In the last couple of months of 2024, the FASB issued some “invitations to comment” intended to allow FASB stakeholders to express their views on whether or not the FASB should pursue the projects identified. It could well turn out that these ITCs offer a preview of topics that the FASB might be taking up in 2025. What’s more, two of these projects have the potential to be somewhat contentious: accounting for intangibles, such as brand recognition, copyrights, patents, trademarks, trade names, customer relationships and customer lists, and key performance indicators. In an interview with the WSJ, FASB Chair Rich Jones observed that “[y]ou’re seeing us really explore what, depending on the direction those projects take, could be a very significant shift in financial reporting.”
Intangibles. As noted above, one of the two ITCs is focused on how to improve accounting for intangibles, including both intangibles recognized as assets in the financial statements and those not so recognized. According to the ITC, “the recognition of an intangible can vary on the basis of the nature of the intangible, its stage of development, and whether it was acquired in a business combination or an asset acquisition. Therefore, some intangibles are recognized as assets either in whole or in part, while others are not recognized as assets at all. In addition, in some cases, costs incurred to create an intangible that is not recognized as an asset are considered R&D efforts, while, in other cases, those costs are considered normal operating expenses (general and administrative). If recognized, the subsequent accounting for an intangible asset can include amortization, impairment, and remeasurement (for example, remeasurement of certain crypto assets to fair value).”
The ITC asks for comment on whether there is a need to address this issue, what types of information would be useful, whether different accounting treatment should apply for acquired intangibles (such as in a business combination) versus internally developed intangibles, and whether the approach should narrowly apply to specific intangibles or apply to broad groups of intangibles. According to Jones, “My own personal view is I think there’s an awful lot put into the intangibles bucket that’s different.”
More specifically, the ITC indicates that the FASB is seeking feedback on the following questions:
- “Whether there is a pervasive need to improve generally accepted accounting principles (GAAP) related to the accounting for and disclosure of intangibles (that is, is there a case for change)
- What intangibles, or groups of intangibles, the FASB should consider addressing
- What potential solution(s) the FASB should consider—including whether the potential solution or solutions are narrow for a specific intangible or could be applied broadly to a group of intangibles—and the expected benefits and expected costs of the potential solution(s)
- Whether different accounting for intangibles should exist depending on how the asset is obtained (internally developed, acquired in a business combination, or acquired in an asset acquisition)
- What information about intangibles an investor utilizes (or would utilize) for its analysis and how that information influences the investor’s capital allocation decisions.”
The WSJ indicates that the project would also “evaluate ways to make it easier for investors to compare earnings for companies that grow through acquisitions with those that grow organically. ‘Today…you can get three very different answers,’ Jones said at a December conference, referring to accounting for intangibles based on how they were acquired.”
According to one commentator quoted in the WSJ, it’s likely that companies will have conflicting responses on the advisability of adding more of these assets to their balance sheets: “‘You’re going to have a subset of companies that welcome an opportunity to finally reflect an asset on the balance sheet for what is really driving the value of the company….Other companies may be less enthusiastic about it because the cost of valuing and recognizing the intangible probably isn’t worth the benefits that they’re obtaining.’”
Financial KPIs. The other ITC addresses financial KPIs. The FASB defines a financial KPI as
“any financial measure that is calculated or derived from the financial statements and/or underlying accounting records that is not presented in the GAAP financial statements. This includes:
- Measures derived from amounts presented in the financial statements (for example, a current ratio calculated using current assets and current liabilities as presented in a classified balance sheet)
- Measures derived from adjusting amounts presented in the financial statements (for example, adjusted net income, adjusted revenue, and adjusted earnings per share (EPS))
- Measures derived from or calculations based on other information included in financial statements or other financial records (for example, earnings before interest, taxes, depreciation, and amortization (EBITDA), free cash flow (FCF), organic sales growth, and funds from operations (FFO)).”
Based on prior research, the FASB believes that the use of financial KPIs has increased significantly. The ITC states that “[f]rom 2013 to 2022, the proportion of SEC filers reporting a Financial KPI increased from 36 percent to 53 percent. Among the S&P 500,… the increase was from 65 percent to 85 percent over the same period. Those increases in Financial KPI reporting also were present across most industry sectors.” Outreach by the FASB, together with research performed, suggested that “there is an increase in the use of Financial KPIs that reduces comparability because standardized definitions of Financial KPIs do not exist.” For example, a sample of public companies used different definitions of EBITDA, with some including interest income and some not, and some combining amortization and depreciation into a single amount. There was also a lack of clarity regarding the definition of amortization that was used and how the capitalization of costs affected depreciation.
While the ITC includes a number of more detailed questions, generally, the FASB staff is seeking feedback on the following:
- “Should Financial KPIs be standardized and, if so, which ones?
- Should Financial KPIs be required or permitted to be disclosed in an entity’s [GAAP] financial statements and, if so, when and for what types of entities?”
In his interview, Jones told the WSJ that, depending on stakeholder input, one possibility is that the FASB might create a standard definition for EBITDA that could be used in the financial statements. But “[i]f companies were to deviate from that definition outside of their financials, the Securities and Exchange Commission or other regulators might require them to disclose their rationale, Jones said. ‘Do I think there’s something we could do there? My own view is absolutely….I’m eager to see what we learn from our stakeholders.’”
Addressing KPIs, the WSJ noted, would be the FASB’s first major foray into non-GAAP measures. According to Jones, an important aspect of the analysis would be determining “which types of companies should have a particular KPI in their financials….‘You might argue that EBITDA is a better measure for a manufacturer but not a very good measure for a financial institution.’” The article observed that companies often rely on KPIs, such as EBITDA and adjusted free cash flow, in their news releases, which some suggest affords companies the opportunity to “present an overly optimistic picture of profitability.” But management usually contends that “focusing on core operating earnings is the most accurate way to depict financial performance to investors.” Approaches, however, do vary. According to one commentator cited in the article, the “FASB should require companies to consistently disclose the inputs to KPIs such as the amortization amount used in a company’s EBITDA calculation….‘It would cut down a lot of our time trying to understand and find these things in financial statements.’”
In the same interview, Jones also advised that the FASB “expects to finalize new rules on accounting for software costs, environmental credits and government grants in 2025.”
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