FASB Votes to Delay Effective Dates on 3 Standards for Privately Held Companies, Including Leases
New deadlines were recently extended for private companies, not-for-profit organizations and certain small public companies. FASB issued the new standard to recognize leases on the balance sheet and provide more information about leasing arrangements so that users can assess the amount, timing, and uncertainty of cash flows from leases. Learn more about its impact to your management team, and how we can help you form a plan.
On October 16, 2019, the Financial Accounting Standards Board (FASB) affirmed its decision to extend the implementation date for select standards for private companies, not-for-profit organizations and certain small public companies. Here are the new deadlines specifically for private companies:
Accounting Standards Update No. 2016-02, Leases (Topic 842) will be effective for annual periods beginning after December 15, 2020, which is January 1, 2021 for calendar-year-end companies.
Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments will be effective for annual periods beginning after December 15, 2022, which is January 1, 2023 for calendar-year-end companies.
Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities will be effective for annual periods beginning after December 15, 2020, which is January 1, 2021 for calendar-year-end companies.
Background on Leases
The most impactful change in accounting standards for most privately held companies is regarding accounting for leases. In February 2016, FASB issued new lease accounting requirements in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under its core principle, a lessee recognizes a right-of-use (ROU) asset and a lease liability on its balance sheet for most leases, including operating leases. This is expected to have a significant impact on most entities’ balance sheets.
FASB issued the new standard to increase transparency and comparability among entities by recognizing leases on the balance sheet and providing more information about leasing arrangements so that users can assess the amount, timing, and uncertainty of cash flows from leases. We wrote in 2017 about its impact, here.
Avoid the Temptation to Delay
With the new effective date for the Lease standard, a calendar-year-end private company will be required to adopt the standard effective January 1, 2021, for its annual financial statements, instead of January 1, 2020. Because 2021 financial statements won’t be issued until sometime in 2022, it may be tempting for private companies to delay evaluation of the impact in adopting this standard.
For a calendar-year-end private company to recognize its leases on the comparative financial statements for the calendar years ending December 31, 2021 and 2020, private companies should evaluate the impact of adoption of this new lease standard early in fiscal year 2020 to ensure not only that a process and system is in place to account for leases under the new standard, but also ensure that key stakeholders such as lenders are aware of the forthcoming changes. If a private company does not begin planning for the change and hold these critical communications with key stakeholders, it can become quickly challenging to catch up.
Thus, continuing to work on the completeness assessment of the lease population now will be a critical, likely time-consuming first step.
Remember: this is not simply an accounting department challenge — it may involve people from various departments across the company. Adoption of this standard may be a large project that possibly includes procurement, IT, and legal departments within the company, as well as stakeholders outside the company such as lenders who rely on specific financial measurements to guarantee lending.
Take advantage of the extension to prepare for the new implementation date by reaching out to your DS+B advisor, or contact Clint Seehusen or Elaine Nelson directly. Our team of audit specialists will work side-by-side with you to create a plan for compliance to the new standard, outline the to-do items in a clear checklist, and help you stay ahead of this FASB rule change. For more information, contact us today.