FASB standards delay will give private cos. a temporary reprieve

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Private companies, nonprofits and some smaller public companies will get some extra time to get ready for major accounting standards, under a recent proposal — time they can definitely put to good use, according to experts.

The Financial Accounting Standards Board voted at a meeting earlier this month to propose giving privately held companies and nonprofit organizations an extra two years, instead of just one year, to implement standards for leases, credit losses, long-duration insurance and hedging after they apply to publicly traded companies (see FASB to propose delays in major accounting standards). For standards such as leases that haven’t yet taken effect for public companies, small reporting companies with annual revenue under $100 million or a public float below $250 million would also get a two-year reprieve.

Insurance companies would appreciate the extra time, according to Matt Adams, insurance practice leader at Big Four firm PwC.

“It’s pretty welcome news,” he said. “Just before FASB deliberated, we did a survey of most of the major life and annuity companies about their perspectives on the prospects for a delay. Not surprisingly, in various categories, more than 91 percent of the respondents indicated that they really needed more time for testing and dry runs and assessments of how the implementation of the standard is going to affect their financial results.”

Insurers were among the industry groups pressing for the deferrals. “Overall I think the industry is really happy with this and lobbied the FASB in an organized and reasonable way,” said Adams. “FASB had met with about a dozen insurers in the runup to this latest meeting, to really understand the insurers’ point of view. In this one instance both sides got to a very reasonable answer.”

The proposed deferral on the leases standard is also earning plaudits, but Matthew Derba, a director at Top 100 Firm CohnReznick, advises companies to use the extra time wisely.

“I think it’s in companies’ best interest to assume this stuff is coming online and to proceed diligently, but cautiously,” he said. “Given some of the reasons that were cited as to why this delay is occurring, such as the difficulty in identifying leases and just putting together a transition strategy, I think it would be in their best interest to cautiously start that process and take inventory of leasing activities. This could be an opportunity to review your leases for a reporting entity. Maybe there’s lease-versus-buy decisions that could be made. Take it as an opportunity to achieve other objectives.”

The extra time could be used on finding the right software to help automate the extra work associated with the new standards.

“When the software vendors get into either modifying their existing offerings for insurers or creating new offerings for insurers to accommodate the standard, the insurers discovered that the five to 10 vendors that were in this sector had varying degrees of progress and success in developing quantifications or new software for this,” said PwC’s Adams. “It caused concern for insurers that they either wouldn’t have completed products in a reasonable amount of time to allow for implementation, or they might make the wrong choice of a vendor early on before many of their software product offerings had time to mature.”

The same goes for the leasing standard, also known as ASC Topic 842 under FASB’s Accounting Standards Codification. “I believe that identifying and leveraging a low-cost Topic 842 implementation tool is a good idea,” said Derba. “I emphasize low cost because this way it will enable a company to be proactive while maintaining a level of flexibility that they need to react as the FASB finalizes its work in this area.”

His firm, CohnReznick, has been offering clients an Excel-based spreadsheet to run some of the calculations.

“We call it the Lease Accounting Tool, or LAT,” said Derba. “It’s really just a calculation tool. It doesn’t have all the bells and whistles of a full-blown software package, but it is quite intuitive and it provides for automated calculations. I think it’s a good low-cost option for somebody that is looking to engage in a do-it-yourself type of implementation, and it’s geared toward private companies. If they’re going with a software package, many times there’s testing that’s required, so if they want to vet the outcome, we’re offering it as a potential in that area as well.”

PwC has been helping many of the major insurance companies implement the new standard for long-duration insurance contracts, such as life insurance and annuities. “I think the approach companies were taking to implement the market risk benefits aspect of the standard has proven to be particularly challenging for them,” said Adams. “The market risk benefit features are things like guaranteed minimum income and death benefits that are often add-on features to annuity and other contracts. Because the standard called for accounting for all of the market risk benefits at fair value, whereas before some were accounted as fair value and some were accounted for using traditional insurance accounting, I think the complexity associated with the implementation has proven to be pretty substantial.”

Several other aspects of the standard have also been difficult to implement.

“The standard calls for the grouping or cohorting of insurance policies at a more granular level than under the prior standards,” said Adams. “Companies really needed more time to evaluate what technologies made the most sense for the standard because of the need for substantially more data to properly assess the impact of the market risk benefit aspects of the standard and the cohorting issues. I think that’s proven to be a bit more challenging for a lot of different reasons. It’s well known for those who follow this sector that data quality and management can be challenging. This is a sector that uses third-party administrators quite a bit, so many of them don’t have direct control over data.”

He and Derba both see benefits in delaying some of the other standards for private companies.

“Each one has different challenges,” said Adams. “The current expected credit loss standard, I think, has a more substantial impact on banking and consumer finance companies than on insurers. In both cases, the current expected credit loss standard and the leases standard being narrower aspects of U.S. GAAP for those companies affected, whereas this long-duration targeted improvement standard is a fairly comprehensive change to the basic accounting framework for life annuity companies.”

“I can understand why they’re pushing back CECL,” said Derba. “From what I understand, it sounds like the banks are having a tough time implementing it. There’s a lot of changes that are very pervasive to the organization, so it’s a bit of a relief to everybody that they’ll have the benefit of observing their [public companies] transition, the pros and cons of their efforts, and use that as a model. It’s very welcome and well received.”

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Accounting standards Financial reporting Insurance CECL PwC FASB