Hi, everyone. Thank you so much for joining us today. Before we get started, a few housekeeping rules to go over. If you have any questions, please put them in the chat, and we’ll get to them at the end of the presentation. We will be offering one CPE credit for this webinar, and we’ll be sending the certification to the email you use to register, along with the presentation slides and webinar recording. In accordance with NASBA requirements, CPE credits are contingent upon full participation in the training session. Late arrivals or early departures will result in an adjustment to the awarded credits, and all attendance modifications will be documented. This session will include three polling questions delivered at unpredictable intervals. You’ll receive a pop-up notification on your screen to answer each question. Responses to all polls are mandatory and must be submitted within two minutes of notification to earn full CPE credit. Correct answers aren’t required, but failure to respond within the allotted time will impact your eligibility for CPE credit.
And presenting today, we have Claudia Wolter, Quality Management Director of KatzAbosch. Claudia joined the firm in 1988 and has been instrumental in advancing the firm’s adoption of innovative technologies and processes. Throughout her career, she’s helped drive major firm initiatives, including large-scale software implementations and the transition to paperless workflows. And with that, I will turn it over to Claudia to get started.
Hi, everyone. It’s great to be with you today. And I did not advance to my bio slide when I was supposed to. So this is my bio, but Megan just went over that with you.
This is what we’re going to talk about today. So we have some things that have happened in the past, but are still having some residual effects, and we’re learning how to implement them, you know, things such as leases, CSOL, and some other miscellaneous things. I’m going to go over what’s effective for 2025 that we should have already implemented, or if you’re a school year maybe you’re getting ready to implement, what’s effective for 2026, so the year we’re currently in, and then what’s coming up for us and what are some of the things in the pipeline that could potentially happen. So throughout the presentation I’m going to have some accounting wisdom slides, just things to make you think a little bit. So if you think compliance is expensive, try non-compliance.
So 2025 was a busy year for FASB. You know, I saw they issued 12 ASUs in 2025 and I was curious, you know, how that compared to prior years. So I actually went back and looked at a handful of years. The past five years that was the most that they had issued. 2016 through 2019 or, you know, was especially through 2018 was really busy, but for those of you who’ve been around, you know, a little longer than some others, you know that 2016 was leases and it was Cecil, and then from 2014 through 2018, 2019, even now, we’re getting all these ASUs that relate to revenue recognition and they’re related to leases and related to Cecil. And so there was constant little tweaks to these things. So as we transition into leases, I counted, I think I counted 13 ASUs that related to leases. So you can see why there were so many ASUs issued for a period of time.
So leases, what should management be doing now? Now if you have common control leasing arrangements, which a lot of companies out there do, there’s the operating entity and then there’s the real estate entity that the operating entity leases from. If you have common control leasing arrangements, these are some of the things to consider.
So making sure you’re evaluating or re-evaluating common control. What we see a lot of times is there’s been changes in ownership, you know, as succession planning is occurring. You know, maybe there’s the owner that’s been the owner of the business for years and now there’s another generation taking over, but that original owner still owns the real estate. And, you know, now the kids own the business or somebody else owns the business, that’s probably no longer common control. So if you’ve been relying on common control practical expedience in your financial statements, you might have to reevaluate that.
In order to not put the leases on your balance sheet under common control lease arrangements, you need to have written leases. They can be month to month. We had a great deal of our clients actually write addendums to their leases that made them cancelable because if they’re cancelable, you don’t have to put them on your balance sheet, but you can’t just have an informal agreement with yourself because then, you know, you’re supposed to look at the written terms and conditions of the lease. There is no written terms and conditions, so just make sure you have some type of lease agreement.
And then a reminder, this came out 2023, leasehold improvement should be depreciated over the economic life of the asset if you have control leasing. So it’s no longer the life of the lease. If you have a seven-year lease or seven years remaining on your lease and you put in some leasehold improvements, but it’s a major leasehold improvement, you don’t write it off over that period of time. You write it off over the life of the asset. And if you end up vacating the building, it’s an equity adjustment. This isn’t just a private company thing. It’s all companies.
Just in general, stepping away from and control, consider departing from GAAP. That’s, you know, an option if your bank or whoever your users of your financial statements will allow you to. Not everybody wants to see the leases on the balance sheet. If they don’t care, why go through the expense and effort to do that?
Consider leases that are embedded in service agreements. So for instance, you know, we’ll just talk about your cell phone for a second. Now, maybe, you know, you have a service agreement, you have a two-year contract, you didn’t pay anything for your phone, you have an asset, it’s a dedicated asset, your cell phone is embedded into that service agreement. So a lot of times you’ll see that with, you know, copiers, that type of thing, but it may also be, we have, you know, say a medical company, medically related, and they have various offices, they may have an operating company, and they may lease all of the buildings directly, the management company may lease all the buildings and all of the equipment. They may own it and then lease it to the various locations, seeing this like in radiology or something like that. And those are big machines that cost a lot of money. So those might be embedded into a management agreement and they should be considered on the balance sheet as an embedded lease.
The evaluation of new leases can be a challenge, because we’re dealing with that now, when you have a modification or a change to a lease, is it a new lease or is it a modification of the existing lease? And I do have a slide on that that we’ll get to in a minute.
So FASB went through a post implementation review of leases. And what they found is that the implementation and ongoing costs to apply the standards was significantly greater than anticipated, you know, that’s shocking, of course. And they didn’t consider the costs during deliberations and they thought it would just be the same as legacy GAAP, you know, same as usual. So the PCC has more simplification on its agenda.
The things that have been found to be the most, you know, complicated, challenging, from most challenging to least challenging: the discount rate. Now, those of you in the private company world, you know, we can use the risk-free rate. So that is an option. But those who are not in the private world can’t do that. There are several practical expedients here for the private world. Recognition and measurement was challenging, related party leases, lease modifications, identification of a lease including embedded leases, sale leaseback transactions, and then allocating between lease and non-lease components which also has a practical expedient.
So as I mentioned, determining whether something is a new lease or a modification can be a challenge. So these are two questions to answer. Has this modification granted an additional right-of-use asset to the lessee that was not included in the original lease? So do I have a new piece of equipment? Do I have additional space that I took on if it’s a real estate lease? And have the lease payments increased in line with the value of the standalone asset of this type? So are the new lease payments commensurate with the value of whatever I received? So for instance, if you’re in a building, you renew the lease for an extra five years, that’s just considered a modification. It’s not considered a new lease. However, if you take on a bunch of new space and the lease payments are appropriate for that new space, then that is considered a new lease. So if you take on new space and the lease payments don’t change, that’s considered a modification because you’re getting something additional that is not commensurate.
Okay, so that brings us to our first polling question of the day. So you have two minutes to answer this polling question. Which accounting standard covers lease accounting? Is it A, ASC 606, B, ASC 326, C, ASC 842, D, ASC 718, or none of the above?
Let’s see, we have 50%, 58% of the vote in. Need to wait till we have 100% or two minutes. And we’re at 75. It doesn’t matter what your answer is, so if you’re not sure, just guess on anything. We’re almost there. There we go. Okay, we got 100%, so we can release the results. 75% said 842 and 25% said 326. It’s 842, so lease accounting falls under 842. 326 is actually CECL, so we’ll be talking about CECL next.
Current expected credit losses, ASC 326. We’re going to talk about this very briefly because it’s kind of not that big of a deal, but wanted to point some things out to you. Some of the challenges that we’ve run into: are my write-offs attributable to credit loss or revenue adjustment? We’ve had allowance for doubtful accounts on our, you know, as a valuation allowance against accounts receivable for years. But what a lot of us found is it was variable consideration. It wasn’t really a bad debt allowance. It wasn’t because we thought our customer was going out of business and was going to be unable to pay us, and it wasn’t a real credit loss adjustment. It was really something, you know, we gave them to make them happy or a change to the contract, in its variable consideration. So those aren’t really considered credit loss adjustments. They don’t fall under 326.
How material are the amounts? You know, most companies don’t extend credit to the point of having large write-offs, so typically write-offs are a very small portion of accounts receivable or even revenue for the year. So something else to consider, we still show credit losses when they happen on our financial statements, but we don’t always go through all the disclosures because it’s a lot to disclose for a little tiny return on that. And it doesn’t apply to entities under common control.
So early in 2025, and it was about a year ago right now, they came up with a new ASU. And the ASU said that for 606 assets—so 606 is revenue recognition, so when I recognize revenue, typically my assets on my balance sheet that are impacted are either accounts receivable or contract assets, so something that relates to revenue—there is a practical expedient that’s available for all entities, not just private entities. So if it’s elected, you don’t need to use reasonable and supportable forecasts in the future. You can assume whatever’s happening as of today is what’s going to happen in the future, so I don’t need to project out. And the reason why they did that really is, if you think about it, accounts receivable, you know, is short-lived, you know, 30, 60, 90 days in theory should be about as far out as they go, so why do I have to project the future when we’re only talking about a very short period of time? Contract assets might be a little bit longer, but in theory, you’re not talking about years and years, you’re talking about a relatively short period of time. So you don’t have to use forecasts.
