This blog post looks at the FASB’s recent decision to change the nature of how the effective dates of standards are staggered for different entity types.
Basis for the change
Earlier this year, the FASB was lobbied by the banking industry, the Chamber of Commerce and members of Congress to delay the effective dates for implementation of Accounting Standards Updates (ASUs) about leases, credit losses (CECL) and hedging. Private companies, smaller public companies, and not-for-profit organizations have found that they are challenged in implementing new standards, specifically in areas such as (1) availability of resources, (2) understanding and applying guidance from post-issuance standard-setting activities, (3) developing or acquiring information technology and expertise in creating and implementing new systems or effecting system changes, and collecting the necessary data required, and (4) gaining knowledge or experience from implementation issues encountered by larger public companies. Based on feedback from stakeholders, the FASB has gained a greater understanding about these challenges and has become more cognizant of how they are often magnified for private companies, smaller public companies, and not-for-profit organizations.
The FASB responds
In response, the FASB has recently presented, in ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU No. 2019-09, Financial Services—Insurance (Topic 944): Effective Date, what it terms a new “philosophy” to extend and simplify how effective dates are staggered between larger public companies and all other entities. This is despite prior reluctance to make changes to the effective dates, specifically regarding ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, for which the FASB had already created a Transition Resource Group to help answer implementation questions and provide more clarity overall. Effective dates in ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which has always been intended to align with ASU No. 2016-13, have also been amended.
Under the FASB’s new approach, major ASUs would first be effective for public business entities (PBEs) that are SEC filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC’s definition (“bucket one”). All other entities, including those eligible to be SRCs, all other public business entities, and all non-public business entities (private companies, not-for-profit organizations and employee benefit plans) would make up “bucket two,” and would have a delayed effective date, which is expected to be at least two years after the date for bucket one entities. For ASU Nos. 2016-02, Leases (Topic 842), 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and 2016-13, the effective date for PBEs has already passed or nearly arrived; only effective dates for non-PBEs have been delayed. ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, is the lone standard for which all effective dates, including those of PBEs, are being delayed. See Accounting and Auditing Update No. 2019-43, Deferral of the Effective Dates of Major New Accounting Standards for Certain Entities, for additional coverage (available on Thomson Reuters Checkpoint); a tabular summary of the original and deferred effective dates is also presented.
New standard operating procedure or unique circumstances?
Although the FASB referred to the implementation schedule as a new philosophy, it is unclear whether it was conceived to deal specifically with the four major ASUs that were to take effect in close proximity, or if it will be applied prospectively to other ASUs. The FASB has indicated that it anticipates continued use of this philosophy for future major ASUs, but that the establishment of effective dates will still be determined on an individual ASU basis and that it reserves the right to vary from the philosophy after thoroughly considering the costs and benefits of a future major ASU. The FASB will be monitoring the effect that applying the philosophy may have on financial statement users and whether the SRC threshold is appropriate for other instances, possibly leading to further tweaking of the philosophy.
The FASB indicated that it would consider further amending ASU No. 2016-02 for private companies next year if public companies’ experience reveals areas where costs of compliance can be reduced for private companies. However, it warned that the extension does not mean that private companies should now take a “wait and see” approach. The extra time that has been afforded to private companies should allow them to gear up for their unique situations and learn from those who have already begun implementation. For instance, as related to ASU No. 2016-02, private companies should use the extra time to accumulate, evaluate and properly record all their leases, and identify a software solution to track them going forward.