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A PDF version of this publication is attached here: The quarter close - second quarter 2021 (PDF 1.41mb)
Introduction
In the second quarter of 2021, environmental, social, and governance (ESG) matters--in particular, climate change--continue to be at the forefront. With Earth Day as the backdrop, President Biden announced new targets for reducing US greenhouse gas pollution. In May, President Biden issued an executive order calling for a wide range of actions to combat risks to the economy and financial system stemming from climate change. As Gary Gensler steps in to lead the SEC, ESG is expected to be one the agency’s priorities. We take a closer look at the SEC under Gensler’s leadership, including recent steps on the path toward new climate-change disclosures.
It’s not just the Biden administration focused on climate change. More and more companies are making net zero or carbon reduction commitments, bringing increased focus to the related accounting and reporting implications. Our National Office specialists weigh in on “green” accounting and what companies should be thinking about.  
Leases also continue to be a hot topic as companies plan for a return to the office and consider making changes to their real estate strategies. This quarter we discuss frequently asked questions related to the accounting for subleases and leasehold improvements.
On the standard-setting front, the FASB is poised to issue an invitation to comment on its future agenda. Will ESG make the short list? We take a sneak peek at some of the topics likely to be part of the discussion, along with a recap of other standard-setting developments.
This edition of The quarter close highlights these and other relevant accounting and reporting topics you should consider as you close out the second quarter of the year.
Headlines - Second quarter 2021
Gensler takes the helm at the SEC: what to expect

To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.

- Gary Gensler, SEC Chair, June 11, 2021

Now that Gary Gensler has been confirmed as the new SEC Chair, the SEC has announced its short- and long-term plans for actions that will shape its regulatory agenda. Notably, the list includes plans to propose amendments to enhance registrant disclosures regarding climate risk and human capital management, a signal that ESG is a high priority.
Also front and center for the SEC is the ongoing surge of special purpose acquisition company (SPAC) transactions. The SEC staff continues to focus on investor protection, with John Coates, Acting Director of the SEC’s Division of Corporation Finance, recently stating that the staff “will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.” Investor protection is also likely to be a primary focus in other emerging areas, such as cryptocurrencies and the “gamification” of trading.
Listen to our What will Gensler do? Priorities and focus areas for the SEC podcast for more insights on what we might see in the future from the SEC. For the latest on SPACs, read our In the loop, The SPAC spree: Current state.
New climate-change disclosures on the horizon?
Increased scrutiny from investors, shifts in consumer and customer expectations, and likely policy changes under the Biden administration mean ESG metrics and reporting are fast becoming a business imperative. In March, then-acting SEC Chair Allison Lee got the ball rolling on potential SEC rule-making by asking for public input on climate change disclosures. The expectation is that the SEC will use this feedback to propose new disclosure requirements, perhaps by the end of the year.
The SEC’s request for input covers a lot of territory. Themes include which metrics to measure and how, where and when disclosures should be provided, and the advantages and disadvantages of industry-focused standards and existing frameworks. Read PwC’s response to the SEC’s request in which we support the SEC’s efforts and provide suggestions to the SEC as they consider potential rulemaking. For more background on the request for comment, listen to our The SEC’s request for comment on climate disclosure, explained podcast.
In the meantime, the SEC has announced an enhanced focus on climate-related disclosure by the Division of Corporation Finance and established a new Climate and ESG Task Force at the Division of Enforcement. With the increased attention in this area, now is the time to revisit disclosures in the context of existing requirements. For more on the existing guidance, read our In the loop, Don’t wait until the SEC staff asks you about climate change. And, for everything ESG, visit our ESG "hot topics" page and ESG: A bridge to action.
Inside scoop - Insights from the frontlines
Here are some of the technical accounting trends we’re seeing during the second quarter of 2021:
Planning for a return to the office? Accounting for subleases and leasehold improvements
As more companies navigate a return to the office, some are finding themselves with excess leased space and are looking to reduce costs by subleasing excess assets. Others are making changes and improvements to their leased space, or entering into new leases as a result of changing real estate needs or to take advantage of current market conditions. These activities raise a number of questions about the related accounting implications under ASC 842, including accounting for subleases, leasehold improvements, and allowances received from lessors.

87% of surveyed executives expect to make changes to their real estate strategy in the next 12 months.

- PwC’s US Remote Work Survey, January 12, 2021

Accounting for subleases by the original lessee
An arrangement is accounted for as a sublease when the original lessee remains obligated under its “head lease” but conveys the right to use the asset to another party under a sublease. In this situation, the original lessee continues to account for the right-of-use asset and lease liability as it did before the sublease, unless it has been modified. The original lessee should, however, consider whether any lease reassessment events or an impairment has occurred. The original lessee, as sublessor, would classify and account for the sublease based on the asset being sublet, rather than the right-of-use asset associated with the head lease. 
When the lessor in the head lease replaces the original lessee with a new lessee, the original lessee should assess whether its lease has been modified or terminated, and apply the relevant model. The lessee should also consider other related accounting impacts. For example, the lessor may have agreed to replace the original lessee on the condition that it provides a payment guarantee, in which case guarantee accounting is likely to apply. Additionally, leasehold improvements may have a shorter useful life, or may have become impaired.
Lease guidance requires a head lease and sublease to be presented separately on the balance sheet. Questions often arise as to whether separate presentation is also required for sublease income. Although disclosure of sublease income separate from sublease expense is required, the lease guidance does not directly address sublease income statement presentation. Therefore, while gross presentation would always be acceptable, we believe net presentation (i.e., head lease expense offset by sublease income) in the income statement is also acceptable when subleasing is not a significant business activity for the entity.
Accounting for leasehold improvements
The accounting for improvements to leased space depends on whether the improvements are considered lessee or lessor assets and who is paying for them. Determining whether an improvement is a lessee or lessor asset requires judgment. Generally, if a lease does not specifically require a lessee to make an improvement, the improvement should be considered a lessee asset. Otherwise, the nature of the improvement may be helpful in making the determination. For example, improvements would likely be considered lessor assets if they are not specialized and it is probable they could be utilized by a subsequent tenant.
The determination matters because a lessee asset is reflected as an owned asset on the lessee’s balance sheet. Lessor contributions to fund the cost of a lessee asset are considered lease incentives and accounted for accordingly. In contrast, lessor assets are not generally recorded by the lessee. Payments the lessee makes to fund construction of lessor assets would generally be considered a lease payment and included when classifying and measuring the lease.
Recently, some companies are making changes to their leased space during the lease term. These changes can trigger modification accounting when the scope or consideration changes, or if the lessee funds construction of lessor assets that are not considered a separate lease. New improvements can also result in a triggering event that could impact the lease term or the useful life of existing leasehold improvements. For example, pre-existing improvements that are removed or demolished may need to be written off. 
Leasehold improvement allowances received after lease commencement
As noted above, when a lessor is reimbursing a lessee for lessee assets, the reimbursement is accounted for as a lease incentive. These reimbursements are typically received after the lessee provides evidence that the work was completed. Since cash may be received after lease commencement or the date the lease is modified, the question arises whether the lessee should record expected incentives and how the cash should be recorded when it is received.
Any amount of incentive that is reasonably certain of being used should be considered a fixed lease payment and be included in the measurement of the lease liability (a reduction) and the corresponding right-of-use asset. The lessee should estimate when the incentive is expected to be received and use that estimate to measure the liability. If the timing or amount of the incentive differs from the estimate, the lessee should analogize to the remeasurement guidance for lessees and adjust the lease liability using the same discount rate used at the lease commencement date.
For more information
Read our Leases guide for a more detailed discussion on these topics: accounting for subleases, leasehold improvements, and lessor reimbursements. If you haven’t yet adopted ASC 842, you can also find our guidance on ASC 840 on Viewpoint. The guidance differs significantly from ASC 842 since under ASC 840, most leases are not reflected on the lessee's balance sheet and there are also differences in the guidance for modifications and lease terminations. For more on leases hot topics, watch the recorded Lease accounting - Springing forward webcast and listen to our COVID-19: Leasing questions, answered podcast.
Revenue: Performance obligations in digital business models
Digital business models are driving change in all industries. Many of these offerings involve multiple goods and services and, therefore, require significant judgment when determining the performance obligations, or units of account, for applying the revenue guidance. A performance obligation is a promise to provide a “distinct” good or service to a customer. Distinct goods or services are accounted for separately. Goods or services that are not distinct are bundled together into a single performance obligation.
