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FASB

Subset of Companies Get Deferral on New FASB Rules for Credit Losses, Hedging, Lease, Insurance Rules

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Denise Lugo

As expected, the FASB on November 15, 2019, issued two new accounting standards with a set of split deferrals on rules for credit losses on loans, leases, hedging, and long-term insurance contracts, four of the most significant new financial reporting changes to be introduced nationwide in decades.

The date changes are especially meaningful for companies impacted by the new credit loss standard, which requires banks to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. The rules were issued in response to the 2007-2008 global financial meltdown, the largest since the Great Depression.

For large public companies that are SEC filers, the rules will go into effect as planned on January 1, 2020, for calendar year-end companies, while smaller public companies will have until 2023 to adopt it.

The deferral comes amid staunch pushback over credit loss rules by some banking groups and U.S. legislators, which they said should be indefinitely deferred for all companies, both big and small, so that an impact study can be done about the changes.

For date changes on leases and hedge accounting rules, private companies and not-for-profit organizations will get until 2021 to apply those provisions. For guidance on long-term insurance contracts, all companies will get additional time to implement those changes, including large public companies for which it was deferred one year to 2022.

Split Set of Deferrals

The deferrals were issued as Accounting Standards Update (ASU) No. 2019-10Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective dates, and ASU No. 2019-09Financial Services—Insurance (Topic 944): Effective date.

Under the provisions, ASU No. 2016-13Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses), was deferred from 2020 to 2023 for smaller reporting companies (SRCs) as defined by the SEC, and from 2022 to 2023 for private companies and not-for-profit organizations.

The reporting changes also defer ASU 2017-12Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2016-02Leases (Topic 842), from 2020 to 2021 for private companies and not-for-profits. Those rules are already in effect for public companies, so no deferral was granted for those entities.

Similarly, ASU No. 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was deferred from 2021 to 2022 for public companies, from 2021 to 2024 for SRCs and from 2022 to 2024 for private companies and nonprofits. The insurance standard, which provides targeted rules relevant to life insurance and annuities contracts, took the board 16 years to complete.

The new ASUs, ASU No. 2019-10 and ASU No. 2019-09, also provide a shift in the board’s philosophy for setting reporting dates on major new standards. Some FASB members have – in board discussions – raised concerns about the potential for comparability issues that might arise from the effective date split between public companies.

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.

For an in-depth analysis of the FASB’s standard for the classification and measurement of financial instruments, please see Catalyst: US GAAP – Financial Instruments — Classification and Measurement.

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.

 

 

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