And then there’s an accounting policy election that is available for private entities where the entity can consider collection activity after the balance sheet date when estimating credit losses. That can only be elected if you also elect the practical expedient. So what happened is originally when the standard came out, they said you have to make an evaluation of, you know, what’s in the balance of accounts receivable at year end, what is the credit loss, you have to have percentages, pools, all this stuff, and you can’t change that. Once you’ve basically made your evaluation, you can’t say, well, it’s March 31st, I’m about to issue my financial statements, I have this $200,000 amount in there that I thought I wasn’t going to receive, but all of a sudden, wow, this customer paid me, this is awesome, let’s not write this off. It’s like, nope, that’s an adjustment for the following year, which was just really silly. And I think they finally agreed that that was kind of silly to do. So now you can take that subsequent collection activity into account. If you use either of those, the policy election or practical expedient, you’re required to disclose it. Again, I would take materiality into account.
So just to sum up the CECL revisions: still look at historical experience, still look at current conditions, but if you elect the practical expedient, you don’t need to look at forecasts, the reasonable and supportable forecasts.
I want to touch briefly on revenue recognition and construction contractors, we do a lot of construction contractor work around here. The PCC underwent a project because construction contractors typically hold retainage—their customer does not pay them 100% of the amount that they bill. So they have accounts receivable, and they have a retention receivable, that is five to 10% of the receivable, typically. And that’s a long-term item that they get paid when the work is approved, typically at the end of the contract. Sometimes there’s other things in the contract that say it might be paid sooner, but it’s typically at the end of the contract. So that’s considered a contract asset.
Construction contractors also recognize revenue on the percentage of completion, so they might bill in advance of when they’re recognizing the revenue, so they would have what’s considered an overbilling. So the original revenue recognition standard said you can only have one contract asset and one contract liability per contract. So the problem for construction contractors is they have this retention receivable and this overbilling—so they had an asset and a liability. So what a lot of us in the construction world did is we just left everything the same, so it wasn’t exactly GAAP, but it was just a grossed-up balance sheet. Bonding companies and banks like to know what’s retention and what’s an overbilling, but it was not technically GAAP.
FASB recognized that, and they were working with various construction industry organizations, and from an accounting perspective, they recognized that and they were going to say that was okay, since everyone in the construction industry understood it. And then at the last minute they said, nope, got to do it. So they gave presentation ideas, and the way we do it at CATS is we show the contract assets, subtract out the conditional retainage that applies to the overbillings, and then we do the same thing down to liabilities. So we show the net amounts on the balance sheet, but we don’t otherwise show it on a contract-by-contract basis—even when we have schedules in the back of the financial statements for each of the contracts, we show the gross amounts.
Another accounting wisdom slide: things that sound simple until you apply GAAP—fair value, common control, probable, reasonable, short term, and standalone.
So we’re going to talk about variable interest entities and common control a little bit. I know common control gets confusing—it’s difficult because common control is not defined, there’s no bright lines, it’s based on control, not common ownership. You have to look to voting rights often because that’s control. Looking to the managing member for an LLC is a lot of times what we try to do, and it can get really complicated if the ownership differs between entities, especially if nobody owns a majority—then it can get really challenging. So an assessment of whether common control exists is based on all the facts and circumstances surrounding the relationships between the parties, both direct and indirect. And it’s the indirect part that can really make it challenging.
So I put together this Venn diagram. It is for illustrative purposes only, it is not being copyrighted, I don’t even know if it’s right—it’s just a general kind of something to make you think about. The related party is your big bubble, your related parties—you have a lot of related parties potentially. VIEs are part of that, we talk about VIEs all the time. A lot of times the VIEs will result in a common control relationship. You might have immediate family members in there who fall into various categories depending on how immediate they are. Officers, directors, and management may create a VIE relationship, but they’re typically a related party, and then you have your non-controlling owners who—whether they’re in the right place in the bubble, I don’t know, but typically that’s probably where they fall.
So I have an example here, just for the fun of it—gave this presentation a couple years ago, and it was on December 19th, so hence the participants in this common control example. I’ve given this presentation a couple times, and I was curious this time if AI would agree with me. So I threw this into Copilot, which is what we use here for that type of stuff. And it agreed with me, so luckily I felt good about that.
Basically, under scenario one, everybody owns 25%. So you think, oh, that’s common control—everybody owns the exact same thing, but nobody has control, so really there is no common control there. Scenario two, same type of thing: Santa and Mrs. Claus, if you group them together and consider that an indirect ownership, they have common control of entity B, but they only have 50% of entity A and you need over 50 in order to have control. In scenario three, Santa and Mrs. Claus together, assuming harmony and voting together, then you could say they have common control—and actually, interestingly enough, Copilot, I didn’t even have to tell it that Santa and Mrs. Claus could be considered together, it just grouped them together. In scenario four, Santa has 60%, but Santa and Mrs. Claus only have 50% of entity B. In scenario five, you definitely don’t have common control. And in scenario six, you definitely do have common control, because Santa has 60 and 70%.
