By Denise Lugo
The FASB on May 20, 2020, voted to extend a proposed year delay for revenue rules beyond franchisors to all privately owned companies that have not adopted the changes. The board also affirmed a similar delay on leases rules for private companies and not-for-profit entities.
The decision means that resource-strapped private companies, the nation’s largest business demographic, can better navigate reporting hurdles amid the coronavirus crisis.
A final standard will be issued in early June.
The vote is an amendment to Proposed Accounting Standards Update (ASU) No. 2020-300, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, issued in April to provide a limited deferral to a subset of companies.
Board members felt that extending the revenue deferral to more private companies was a necessary add in to help companies navigate the changes—new, historic rules that could prove to be substantial.
“The reason I would support the deferral for revenue recognition for privates and not-for-profits that have not yet adopted, simply has to do with timing,” FASB Vice Chairman James Kroeker said. “That is the time period in which they’re trying to close their books and that the auditors couldn’t be there was perhaps the most inconvenient time or the most difficult time in terms of adoption,” he said.
Private companies told the board that having to adopt the standards amid the work upheaval created by the novel coronavirus (COVID-19) pandemic, layered on unforeseen challenges. The virus created global and nationwide upheaval, causing states to set up stay-in-place decrees and companies to quickly put in place work-from-home mandates to help stem its spread.
“I have sympathy for what many of the companies are burdened with right now,” FASB member Susan Cosper said. “And I think when we think about the population of entities, I think they span a wide range of sophistication and they may not have the technology or the resources to be able to effectively implement the standard, let alone just dealing with the normal day-to-day blocking, tackling on operations,” she said.
Cosper said private companies had not been focused on an early adoption of the revenue rules that the board had purposely set for annual financial statements, because private companies typically do not do a lot of work until the end of the year and they place a lot of reliance on their auditors. “And so I think that the unfortunate circumstance is that [the crisis] overlaps the implementation of revenue but I think in many instances it’s not that much different than the concerns that we had around leasing,” she said.
FASB members also voted against extending the revenue delay to ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Board members said that standard would prove helpful to nonprofits that need to account for funds obtained from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, because it improves the accounting model they formerly used.
The Rules, The Changes
About 44 companies, trade groups, and accounting firms responded to Proposed ASU No. 2020-300 by the board’s May 6 deadline. Most respondents agreed with the delays but wanted the revenue extension broadened, according to board discussions.
The proposal specifically would defer ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which took effect in 2018 for public companies and in 2019 for private companies that are calendar year end filers. The standard replaces hundreds of pieces of industry-specific rules with a principles-based five step model for reporting revenue. Some private companies are still in the process of adopting the rules.
Under the changes, all private companies and nonprofits that have not yet filed GAAP financial statements, can opt to apply revenue rules to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020, a year later than today.
The board vote would also defer ASU No. 2016-02, Leases (Topic 842), which took effect in 2019 for public companies. Last year the FASB deferred those rules for private companies from 2020 to 2021. The standard requires companies to report—for the first time—the full magnitude of their long-term lease obligations on the balance sheet.
Under the changes, private companies, private nonprofits, and public nonprofits that have not yet filed financial statements can now apply leases rules to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, a year later than current requirements.
The board also clarified a narrow issue that some accounting firms raised regarding nonprofit entities that file in the Electronic Municipal Marketplace Access (EMMA) system.
Several respondents raised a question about whether public not-for-profit entities that have already filed interim financial information in the EMMA system that reflects the adoption of leases would also qualify for the leases deferral. Those practitioners asked for clarity about when financial statements are considered issued or made available for issuance—a criterion for getting the deferral.
The board said that if a nonprofit entity has published a full set of GAAP financial statements (quarterly or annual) on EMMA reflecting the new leases standard, then the deferral would not apply. If, however, the nonprofit has provided only some lesser degree of financial information, that nonprofit could apply the deferral.
This article originally appeared in the May 21, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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