What do Companies Need to Consider During their Year-End Audits?

With the year-end audits currently underway, many companies are evaluating recent accounting pronouncements and other events that could impact them from an accounting analysis, financial reporting, and internal controls perspective. 

Events Impacting Accounting Considerations 

The incoming administration’s contemplated economic policies may impact companies' accounting over the next few years. 

Economic Policies and Tariffs  

An increase in tariffs could raise the cost of obtaining or producing goods, which may not be fully recoverable through price increases and could, according to several economists, result in decreased gross margins. If the price increase is passed to consumers, this could result in lower sales volume if the consumers alter their purchase behavior due to the higher prices. Either of these scenarios could impact impairment consideration for inventory, long-lived assets, and goodwill, as the lower gross margin or lower sales would negatively impact future cash flow projections, which are key when determining and measuring impairments. 

Mergers and Acquisitions (M&A)  

A more pro-business agenda is expected to increase M&A activities. Accounting for acquisitions can be complex, such as identifying whether the transaction is a business combination or an asset purchase, determining the purchase price, producing an opening balance sheet, or determining the step-up adjustments to fair value for certain assets and liabilities. In certain circumstances, companies may want to engage specialists to address the accounting and valuation complexities related to business combinations to allow management to focus on their core functions. 

New Accounting Pronouncements 

For calendar year-end public companies (these include broker-dealers who fall under the definition of a public entity), they need to adopt the following accounting pronouncement for the year ended December 31, 2024: 

• Segment Reporting: All public entities that report segment information in accordance with Accounting Standards Codification (ASC) Topic 280, Segment Reporting, including those entities with a single reportable segment, have to comply with the ASU 2023-07 that now requires an enhancement of disclosures relating to significant segment expenses for reportable segments. This ASU was effective on January 1, 2024, for calendar year-end public companies and interim periods starting January 1, 2025. The application is retrospective to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the adoption period.  

For all calendar year-end companies, they would need to adopt the following accounting pronouncement for the year ending December 31, 2025: 

• Accounting for and Disclosure of Crypto Assets: Digital assets that meet certain criteria, including (a) being created or residing on blockchain or similar technology, (b) being fungible, (c) being secured through cryptography, and (d) not being issued by the reporting entity, are now required to be measured at fair value, even if they are not traded on an active market, at each reporting period with changes in fair value recognized in earnings. ASU 2023-08 is effective for all calendar year-end entities on January 1, 2025. Upon adoption, entities will record a cumulative adjustment to retained earnings as of the beginning of the period of adoption. Retrospective restatement for the prior period is not required nor allowed. Early adoption is permitted.  

For calendar year-end public companies, they would also need to adopt the following accounting pronouncement for the year ending December 31, 2025, and for calendar year-end private companies for the year ending December 31, 2026 (some of these may require an evaluation of existing accounting process is recommended due to the amount of information needed for the disclosures): 

• Income Tax Disclosures: ASU 2023-09 (Income Taxes (Topic 740): Improvements to Income Tax Disclosures) mostly expands the disclosure requirements by requiring more disaggregated information related to the rate reconciliation for all public companies and related to the income tax paid for all entities. ASU 2023-09 is effective on January 1, 2025, for calendar year-end public companies and January 1, 2026, for all other calendar year-end entities. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted.  

• Profits interest: Companies often provide employees and other nonemployees with profits interest and similar awards to align compensation with the companies’ operating performance and provide those holders with the opportunity to participate in future profits and equity appreciation of the companies. The new ASU 2024-01 has been issued to clarify whether these awards fall under share-based payment arrangements under ASC 718 or similar to cash bonus or profit-sharing arrangements under ASC 710. ASU 2024-01 is effective on January 1, 2025, for calendar year-end public companies and on January 1, 2026, for all other calendar year-end entities. Early adoption is permitted. 

For calendar year-end public companies, they would need to adopt the following accounting pronouncement for the year ending December 31, 2027: 

• Expense Disaggregation Disclosures: Public companies will be required to disclose disaggregated information about certain costs and expenses in their financial statements’ footnotes. ASU 2024-03 (Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expense) and ASU 2025-01 were subsequently issued to clarify the effective date. ASU 2024-03 will require, among other things, the disclosure in tabular fashion of types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, SG&A, and research and development). Additionally, it also requires the inclusion in these tabular disclosures of certain amounts that were already required to be disclosed under other U.S. GAAP pronouncements, a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively, and the disclosure of the amount of selling expenses and the entity’s definition of selling expenses. This new guidance (as clarified by ASU 2025-01) is effective on January 1, 2027, for calendar year-end public companies. Early adoption is permitted. There is no similar requirement for private companies. 

Stay Informed on Best Practices for Year-End Audits  

Year-end audits are critical for companies to evaluate their accounting practices and maintain compliance with new pronouncements. Please connect with our team using the form below if you have any questions.