So then I asked Copilot, can Santa get Rudolph’s votes? What do you think about that? And it says, well, if Santa controls Rudolph through power, dependence, or influence, and Rudolph is not an independent decision maker, then yes, maybe Santa does get Rudolph’s votes. So I thought that was interesting, it amused me. And then lastly, assume entity A is an S-Corp and entity B is an LLC of which Santa is the managing member—then Santa basically, no matter what, gets 100% of entity B. So it pulls in everything except for potentially scenario five at that point, unless Santa gets Rudolph’s votes—or I guess it wouldn’t necessarily pull in scenario one or two either.
Okay, so issued ASUs. I’m just going to go through all the ASUs that have been issued. They’re effective for 2025 through 2030. I have slides on most of them, I’m not going to spend a lot of time, but I just wanted you to have a list of everything basically in order of effective date. And each one says early implementation is allowed, because now everything you can early implement—it used to be sometimes you weren’t allowed to, so that column is basically irrelevant.
There’s one on fair value equities, which just changes the practice for certain entities. Most of these are very, very narrow scope, so most of them are not that impactful to any of you. Equity method and joint ventures, an income tax credit and income tax benefit one, and intangibles, goodwill and other—crypto. I do have a number of slides on this, I find this one fascinating, so we’ll talk about that. And then there’s the one that requires a joint venture to adopt a new basis of accounting, basically saying it needs to, once it’s formed, recognize its assets and liabilities at fair value, which kind of seems like common sense.
The next one is an income tax disclosure one. It’s effective for public business entities for 2025, and effective for private entities for 2026. I do have a number of slides on that. The first one listed there is the credit loss one that we already talked about. The next one is a stock compensation one that I have a slide on, effective for 2026. The next one is just codification improvements—usually little tweaks to language. I do have a slide or two on the convertible debt one.
The next ones are effective for 2027, and these are just for the public business entities, so most of you probably don’t have to deal with this—it’s requiring disaggregation of expenses in the income statement, and I do have a slide or two on this. Also effective in 2027 is a couple more: there’s a lot of derivative ones and share-based compensation ones—a lot of share-based compensation, I think, you know, like all the tech companies out there have a lot of share-based compensation, so we see a lot more of these ASUs, but I do have a slide on that. And then the business combination one, there’s a slide on that; derivatives hedging, I have a slide that we’ll go over; same thing for purchased financial assets; there’s a CECL one, slide on that. Codification improvements are again just tweaks.
The next one was issued this year—I don’t have a slide on this because when I originally put this presentation together, this was just a project, and it was just issued like two months ago, so I apologize for not having a slide. But it requires paid-in-kind dividends to be initially measured based on the paid-in-kind dividend rate stated in the preferred stock agreement, which I don’t think most of you are dealing with to a high extent.
Effective in 2028 is intangibles, goodwill, and other—internal use software. I do have a couple of slides on this, I think this is something that might apply to some of you on a more broad basis. The next one is a derivative one, effective in 2029, just some very narrow scope improvements. And then environmental credits, that one was just issued last month—I do have some slides on that, but as a proposal I haven’t compared it to the final ASU yet, though I doubt if there’s a lot that’s changed, and I have a really high-level presentation on that anyway. Effective for 2030 is accounting for government grants, I have a couple of slides on that. And then there’s this other one that’s effective depending on if the SEC ever passes something, so it’s not something we need to worry about too much.
So crypto, as I mentioned, I find this fascinating. I don’t know if any of you have crypto—I gave a presentation a month or two ago and asked the audience, there were probably 60-some people in the audience, and nobody deals in crypto, so I’m guessing probably not a lot of companies out there dealing in crypto. So we’ll go through this quickly. Crypto all of a sudden appears out of nowhere and we’ve got to figure out how to account for it, so it was accounted for as an intangible—intangibles are put on your sheet at cost, and if an intangible is impaired it gets written down to fair value, and if it goes back up it never gets written back up. So you could have crypto you bought at two thousand dollars a share, you put it on your balance sheet at two thousand dollars a share; crypto is a little volatile, it goes down to fifty dollars a share, you write it down to fifty dollars a share; now it’s ten thousand dollars a share, it’s a lot more, but it’s still sitting on your balance sheet at fifty dollars a share. That’s the way it was accounted for.
They have changed that, and now say that you can record it at fair value as long as it meets certain criteria. It has to be an intangible asset, it has to not provide the asset holder with enforceable rights or claims to underlying goods or services, it has to be secured through blockchain or a distributed ledger, secured through cryptography, has to be fungible, and it cannot be created by the entity or one of its related parties. It does not apply to certain things that you can look at if you need to know. And the standard only deals with the subsequent measurement of crypto—it doesn’t deal with initially purchasing crypto and what you need to do there. So it does deal with all the disclosures, because obviously the way you’re accounting for it, that subsequent measurement is changing a lot—gains and losses, how you present those, and how you put those on your statement of cash flows. All of those are covered, I have slides in here, but I won’t go over them all so I’m not boring you with something you don’t particularly care about.
And here’s your transition slide. Okay, that brings us to poll question number two. Under ASU 2023-08, crypto assets such as Bitcoin must be measured at what value on the balance sheet? Historical cost, fair value, amortized cost, or net realizable value?
We’re at 85% of the vote and we’re almost there. Okay, so the answer is B, fair value. Historical cost is how they used to be measured, and now they’re measured under fair value under 2023.
Okay, so we have another accounting wisdom: documentation is remembering what you knew when you knew it. We like to say, as we’re training people, your future self will thank you, because when you’re trying to figure out what the heck you did next year, you appreciate that you documented it this year.
I talked a couple times about public business entity, or the opposite of it, a private entity. So public business entity is more than just somebody who files with the SEC. In 2013 there was an ASU issued that gave the definition of a public business entity, which is 25 pages, so we’re obviously not going to talk about all of that—I just wanted to give you a really high-level view. It’s an entity that’s required by the SEC to file or furnish statements with the SEC, that’s kind of obvious. It is not a consolidated subsidiary of a public company, so those stand-alone statements are not considered a public business entity. And an entity that has securities that are not subject to contractual restrictions on transfer, and that is, by law, contract, or regulation, required to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis, is considered a public business entity. That’s sometimes like some entities that issue bonds, or crowdfunding arrangements, those types of things—so still pretty narrow there.
There are new income tax disclosures that are effective this year, 2025, for public business entities, and 2026 for private entities. The main thing here is it’s all disclosures, no changes in measurement or recognition—there’s just a greater disaggregation of the income tax disclosure. So now you have to disclose your state, federal, and foreign amounts separately. If you have various states that you paid, any state that you have paid or accrued more than 5% of the total needs to be disclosed separately—so it’s both cash paid and expense, that’s the main thing. There are some things you no longer need to disclose, but I think there’s not a whole lot there that applies to us anyway. And if you’re a public business entity, you also need to disclose a tabular reconciliation. So luckily, private entities get out of some of these disclosures.
Something to remember: the One Big Beautiful Bill Act may have an impact on your deferred taxes—you could have items in there that changed because the law changed something. Also, if you have uncertain tax positions and something’s changed, you might need to do some reevaluation.
Okay, so now getting into some of the more recently issued ASUs. Profit interests provide rights to future profits or equity appreciation, but not existing assets of the entity. They vary in form and complexity, which results in diversity in accounting treatment, and this ASU is striving to reduce that diversity. So the interests are typically an interest in the growth versus an actual stake in the business—you’re giving somebody an interest in what’s happening in the business, but not actually an interest in the business itself, and it’s a way to keep people engaged in the business and their job. So some interests are liabilities, some are equity, some are not recorded because they’re event-based, like a change in control—so obviously there’s a lot of challenges in consistency in practice. This ASU offers examples to assist in consistency in practice, and it could potentially impact both the recognition and measurement of entities with phantom stock.
And then the disaggregation of income statement expenses—as I said, this is only for public business entities, it does not apply to not-for-profits or employee benefit plans. The categories you need to disaggregate in your income statement are purchases of inventory, employee compensation expense, depreciation, intangible asset amortization, and depletion.
Okay, the ASU on convertible debt clarifies the accounting for inducement offers, which distinguishes them from extinguishment accounting. An inducement, often referred to as a sweetener, is an extra incentive offered by a company to encourage bondholders to convert their convertible debt into equity before the debt’s original maturity date. Companies do this to eliminate debt, reduce future interest payments, or potentially improve their balance sheet. Originally, ASU 2020-06, an earlier ASU, expanded the guidance, and this ASU clarifies when induced conversion versus extinguishment accounting applies. Clarifications help to maintain accurate accounting treatments, improving reliability and comparability of financial statements, and there are no additional disclosures required for this ASU.
Another accounting wisdom: materiality is a professional judgment until it isn’t, and you get into an argument with your QC reviewer about that.
Okay, so the idea behind ASU 2025-03 is to eliminate the automatic assumption that the primary beneficiary of a variable interest entity is the accounting acquirer during a business combination—companies must now evaluate which party actually directs the combined operations.
Then ASU 2025-04 is a clarification which deals with share-based payment awards granted to customers. Occasionally you’ll see somebody offering shares to their customers—I had a client who did this many years ago, a lot of times it’s startup entities trying to gain traction. So it touches upon both stock compensation and revenue recognition guidance, two of your standards there. Primarily, the ASU clarifies that the variable consideration constraint guidance under ASC 606 does not apply to share-based payments issued to customers.
