The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (ASU 2023-06). The ASU incorporates into the Accounting Standards Codification (ASC or Codification) several U.S. Securities and Exchange Commission (SEC) disclosure requirements under Regulations S-K and S-X. The amendments in the ASU are intended to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations.
In an SEC document issued on August 17, 2018 titled, Disclosure Update and Simplification, Release No. 33-10532, the SEC asked the FASB to consider adding some of its disclosure requirements into the Codification. These requirements are similar to, but ask for more information than, generally accepted accounting principles.
The ASU incorporates into the Codification approximately half of the disclosures referred to the FASB by the SEC. They modify the disclosure or presentation requirements of a variety of Topics in the Codification. Some of the amendments represent clarifications to, or technical corrections of, the current requirements. Because of the variety of Topics amended, a broad range of entities may be affected by one or more of the amendments.
While entities should assess the applicability of each amendment in ASU 2023-06, the following enhanced disclosure requirements are likely to have a more pervasive impact:
- Disclosure of assets mortgaged, pledged, or otherwise subject to lien and the obligations collateralized (ASC 440-10, Commitments – Overall)
- Disclosure of amounts and terms of unused lines of credit and unfunded commitments; public business entities (PBEs) are also required to disclose the weighted-average interest rate on outstanding short-term borrowings (ASC 470-10, Debt – Overall)
- Disclosure of an accounting policy in annual periods where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows (ASC 230-10, Statement of Cash Flows – Overall and ASC 815-10: Derivatives and Hedging- Overall)
Other amendments include the following:
- Required disclosure of any material prior-period adjustments and the effect of such adjustments on retained earnings in interim financial statements when there has been a change in the reporting entity
- Required disclosure of the methods used to compute diluted earnings-per-share and clarification that certain disclosures should be made during interim periods
- Required disclosure of liquidation preference in involuntary liquidations of preferred stock if the liquidation preference is other than par or stated value
- For certain secured borrowing and collateral transactions subject to ASC 860-30, clarifies that accrued interest should be included in the presentation of any repurchase agreement liability, and requires that (a) reverse repurchase agreements be classified separately if the carrying amount exceeds 10% of total assets, (b) PBEs disclose the weighted-average interest rate on any repurchase liability, and (c) entities disclose the amounts at risk with an individual counterparty if that amount exceeds more than 10% of stockholders’ equity, and whether there are any provisions to protect against counterparty default
- Clarification that the supplemental information in ASC 932-235, Extractive Activities – Oil and Gas – Notes to Financial Statements, is required for each annual period for which a specified financial statement is required
- Requires that investment companies subject to the industry-specific guidance in ASC 946 disclose the components of capital on the balance sheet
- Required disclosure for annual reporting periods of the tax status of distributions per unit (e.g., ordinary income, capital gain, and return of capital) for a real estate investment trust subject to the industry-specific guidance in ASC 974
ASU 2023-06 contains detailed descriptions of these new or enhanced presentation and disclosure requirements, including implementation guidance and examples.
Effective date and transition requirements
Entities should apply the amendments in ASU 2023-06 prospectively.
For entities subject to the SEC’s existing disclosure requirements and for entities that have to file or provide financial statements with or to the SEC for the purpose of selling or issuing securities that do not have contractual limits on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. As a result, the effective date will be different for each individual disclosure based on the effective date of the SEC’s deletion of the related disclosure. Early adoption is prohibited. For all other entities, the effective date will be two years later. Early adoption is permitted for these entities, but not before the provisions of the ASU become effective for entities subject to SEC’s regulation.
The effective dates of the amendments are predicated on the SEC removing its related disclosure requirements from its regulations. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity.