More COVID-19 relief: FASB to defer implementation deadlines
- May 21, 2020
- Posted by: Hood & Strong
- Category: COVID-19
During the novel coronavirus (COVID-19) pandemic, many businesses are, at best, facing unprecedented operational challenges and, at worst, struggling to avoid bankruptcy. In such dire circumstances, the last thing management wants to think about is updating the company’s systems and records to comply with new accounting rules. Fortunately, the Financial Accounting Standards Board (FASB) has unanimously decided to propose one-year deferrals of the updated revenue recognition and leases standards for certain entities, including specific types of businesses and nonprofits. Here are the details.
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), took effect in 2018 for public companies, and 2019 for private companies. It replaces a plethora of industry-specific revenue guidance with a principles-based five-step model for reporting revenues earned from customer contracts.
The guidance is effective for annual reporting periods, but not for interim periods. So, private companies are currently in the process of adopting the guidance, and the audit of their first set of financial statements under Topic 606 is in process for many private companies.
On April 8, the FASB decided to give privately owned franchisors the option to defer the effective date of the revenue recognition standard to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. The FASB also added a research project to its agenda to evaluate how to reduce implementation costs associated with applying the guidance to initial franchise fees.
ASU 2016-02, Leases (Topic 842), took effect in 2019 for public companies. In November 2019, the updated guidance was deferred to 2021 for private companies. The update requires companies to report — for the first time — the full magnitude of their long-term lease obligations on the balance sheet.
The FASB has decided to amend the effective date of the updated leases standard for private companies and private not-for-profit entities to annual reporting periods beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022.
The rules will also be amended for nonprofit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (public NFPs) and that have not yet issued financial statements. For these entities, the rules will change to take effect for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will continue to be permitted.
“With respect to leases, I recognize that, with the dislocation that’s occurring, the need to divert resources,” said FASB Chairman Russell Golden. “There is a need to defer leases by one year in my mind, both with private companies as well as those not-for-profit conduit borrowers that have not issued their financial statements. It is that subcategory that I think is driving the need to do this in a timely manner as a lot of them have a June 30 year end and a lot of those entities are universities and hospitals and I think the deferral will go a long way.”
The pandemic has dislocated accounting staff and affected entities’ general transition plans. FASB members unanimously agreed to grant the deferrals, because they were sensitive to the implementation concerns brought out by the COVID-19 crisis.
“In this period of uncertainty for not only the organizations that are applying [U.S. Generally Accepted Accounting Principles] but for users of the financial statements looking past the actual numbers and trying to look to the future about the entities, I think it’s important that we have as much stability as possible in the actual financial reporting space, so I feel very strongly [about] deferring,” said FASB member Marsha Hunt. “This is not the right environment in which to be introducing change, which brings with it risk of implementation issues… It’s more supportive of all entities if we could take this off their plate so that they can focus on their operational concerns right now.”