We already talked about credit losses, but I want to throw it in there because I’m trying to go in order of the ASUs issued. And then we have the accounting for internal use software. The goal for that was to modernize the accounting for software costs and provide greater transparency into an entity’s software costs. Think about how software has changed over the years—you no longer just buy software off the shelf and install it on your computer, or download it and have it for a period of time, it’s changed a lot. So this ASU deals with how you identify software versus a hosting arrangement, which is mostly what you see now.
I am mostly going to read this slide because it is highly definition-oriented. Software exists if the company has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for the company to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Cloud computing arrangements that do not meet the definition of software are service contracts. Software is considered internal use software when it is acquired, internally developed, or modified solely to meet the entity’s internal needs, and during the software’s development there’s no plan to market the software externally.
Prior to the new ASU, external use software was capitalized based on technological feasibility. Internal use software was capitalized after the preliminary project stage was completed, management authorized and committed to funding the project, and planning and major decisions were substantially complete—that’s considered when technological feasibility was established. Now, when you account for internal use software, basically the first bullet is gone—we no longer have stages, they got rid of the whole stage idea. The second bullet remained the same, and the final bullet is primarily unchanged, but clarified to say it is probable that the project will be completed and the software will be used to perform the function intended, which is referred to as the “probable to complete” recognition threshold. So an entity must assess whether there’s any developmental uncertainty, and you can’t begin capitalization until the significant developmental uncertainty is resolved—and you cannot expense all software costs as incurred, you can’t just say I don’t want to deal with this, I’m going to expense everything, that’s not allowed. You’re required to capitalize qualifying costs, and all training and conversion costs are expensed as incurred, which is kind of how it’s always been.
The next ASU is a derivative one. It clarifies and refines two key areas: it expands derivative scope exceptions to exclude contracts based on a single party’s specific operational metrics, like an ESG goal or something like that, and it dictates that share-based non-cash consideration from customers must first follow revenue recognition rules. So it talks a lot about underlyings, and underlyings are variables that impact a payoff or settlement or something like that. Here are some examples of underlyings—things that might be in a contract where you don’t know what’s going to happen because it’s a variable, so you’re trying to determine if you’re dealing in derivatives or not. Some practical examples of things people are dealing with that aren’t necessarily numbers as underlyings: ESG-linked bonds, R&D funding arrangements tied to reaching certain milestones, litigation funding arrangements, customer consideration involving share-based non-cash consideration, and operational metrics like reaching a certain sales target. These things are hard to predict because they’re variable.
When CECL first came out, everybody thought it was for banks, and then the accounting group said no, no, it’s not just for banks—but I really think it’s most impactful for banks, because it’s not usually material for operating entities. So the ASU expands the gross-up approach to a newly created category of purchased financial assets, requiring acquirers to record them at purchase price plus an allowance for expected credit losses, rather than expensing losses immediately.
And we have a hedge accounting one, which is just focused on simplification—it allows companies to achieve and maintain hedge accounting for a wider variety of effective economic hedges without triggering unintended hedge de-designation.
And then the accounting for government grants. When COVID happened and we had all the PPP funds that companies received and the ERC, the credits for employee retention, nobody knew how to account for this stuff—we didn’t have to deal with it previously, businesses didn’t typically get government grants. So we all scrambled, the AICPA got involved and came out with guidance, and now they’ve codified that guidance, basically. So they went into grant related to an asset, grant related to income. Businesses don’t get grants a lot, but they do sometimes—there are economic development grants, or occasionally you might get a grant related to building in an economically disadvantaged area, so you might get a grant related to an asset. This ASU just goes over how to handle that, what your required disclosures are, and where to put these items in your income statement when you have them—basically all the things that we did for the COVID funds we received, plus all the disclosures.
Okay, that’s what’s been issued, except for the two new things that were issued in 2026. What’s on FASB’s agenda? The more pervasive items expected in 2026 are the accounting for environmental credits, which was issued last month—I will talk about that—accounting for debt exchanges, application of Topic 715 to market return cash balance plans, initial measurement of paid-in-kind dividends (issued in May), targeted improvements to hedge accounting, and a post-implementation review project related to CECL.
So environmental credits: we’ve had clients who have actually created these environmental credits because they did stream restoration and had credits they would buy and sell and create for companies, that kind of thing. This is effective for 2029 for private companies, and 2028 for public business entities. What is an environmental credit? The easiest way to explain it is, if you do something bad—violate emissions or pollution standards, or do something harmful to the environment—you could be penalized, and then you have an item that creates an obligation. So you need to do something good to counterbalance it, to fulfill your credit obligation. You can purchase credits that are available to purchase, or you can embark on a project yourself that has environmental benefits—like hiring a company to do stream restoration to fulfill your obligation from whatever it was that you did.