What is a “distinct” good or service?
A good or service is distinct if it is both: (1) capable of being distinct; and (2) separately identifiable from other promises in the contract (i.e., distinct in the context of the contract). A good or service is capable of being distinct if the customer can benefit from that good or service on its own or with other readily available resources.
Assessing whether a good or service is separately identifiable often requires judgment. The objective is to determine whether the company is promising to transfer individual goods or services to the customer, or to transfer a combined item, to which those individual goods and services are inputs.
The revenue guidance provides three factors that indicate a good or service is not separately identifiable: (1) the entity provides a significant service of integrating the goods or services into a combined output; (2) one or more of the goods or services significantly modifies or customizes other goods or services in the contract; or (3) the goods or services are highly interdependent or highly interrelated. However, these factors are not an exhaustive list.
“Smart” devices and similar offerings
Offerings such as “smart” devices often include multiple elements--for example, a piece of equipment, embedded software, and subscription services accessed through the cloud. In these situations, determining which elements are distinct significantly impacts the accounting outcome because if the equipment with embedded software is distinct, revenue allocated to that element is recognized at the point in time it is delivered to the customer. However, if all of the elements in the arrangement are combined, revenue is likely recognized over time for the combined performance obligation.
Key considerations include whether the equipment or device with embedded software is highly interdependent or highly interrelated with the subscription services. This requires obtaining a detailed understanding of the functionality provided by each element and how they interface with each other. Subscription services that only provide additive functionality are likely distinct. If all of the elements together provide new or different functionality and there is significant two-way interaction between the elements, this may indicate they are not distinct and should be combined.
It is important to keep in mind that an offering marketed to customers as a “solution” is not automatically a single performance obligation. That conclusion must be supported by a comprehensive assessment of whether the underlying goods and services are distinct using the criteria outlined above.
Ask the National Office - Perspectives from our professionals
“Green” accounting: what you need to know
Ashleigh Pierce
Director, National Professional Services Group, PwC US
Question: What do we mean by “green” accounting?
Ashleigh: It refers to the accounting for steps companies take to make their operations more environmentally friendly (part of the “E” in ESG). This might include accounting for carbon reduction strategies, such as purchasing carbon offsets, investing in renewable energy projects, or embedding ESG targets into financing agreements or compensation metrics.
Companies in all industries are making pledges to reduce their carbon footprint. One such pledge is “net zero,” which refers to a company’s commitment to reduce its greenhouse gas emissions and to offset all emissions that cannot be reduced.
Question: What makes a net zero strategy effective?
Ashleigh: There are numerous strategies and no one-size-fits-all approach. An effective net zero strategy is one that combines actions such as:
Reducing: Companies can reduce emissions by investing in technology and infrastructure by doing things like electrifying operations to reduce reliance on fossil fuels or green certifying buildings. To further reduce, they can directly invest in renewable energy sources that generate renewable energy credits (RECs) or they can purchase RECs from a power generator.
Absorbing: To absorb unavoidable emissions, companies can capture and store some of the carbon emitted, as airlines sometimes do when flying.
Offsetting: To offset emissions that cannot be avoided or absorbed, companies can invest in programs such as reforestation to “make up” for the emissions they themselves produce.
Maria Constantinou
Director, National Professional Services Group, PwC US
Question: What is the accounting for these strategies?
Maria: For many common strategies to achieve net zero, a company should follow existing US GAAP for other similar projects (e.g., existing rules for capitalization of a plant). Those that are investing in technology should also consider whether any research and development costs can be capitalized, or if they should be expensed as incurred.
For some strategies, such as the purchase of RECs or carbon offsets, there is no authoritative guidance within US GAAP. As a result, a company may account for a REC or carbon offset as (1) inventory (if held for use or sale) or (2) an intangible asset (if held for use). We believe either approach is acceptable provided it is applied consistently, reasonable based on the intended use, and properly disclosed.
Question: What else should companies consider on net zero?
Maria: These strategies can be extremely complicated, and no two are the same. It is important to understand the underlying source of each emissions reduction and how each program works to get the accounting right. This will also help a company avoid greenwashing (overstating the level of emissions reduction a company achieves), which can happen unintentionally as companies navigate the complexities in this evolving area.

