The FASB on November 10, 2021, unanimously voted against delaying lease accounting rules a third time for private companies, citing concerns that investors would need to wait almost eight years for the more transparent information the rules afforded.
“One of the challenges with multiple deferrals is there’s always the expectation there’s another deferral coming. One of the reasons I was happy this came in was to take that off the table so people do realize there is some certainty of adoption, which I think is important,” FASB Chair Richard Jones said. “I am also sympathetic to the challenges and pain that go along with adopting a major standard – I don’t see them getting better over time, they will be there two years from now.”
The vote means private companies need to continue to plan to adopt the rules for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
Accounting Standards Update (ASU) No. 2016-02, Leases, was issued in 2016 to require the full magnitude of long-term lease obligations to be recorded on balance sheets, a historic first in U.S. financial reporting. Public companies had to adopt the changes in 2019.
The standard was deferred in 2019 and 2020 for nonpublic entities after companies flagged similar implementation challenges.
“I did not find the request for an additional deferral to match the reasons why I was supportive of the request back in June of 2020,” FASB member Marsha Hunt said. “It seems to me that resource constraints, priorities for a number of organizations are different. People are learning how the pandemic, how the current economic environment is affecting their businesses. It doesn’t seem that we were in the temporary situation that we were in back in June of 2020.”
The deferral topic was raised by a state CPA which asked the board to consider delaying the rules two additional years, citing – among other matters – concerns that private companies were forced to obtain new sources of financing amid the COVID-19 pandemic, and would need more time to work with lenders to waive or modify debt covenant agreements that might be impacted by the changes.
Board members flagged feedback from financial statement users on the Private Company Council as helpful in making their determination not to grant the delay, stating those users said the rules should be adopted.
“And certainly when we deferred it the last time we got some negative feedback from users who, were users that looked at both private and public companies and so I thought that was pretty compelling,” FASB member Susan Cosper said.
Private companies have known for years that the standard was coming and therefore have been in position to ensure that at least their footnotes were up to date, according to the discussions.
“We did stagger the effective date for interim and annual reporting, because we do recognize that a lot of the smaller nonpublic entities will wait until after their year-end until their auditor is coming in, or just before the auditor is coming in, to do the audit work to implement new standards and that’s true of even for large standards like rev rec,” FASB member Christine Botosan said. “And so for some of these entities, it won’t even be until 2023 that they’ll probably start looking at this, which is another 18 months from now.”
For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases , also on Checkpoint.
Additional analysis of the lease standard can be found in the Accounting and Auditing Update Service[AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service[SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—an Explanation and Analysis of Accounting Standards Update No. 2016-02.
This article originally appeared in the November 11, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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