These are what’s within and without scope—this could have changed, this is what was proposed, but it’s probably pretty set in stone, is my guess. If you purchase a credit or do one of these projects that you plan to use, that’s an asset you put on your balance sheet; if you just go out and do a voluntary project, that’s an expense. But if you plan to use it to offset some obligation, then you put it on your balance sheet as an asset, and you have a liability on your balance sheet if you have an obligation. How do you measure that liability? It’s calculated using the carrying amount of the funded portion—whatever assets you have on your balance sheet, that’s your funded portion—plus the unfunded portion, which is the fair value of a credit if you were to go out and purchase it, times the number of credits that are unfunded. That’s how you calculate your liability. There’s an example if you need to go through it, and then a bunch of disclosures, of course.
Another accounting wisdom slide: accounting is mostly deciding if something is an asset or an expense, a lease or a service, debt or equity, revenue or variable consideration, compensation or profit sharing—which works beautifully until you throw in software costs, crypto, profits interests, and government grants.
Okay, just something to consider on tariffs: we have all these tariff conversations going on, and people are trying to get tariffs refunded. Just remember, tariffs should be built into the cost of an asset—if it’s a fixed asset or inventory, it should be capitalized on your balance sheet. However, you also have to take into account impairment considerations—you don’t put inventory on the balance sheet above fair value, so just keep that in mind, you might have to write it down. And for those trying to get refunds, we just have to keep watching legal developments that might impact your balance sheet and what is potentially disclosed.
What’s on the Private Company Council’s agenda? They’re very narrow focused—it’s mostly simplification and cost-benefit improvements, some accounting simplifications on debt-related issues. That’s really all they have at this point, and credit losses is off the agenda.
So I want to transition from ASUs to some more practical things: fraud. Many of you have seen and dealt with fraud—75, 90% of our clients have dealt with fraud. There’s check washing, AI-generated counterfeit checks, impersonating vendors, impersonating management, IT phishing, social engineering, multi-factor authentication bypass. So my goal right now is to just say: proactively protect yourself.
So what can you do to protect yourself? I’m really going to get back to basics here and talk about the importance of accounting controls. In today’s environment, we’re so focused on efficiencies and automation that we sometimes overlook the fundamentals. Cash remains your most vulnerable asset, especially from a theft perspective, and there are more sophisticated ways to access it today than ever before. So make sure you secure it internally with strong controls—segregation of duties, authorization, custody, reconciliation—all of those items are critical in your processes.
Strong internal controls do more than protect the assets—they strengthen your entire organization. They improve the accuracy of your records, support better budgeting and forecasting, and enhance strategic decision making. They also matter externally: if you’re facing an insurance claim, insurance might look at whether you have appropriate safeguards in place, and that’s going to help your claim. And if you’re seeking investors or financing, strong controls enhance your credibility and confidence in your business.
Technology is a double-edged sword in this evolving risk landscape. While cloud systems and digital payments improve efficiency, they increase exposure to phishing and unauthorized access. Remote work raises control risks—with decentralized teams, businesses rely more on electronic processes, making monitoring and oversight more critical than ever. You know, I can’t just yell across the hall, “hey, did you authorize that payment,” because people are working from home today, so they’re not going to hear me.
Financial discipline matters more in today’s economy. Tighter budget-to-actual reviews are key to managing cash flow, expenses, and liquidity. Fraud schemes are getting more sophisticated—common risks include vendor fraud and payroll manipulation, especially in organizations without strong segregation of duties. The bottom line: strong internal controls are no longer an option, they’re essential to protecting your assets and maintaining operational stability.
We always talk about segregation of duties, but segregation is foundational—separating authorization, recording, and custody reduces both fraud risk and errors. It’s a reality for smaller teams that when full segregation is impossible, compensating controls like independent reviews are critical. Approval discipline matters—structured workflows ensure the right people review and approve a transaction before it goes out or occurs. And back to documentation: documentation equals protection. Clear, documented approvals create accountability and a defensible audit trail. So even if you can’t fully segregate duties, you must deliberately design controls to try to close the gaps.
Performing regular account reconciliations and having strict access controls are essential in ensuring accuracy and preventing unauthorized activities within the accounting system. Reconciliation serves as a detective control that validates the integrity of financial data by comparing internal records with external documents, such as bank statements, credit card statements, and loan records. Conducting these reconciliations monthly or more frequently—I encourage you to do it daily or weekly—because the longer it takes you to find something that’s happened, the more likely your bank is not going to be there to help you, since they usually have a certain amount of time that’s required. The sooner the better. So I’m encouraging people to do daily reconciliations, it makes it easier as the month goes on too. It helps detect anomalies promptly, and an independent review of the reconciliation adds a second layer of assurance—somebody should be reviewing the bank reconciliations.
