2023 Financial Accounting Update

Highlights from Keiter’s annual fall seminar

Each year, Keiter aims to help businesses and other accounting professionals navigate through new standards and regulations. At this year’s fall seminar event, Business Assurance and Advisory Services Partner, Brett Sinsabaugh, CPA, CCA and Manager, Colin Hannifin, CPA  shared insights on some of the latest updates to accounting policies.

Current Expected Credit Losses (CECL)

The Current Expected Credit Losses (CECL) standard affects how credit losses are recognized in financial reporting. Previously, the incurred loss model was the norm. It used historical data to estimate credit losses, but this approach often delayed loss recognition, leading to inaccurately inflated balance sheets. CECL introduces a more proactive approach, focusing on expected losses, which means recognizing potential credit losses much earlier.

If your business holds financial assets like loans or lease receivables, CECL needs to be considered. New guidance suggests that losses are recognized when management expects losses, even if probability is remote and usually at recognition of the asset. Businesses need to factor in historical loss experience, current economic conditions, and reasonable and supportable forecasts about future conditions to loss estimates.

Adoption of CECL is currently in effect as of the 2023 calendar year and could impact both your balance sheet and income statement.

ASC 842: Leases

The ASC 842 accounting standard for leases first took effect in 2022. It requires lessees to represent all leases with initial terms greater than 12 months on their balance sheets. It is important to apply materiality to lease agreements and maintain an updated record of all lease agreements.

When preparing future lease negotiations, lessees should include details of renewal, purchase, and cancellation options as well as substitution rights.

Emerging ESG standards

Environmental social & governance (ESG) are emerging standards and criteria used to evaluate entities. These standards are categorized in three groups:

• Environmental: focusing on sustainability, protecting the environment, energy use, and climate change,
• Social: entity relationships with employees, suppliers, customers, and the community, and
• Governance: leadership at the board and corporate level, internal controls, and shareholder rights.

Currently, multiple sets of standards exist and more continue to be formed. European standards are leading the way for existing ESG criteria. Challenges in adopting these standards include confusing policies, liability concerns, lack of quality data, and resource limitations. These standards may become increasingly used by investment firms for corporate evaluation, so it is important to stay updated on future developments in this rapidly evolving area.

These changes may affect your financial reporting, so please reach out to your Opportunity Advisor for more guidance and to ensure accuracy and compliance.