FASB to propose delays in major accounting standards
The Financial Accounting Standards Board voted Wednesday to propose to delay some of its major accounting standards — including credit losses, leases, hedging and long-duration insurance contracts — for private companies, nonprofits and small reporting companies.
FASB members voted to issue two proposals for public comment. One of them would delay the effective dates for major standards that recently created (or amended) the credit losses (also known as CECL because of the current expected credit loss model it uses), leases, and hedging standards for private companies, small reporting companies and other public businesses, giving them an extra two years to implement the standards beyond the effective dates for public companies, instead of the extra one year that private companies and nonprofits typically now have. The other proposal would delay (and stagger) the effective dates of FASB’s long-duration insurance standard for large public and small public and private companies.
There would be what FASB refers to as a "two-bucket approach." The hedging and leasing standards have already taken effect for public companies since January 2019, and will take effect in January 2020 for private companies. The proposals would now move those effective dates out to January 2021 for private companies.
The CECL standard is currently set to take effect in January 2020 for SEC filers, except for small reporting companies, which are supposed to begin implementing it in January 2023. The proposal would push back the dates for all other public business entities from January 2021 to January 2023, and for private companies and nonprofits from January 2022 to January 2023.
The insurance contracts standard would be delayed for both public and private companies, as well as for nonprofits. The proposal would move the effective date for SEC filers from January 2021 to January 2022, except for small reporting companies, which have until January 2024. Other public business entities would see the effective date move from January 2021 to January 2024. For private companies and nonprofits, the effective date would move from January 2022 to January 2024.
Small reporting companies are defined as those with a public float of less than $250 million; or annual revenue of less than $100 million and either no public float or a public float of less than $700 million.
FASB is considering whether it should revise its philosophy on setting effective dates between public companies and private companies. “Today our philosophy is to set the effective date for a public company and then give one more year for private companies and not-for-profits, but not not-for-profit that have conduit debt out,” FASB chairman Russell Golden told Accounting Today ahead of the meeting. “What we have been doing for the last three or four months is studying whether or not smaller companies, not-for-profits, private companies and small reporting public companies could benefit from more time to learn from the implementation efforts of public companies. We've asked about resources availability, systems availability and potentially solving uncertainty about accounting policy. What we've learned is that they would benefit from an additional year. And so we're going to discuss a philosophy such that all private companies would receive two years between the public effective date and their effective date. Small reporting companies would also receive that, and then all not-for-profits, including those with outstanding conduit debt offerings. And we would only do that for major standard changes.”
Golden said that for minor standards, the one-year difference between public and private companies would probably remain in place. “For leases and hedging, we will give more time for private companies and not-for-profits that have not yet applied the new leases standard,” he said. “All public companies, including small reporting companies, have already applied the leases standard and so they would not be given more time, but private companies would be. And then for CECL and insurance, those are not yet effective for private companies or smaller reporting public companies, so they would be allowed more time. We would not be changing the effective date for CECL for the larger public companies. That would remain in essence at the beginning of 2020 for calendar year-end companies.”
Golden had previewed some of the plans during a speech at an Institute of Management Accountants conference last month (see FASB looking at delaying standards for private companies and nonprofits for 2 years).
The extra delay should give companies more time to get ready for the standards and will be especially beneficial to private companies. “Generally speaking, we’re certainly supportive of that,” said Angela Newell, national assurance partner in the national accounting group at BDO USA. “We audit a lot of private companies, and the biggest issue for most of the private companies isn’t any one specific standard. It’s the accumulation of large significant standards coming so quickly one on top of the other. Providing some breathing room between the two major standard implementation dates is helpful.”
FASB sees the delay as helping companies properly implement the new standards. “We think this will give those companies an opportunity to have a quality implementation,” said Golden. “We're also going to ask the staff to proactively ask companies that have implemented leases and hedging — and we will eventually do this on CECL — but with respect to leases and hedging, what were some of their areas where they were confused? What were some areas where there could be a more cost effective solution? And bring that back to the board in the fall and the board can decide should we make an update to the existing standard to reduce costs or should we provide additional educational material to help facilitate the implementation for the smaller company? We will do the same thing when CECL is effective for the large public companies. We will then be reaching out in the same time period next year.”