Access controls are a preventive measure against both internal and external threats. Businesses should configure role-based permissions within their accounting system so users only have access to the functions necessary for their responsibilities. For instance, the ability to add or modify vendors should be restricted to designated individuals, given the high fraud risk associated with vendor file manipulation. It’s also critical to prohibit shared logins to maintain accountability and ensure audit trails remain reliable. Regular access reviews should be conducted quarterly, or whenever staffing changes occur, to ensure permissions remain aligned with job duties and that former employees no longer retain access to sensitive financial statements. Enabling MFA across accounting and banking platforms significantly strengthens security by preventing unauthorized access, even if passwords are compromised. Collectively, reconciliation and access controls create a comprehensive framework that improves data accuracy, strengthens asset protection, and reinforces operational consistency across the business.
Vendor management, journal entry oversight, and ongoing budgetary controls are key accounting controls for entities. Vendor controls begin with restricting who can set up or edit vendor records—fraud schemes frequently involve creating fake vendors or altering payment instructions, making it critical to require verification documents such as W-9s, business registration, or signed contracts before a vendor is activated. Businesses should also conduct periodic reviews to identify duplicate vendors, inactive vendors, or unusual payment activity.
Journal entry controls are equally vital because manual entries can override automated safeguards built into the system. Only qualified personnel—typically a controller or senior accountant—should have the authority to post journal entries, particularly those affecting cash, revenue, or high-risk accounts. Every journal entry should include supporting documentation and a clear explanation of its purpose, and management should review a monthly report of all posted journal entries to ensure completeness and accuracy.
Budgetary controls tie financial activity to strategic objectives by requiring regular comparison of actual performance to planned expectations. Monthly variance analysis highlights deviations early, giving management the opportunity to investigate overspending, revenue shortfalls, or cost fluctuations before they impact cash flow. This process not only strengthens financial discipline but also enhances forecasting accuracy and supports better decision making. Together, these three categories of controls significantly elevate financial reliability, reduce opportunities for fraud or misstatements, and create a structured approach to resource management.
Independent oversight is another very crucial part, basically your final layer of protection. Small businesses often operate with lean teams and overlapping job duties—external or independent review compensates for the absence of internal audit departments. Owners, controllers, or even external CPAs can conduct periodic evaluations of key financial processes including reconciliations, payment activities, journal entries, and overall financial reporting, helping to identify anomalies that internal staff may overlook due to familiarity, workload, or limited expertise. External accountants can also conduct monthly or quarterly reviews to validate the accuracy of financial statements, assess accounting policies, and ensure compliance with regulatory requirements, tax obligations, and loan covenants. These reviews create a valuable feedback loop, enabling leadership to refine policy, strengthen controls, and address weaknesses before they become significant issues. Independent oversight also promotes transparency and credibility with lenders, investors, and stakeholders, demonstrating that the business takes financial governance seriously. In addition, external reviewers often bring specialized knowledge of fraud schemes, industry risks, and emerging best practices that internal staff may not be aware of. As an ongoing practice, independent oversight reinforces accountability, instills financial discipline, and provides assurance that the control environment remains effective as the business grows and evolves.
So what do we do now? We can’t just assume everything’s business as usual—the world has changed so much, and your employee handbook and processes might be outdated, so take a look at that and see what needs to change. One of the primary things to do is enable positive pay. People don’t want to pay for positive pay until they have one bad check—I had a client with a half-million-dollar check that cleared, and they didn’t even realize it for two months, because somebody had changed the vendor and they didn’t pay them properly. Use lockbox services to reduce check handling and speed cash collections. Review cyber crime and other protective insurances. Activate banking and credit card alerts so you know quickly if anything unusual happens. Implement multi-factor authentication, and review your bank’s fraud tools. These actions help protect your cash.
And here’s your last poll question: which of the following is a recommended step to protect against check fraud—eliminating online banking access entirely, enabling positive pay through your financial institution, switching to cash-only transactions, or reducing the number of authorized signatories to one?
We have almost everyone’s voted. Again, it doesn’t matter what your answer is, you still get credit. Okay, so the answer is B, enabling positive pay.
So do we have any questions? Oh, I have one more accounting wisdom: professional judgment improves with scar tissue. Those of you who have been around for a while know about scar tissue.
Megan is not talking to me, so I assume we do not have questions. Claudia, we do not, but thank you. Well, if you have any questions, let us know, and you can always email us too and we can get back to you. And only one minute over—so thank you for your time today, appreciate it, and I hope everybody has a great rest of your day.
