company won’t report any accrual-basis items, such as accounts receivable, prepaid assets, accounts payable or deferred expenses.

Tax basis

Another financial reporting option is to use the same accounting method for book and tax purposes. Under tax-basis accounting, you only record transactions when they relate to tax.

This method can be helpful for companies that want to minimize their tax liability. It can also be beneficial if your business doesn’t have complex financial affairs and you don’t need up-to-date information about your financial situation.

Accrual basis

As your business grows and has more sophisticated financial reporting needs, you may decide to transition to the accrual method of accounting. Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) must use accrual-basis accounting. GAAP is considered by many to be the “gold standard” in financial reporting. Most lenders and investors prefer statements prepared using this method because it’s the most reliable for long-term financial planning and decision-making purposes.

Under accrual-basis accounting, revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (not necessarily when they’re paid). This methodology matches revenue to the corresponding expenses in the proper period. Compared to the cash and tax methods, the accrual method helps you more accurately evaluate growth and profit margins over time and against competitors.

Using the accrual method also can help you manage cash flow. For example, with more timely financial data, you can negotiate payment terms with suppliers, plan for significant expenses and forecast future cash needs.

What’s right for your business?

Choosing the right accounting method for your business depends on your financial needs and accounting skills. Some businesses use a hybrid approach incorporating elements from two or more methods. The method you’ve used in the past may not be appropriate for your current situation. Contact us to help you find the optimal approach.

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What do Tesla cars, smart TVs and equipment used for making french fries have in common? The answer is embedded software, according to recent comments by Financial Accounting Standards Board (FASB) Vice Chair James Kroeker. He also told the Private Company Council that today’s mixed accounting model for software costs is outdated and should be modernized under one model.

Here’s an update on the FASB’s project to revamp the rules for recognizing, measuring, presenting and disclosing software costs. The project is based on feedback from companies that find the current rules complex and costly.

Applying the existing guidance

There are two main areas of U.S. Generally Accepted Accounting Principles (GAAP) that provide accounting guidance for software costs. To determine how to account for software costs, a company first must evaluate which area of GAAP applies. The guidance that a company must follow is largely dependent on how a company plans to use the software.

Specifically, when a company determines that it has a substantive plan to sell, lease or otherwise market software externally (including licensing), it’s required to account for the software costs as external use. In this situation, Accounting Standards Codification Subtopic 985-20, Software — Costs of Software to Be Sold, Leased, or Marketed, would be applied.

Conversely, if a company doesn’t have such a substantive plan in place when software is under development, it’s required to account for the software costs incurred to develop or purchase software as internal use. In this situation Subtopic 350-40, Intangibles — Goodwill and Other — Internal-Use Software, would be applied.

The guidance for internal-use software is generally applied to hosting arrangements by both the vendor that’s incurring costs to develop the hosting arrangement for customers (such as software-as-a-service) and the customer incurring costs to implement the hosting arrangement. However, Subtopic 985-20 applies to hosting arrangements in which 1) a customer has a contractual right to take possession of the software at any time during the hosting period without significant penalty, and 2) it’s feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

Designing a one-size-fits-all approach

The ultimate goal of the FASB’s project on reporting software is to align the differing accounting models for external and internal use. If the project takes shape as planned, companies will no longer have to distinguish between two sets of guidance. Instead, they’ll apply a single model for all software. That means everyone would follow the same model, regardless of whether they purchased software as a license, entered into a cloud computing arrangement, or developed internal software, licenses or cloud solutions.

However, there’s little consensus now on how that model would work. Approaches currently being researched by FASB staff include:

• Requiring software costs to be capitalized based on a principle such as when there’s a present right to the economic benefit as a result of incurring the software costs,
• Requiring software costs to be capitalized if they’re undertaken during certain development activities, and
• Expensing all software costs, including cloud computing.

Members of the Private Company Council gave mixed views on which approach they favored, reflecting the difficulty the FASB could ultimately face on the topic. Some financial statement preparers prefer a principles-based approach, while others said they like the idea of expensing software costs as there’s no true prediction of its future useful life.

Stay tuned

This project is currently in the deliberation phase. No proposals have yet been issued, but the FASB plans to discuss this topic in the coming months.

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