FASB Offers Reprieve from Updated Lease and Revenue Recognition Rules
If you're feeling burned out from coping with extreme circumstances brought on by the COVID-19 pandemic, you're not alone. Fortunately, the Financial Accounting Standards Board (FASB) and Congress are offering some compliance-related relief for certain entities.
Deferral of Revenue Recognition Rules
Let's start with Accounting Standards Update (ASU) No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities. It postpones the effective dates to two standards. First, ASU 2014-09, Revenue from Contracts with Customers (Topic 606), grants a one-year deferral for privately owned companies and nonprofits that haven't yet adopted the standard.
Under the deferral, private companies and not-for-profit organizations that qualify can choose to apply the updated revenue recognition rules to annual reporting periods beginning after December 15, 2019. Qualifying entities also can defer the rules for interim reporting periods within annual reporting periods beginning after December 15, 2020. Early adoption is allowed.
The updated revenue recognition guidance was issued in 2014 to replace hundreds of industry-specific accounting rules with a principles-based five-step model for reporting revenues earned from certain types of customer contracts. This is the second delay granted for the revenue recognition standard.
The FASB issued the previous deferral in 2015. It allowed public companies to apply the updated guidance to annual reporting periods beginning after December 15, 2017, and private companies to apply it to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.
Public companies and some nonprofits have already adopted the rules. But, when the COVID-19 pandemic hit, many private companies were in the process of preparing their first annual financial statements under the updated guidance. So, the FASB approved an additional deferral.
CARES Act Defers CECL Standard for Large Banks
On March 27, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act. One provision of this law will allow large public banks to temporarily postpone the current expected credit loss (CECL) standard.
Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued in response to the financial crisis of 2007–2009. The updated guidance relies on estimates of probable future losses, rather than the incurred-loss model that's used under existing guidance. The change was originally scheduled to go into effect for most public companies in 2020.
Now, under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates can choose to postpone implementation of the CECL standard until the earlier of:
- The end of the national emergency declaration related to the COVID-19 crisis, or
- December 31, 2020.
Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they've communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.
This is the second time the CECL has been delayed. In October 2019, the Financial Accounting Standards Board (FASB) extended the deadlines for smaller reporting companies (SRCs) from 2021 to 2023, and for private entities and nonprofits from 2022 to 2023.
Today's uncertain lending environment could create significant credit losses for some banks. To measure those losses under the updated guidance, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. Making estimates could prove challenging. Fortunately, the CARES Act gives large banks extra breathing room during the pandemic.
Deferral of Lease Rules
The second deferral under ASU 2020-05 applies to the updated lease guidance. Specifically, it grants a one-year delay of ASU No. 2016-12, Leases (Topic 842), for the following entities:
- All private companies
- Private not-for-profit organizations
- Public nonprofits that haven't yet adopted the rules
Under the deferral, private companies and private not-for-profit organizations can choose to apply the standard to fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-for-profit organizations that haven't yet issued (or made available to issue) financial statements reflecting the adoption of the lease guidance can choose to apply the standard to fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed.
The updated lease guidance was issued in 2016 to require companies — for the first time — to record the full magnitude of their long-term lease liabilities and assets on the balance sheet. Public companies had to adopt the rules for fiscal years beginning after December 15, 2018, and it would have taken effect for private companies with fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Previously, the FASB had issued a one-year deferral in November 2019 for private companies.
Proposal to Defer Long-Term Insurance Standard
On July 9, the FASB issued a proposal to defer the updated guidance for long-term insurance contracts to help insurers navigate hurdles brought by the COVID-19 pandemic. If approved, the proposal would provide a one-year deferral of ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
The deferral would postpone the effective dates of ASU 2018-12 for large public companies until 2023, for smaller reporting companies (SRCs) until 2025, and for private companies and not-for-profit organizations until 2025. Earlier adoption is encouraged.
ASU 2018-12 provides simpler, more transparent ways to report technical aspects of life insurance, disability income, long-term care and annuity payouts. If approved, the proposal will be the second delay granted to insurance companies. In November 2019, the FASB deferred the updated guidance after the American Council of Life Insurers said that companies needed more time to put software systems in place, educate investors and staff, and work on other troublesome matters.
These standards are some of the most substantial accounting changes to hit the U.S. marketplace in decades. The FASB recognizes that many companies will need more time to evaluate and process the changes under these unprecedented conditions. If you have questions about implementing these changes, contact your Brady Ware accounting and auditing advisors.