For more information, see our latest In the loop, Zeroing in on net zero: What it means for your company.

In transition - Practical reminders for new standards
FASB clarifies the accounting for modifications of freestanding equity-classified written call options
On May 3, the FASB issued ASU 2021-04, which provides a principles-based framework for issuers to account for a modification or exchange of freestanding equity-classified written call options. The new guidance clarifies that to the extent applicable, issuers should first reference other GAAP to account for the effect of a modification. If other GAAP is not applicable, the guidance clarifies whether to account for the modification or exchange as (1) an adjustment to equity, with the related EPS implications, or (2) an expense, and if so, the manner and pattern of recognition. The accounting depends on the substance of the transaction, such as whether the modification or exchange is the result of raising equity, a financing transaction, or some other event. The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted.
SEC modernization of Regulation S-K disclosure requirements
Amendments to Regulation S-K became effective in February, which modernize, simplify, and enhance Management’s Discussion and Analysis (MD&A), streamline supplementary financial information, and eliminate the requirement to provide certain selected financial data. These changes impact many SEC filings, including Forms 10-K, 10-Q, 20-F, and 40-F and many registration statements. As a reminder, registrants are required to comply with the new rules beginning with the first fiscal year ending on or after August 9, 2021. Registrants may early adopt the amended rules at any time after the effective date (on an item-by-item basis) as long as they provide disclosure responsive to an amended item in its entirety. For more detail on the amendments, read our In depth, SEC amends MD&A and eliminates selected financial data.
Human capital disclosures: a look back at 10-K trends
We looked at more than 2,000 10-K filings since the SEC's new human capital disclosure rules went into effect. Here are some of the trends we noted.
On the horizon - Standard-setting developments
Here are standard-setting developments you need to know about as we make our way through 2021:
Coming soon: an invitation to comment on the FASB’s agenda
The FASB plans to issue an invitation to comment this summer giving stakeholders an important opportunity to weigh in on future areas of focus, helping shape the standard setter’s agenda for years to come. The FASB provided a preview of some of the issues they are considering at the April 8 FASAC meeting. Potential topics include high-profile emerging issues, such as ESG and digital assets. Other topics being floated include recognition and measurement of government grants, accounting for internally-developed intangible assets, and distinguishing liabilities from equity.
The IASB has already issued its request for input on its agenda through a request for information with comments due by September 27. The request contemplates several issues that could be addressed in a future project, some touching on similar themes as those likely to be included in the FASB’s request.
FASB proposes amendments to expand fair value hedge accounting
On May 5, the FASB issued an exposure draft, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, that would expand companies' abilities to hedge the interest rate risk of portfolios of prepayable financial assets (or beneficial interests) in a fair value hedge. The proposal expands the use of the portfolio layer method (currently referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of prepayable assets. It also provides additional guidance on the accounting and disclosure of fair value hedge basis adjustments associated with a portfolio layer hedge strategy, and how they interact with the guidance on credit losses. Comments on the exposure draft are due by July 5.
FASB moves forward with amendments to the leases standard
On April 14, the FASB decided to finalize amendments requiring a lessor to classify a lease with variable lease payments (that do not depend on an index or rate) as an operating lease if (1) the lease would have been classified as a sales-type or direct financing lease and (2) the lessor would have recognized a selling loss at lease commencement. The FASB directed the staff to draft a final ASU.
In addition, the FASB preliminarily decided to amend the leases standard to allow lessees that are not public business entities to elect to use a risk-free rate as the discount rate by class of underlying asset, rather than for all leases. Look for an exposure draft for comment soon.
FASB's latest decisions on segment reporting
The FASB continues to discuss its project to improve disclosures about reportable segments of a public entity. Currently, the FASB is planning to add a new principles-based disclosure of segment expenses that are (1) regularly provided to the chief operating decision maker (CODM) and (2) included in the reported measure of segment profit or loss. Recent tentative decisions were made on reconciliation requirements, interim disclosures, and the impact of changes to reportable segments. Next up, the FASB plans to further discuss the consideration of segment expenses that can be "easily derived" from information regularly provided to the CODM. Refer to the FASB's project page for the latest updates.
PwC Reference library
PwC’s accounting podcasts
PwC's Accounting podcast series includes a library of podcasts covering the most significant accounting and reporting trends relevant for the second quarter close.
In addition, our Thursday podcast series for CFOs, controllers--really, anyone in finance--asks big questions as businesses adapt to the changing environment. This season, our Forecast 2021 episodes focus on preparing you for the year ahead by offering insights to help you better understand and manage some of the opportunities and challenges that your company might face--think policy, emerging technology, and other big picture topics, but through a finance lens.
Some of the most popular podcasts from this quarter include:
For all of our podcasts on today’s most compelling accounting and financial reporting issues, subscribe to our podcast feed on your podcast platform of choice.
In depth
In brief
In the loop
Point of view
Governance insights
Accounting and reporting webcasts
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Appendix - Effective dates
Calendar year-end
PBEs
Nonpublic companies
2021
Equity securities, equity method, and derivatives (a)
Simplifying accounting for income taxes
Cloud computing
Collaborative arrangements
Consolidation: VIE related party
Defined benefit plan disclosure requirements
Episodic television series
Goodwill: Evaluating triggering events
Hedging
2022
Convertible debt and contracts in own equity (b)
Freestanding equity-classified written call options (a)
Equity securities, equity method, and derivatives (a)
Freestanding equity-classified written call options (a)
Leases
NFP entities: contributions of non-financial assets
Simplifying accounting for income taxes
2023
Insurance: long-duration contracts (c)
Credit losses (d)
Goodwill impairment (d)
2024
Convertible debt and contracts in own equity (b)
2025
Insurance: long-duration contracts (c)
a) A consensus of the FASB Emerging Issues Task Force.
b) Effective in 2022 for SEC filers other than SRCs; effective in 2024 for all other companies, including SRCs.
c) Effective in 2023 for SEC filers other than SRCs, and effective in 2025 for all other entities, including SRCs.
d) Effective in 2020 for SEC filers other than SRCs, and effective in 2023 for all other entities, including SRCs.
For further information on the new accounting guidance for public and nonpublic companies, including available PwC resources, refer to the Guidance effective for calendar year-end public companies and Guidance effective for calendar year-end nonpublic companies pages on Viewpoint.
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