FASB defers revenue recognition and leases standards for private companies and nonprofits due to coronavirus

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The Financial Accounting Standards Board released an accounting standards update providing a one-year effective date delay for private companies and organizations to apply the revenue recognition and leases standards, due to the COVID-19 pandemic, although they still have the option to apply the standards early.

The official accounting standards update formalizes a vote by FASB on May 20 (see our story).

“The FASB issued the ASU to allow certain companies and organizations who have not yet applied the revenue recognition and leases guidance to delay their implementation by one year,” said FASB Chairman Russell G. Golden (pictured) in a statement. “We believe the deferral will provide these stakeholders a measure of relief during this unprecedented time.”

The update enables private companies and not-for-profits that haven’t yet applied the revenue recognition standard to do so for annual reporting periods starting after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020.

FASB’s original proposal for deferring the revenue recognition standard had been targeted at franchise businesses, some of whom had complained about the timing of the standard in terms of their businesses (see our story). Ultimately the board decided to extend the deferral to other types of private companies.

“Based on feedback from our stakeholders, the FASB amended our original proposal that would have limited the revenue recognition delay to private company franchisors,” Golden added. “Consequently, the ASU provides the revenue recognition deferral to certain other private companies and organizations that have not yet issued (or made available) financial statements that reflect adoption of the guidance.”

This isn’t the first time FASB has delayed the revenue recognition standard. It was issued in 2014 as part of a major convergence project with the International Accounting Standards Board and was set to take effect for public companies in 2017 and for private companies in 2018.

For leases, the accounting standards update offers an effective date deferral to private companies, private not-for-profit organizations, and public not-for-profit organizations that haven’t yet issued (or made available) their financial statements reflecting the adoption of the guidance. It’s intended to provide near-term relief for certain entities for whom the adoption of the leases standard is imminent.

Under the standards update, private companies and private not-for-profit organizations may apply the new leases standard for fiscal years starting after Dec. 15, 2021, and to interim periods within fiscal years beginning after Dec. 15, 2022. Public not-for-profit organizations that have not yet issued (or made available to issue) financial statements reflecting the adoption of the leases guidance may apply the standard for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

The leases standard already took effect for public companies at the start of 2019 and was supposed to take effect at the beginning of this year for private companies and nonprofits. Last October, FASB decided to postpone the effective date of the leases standard for private companies and nonprofits, though it had already taken effect for public companies (see our story). It will now be pushed back for another year for private companies and nonprofits, who will have more time to deal with some of the issues encountered by public companies.

“Public companies had some challenges as they went through the adoption in their first year last year,” said Jennifer Booth, vice president of accounting at LeaseQuery, a company that provides software for lease accounting. “Everybody knew there was a big hurdle in terms of initial implementation, in terms of making sure you have an inventory of your leases and that you have the appropriate discount rate you’re using at transition, and getting the entries on the books. But I think what companies didn’t necessarily realize was there were a lot of the day 2 matters, like: ‘We got it on the books, but going forward how do we account for modifications and terminations? What controls do we have when we start a new lease?’ There has been quite an effort to get those amounts on the books. A lot of public companies realize they need to put policies and procedures in place to account for that ongoing activity.”

The COVID-19 pandemic has brought its own set of complications. “Many lessors have been contacted by their lessees about rent concessions, or modifications or adjustments to their leases,” said Booth. “There have been many requests for short-term relief, like some type of rent concession or rent deferral. Companies are in office buildings, and cash flow may be tight because they may not be able to run operations like they typically would, so they’re trying to preserve cash and they’re reaching out to their lessors and saying, ‘Nobody is in the building. We would like to either defer payments until later when business is back up and running, or can we get a rent concession since nobody is in the building? Can you take a portion off of our rent?’ That is definitely very widespread, and we were pleased to see the FASB offering relief to lessees. They said in their April 8 meeting and then followed up in a publication that they will allow lessees and lessors to more easily recognize these rent concessions and rent deferrals by recognizing those as income in the current period versus having to account for those as modifications.”

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