Delaying the standard for long-duration insurance contracts would help companies large and small. “The insurance standard right now will be required to be effective for the beginning of 2021 for public companies, and we're going to consider moving that out by one year for the large public companies and then applying this new philosophy for the smaller reporting companies and the private companies for insurance,” said Golden. That change would give private companies and nonprofits an extra two years to implement the insurance standard.
After the meeting Wednesday, FASB issued a second question-and-answer document that addresses more than a dozen frequently asked questions related to the CECL standard, including use of historical loss information, making reasonable and supportable forecasts, and the reversion to historical loss information.
“In our commitment to help stakeholders in their implementation by providing education materials, the FASB staff is going to present to the board a question and answer associated with applying the reasonable and supportable forecast language within the CECL standard,” said Golden.
The U.S. Chamber of Commerce welcomed FASB’s plans to delay implementation of CECL for smaller banks and credit unions. “We appreciate the actions taken by the FASB today to extend the period for implementing new accounting standards for small public and private companies,” said Tom Quaadman, executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness, in a statement. “CECL was proposed to improve access to relevant information related to loan losses at financial institutions, and though well-intended, represents a significant change from the prior standard’s approach and more time is needed for implementation. We look forward to continue working with FASB and the Securities and Exchange Commission to address issues related to the CECL accounting standard and fix adverse implementation issues.”
FASB has also been hearing feedback from credit unions and private banks urging it to ease the requirements of the CECL standards.
“We've been talking to companies, their auditors and their regulators about the implementation questions they have on CECL,” said Golden. “This is an area where there have been some views expressed by some that we believe are inconsistent with the standard, and we wanted people to understand what was the board's intent in applying the reasonable and supportable forecast. For example, some people have a view out there that you have to use data about the economy as a whole even when a small community bank only operates within their community. We think the standard is clear you don't have to do that. And so we're going to make it clearer, as part of this Q&A, that you only consider your reasonable, supportable forecasts based on the conditions that are relevant to the loans that you have issued, and if you're focused in one community, then you focus on that community. You don't focus on other communities.”
At the meeting, the board authorized the FASB staff to plan a series of CECL educational workshops to be held around the country. More information about the workshops will be available on FASB’s website in the weeks ahead.
“I'm also going to ask the FASB staff to plan some CECL educational training workshops across the country and come back to us with a more detailed plan in the fall, and then we will engage in that after that,” said Golden. “That's specifically designed so that we can go talk to community banks and credit unions and help them understand how to apply this standard.”
Meanwhile, FASB has been listening to feedback from its Transition Resource Group on CECL about how banks and credit unions are implementing the standard.
“The reasonable supportable forecast has been reviewed by members of the Transition Resource Group,” said Golden. “We still stand ready to answer any questions that come to the Transition Resource Group, but we haven't had any formal questions submitted in quite some time. At this point, the only substantial issue that we're aware of is this, that we think will be solved by this FASB staff Q&A, but we stand ready to help answer any other questions that come about throughout the implementation time frame.”
Earlier in the meeting, FASB also dealt with some matters related to the transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR). At last month’s meeting, FASB advanced an initiative to offer accounting relief for companies and organizations that need to modify their contracts as financial institutions move the global reference rates for loans, leases and other items (see FASB moves to ease companies’ transition from LIBOR to SOFR).
“I expect to finalize our initial deliberations and to publicly expose the relief to help people transition from LIBOR to SOFR,” said Golden. “A few months ago, the board had initial discussions on how to treat debt modifications when going from LIBOR to SOFR. This is a follow-on to that related to how do you treat changes in your derivatives and your hedge documentation. So we will bundle those two decisions and put out a document for public exposure that will hopefully be issued in August to help smooth the transition from LIBOR to SOFR.”
The exposure draft is likely to include some extra disclosures to help with the transition from LIBOR to SOFR. “The real concern there is really around hedging arrangements,” said Newell. “Technically under the hedging literature, when you make changes to things, you sort of break your hedging relationships. The point is to try to provide some relief because of the fact that LIBOR is going away and people are going to have to be moving to other benchmark rates. The intent is not to all of a sudden break everyone’s hedging, and to the extent there are impacts, provide some disclosure requirements. I think that one is still a little bit more nebulous. I’m going to be interested to see what the actual language in the exposure draft looks like.”
FASB also plans to deal with a question related to how to apply the revenue recognition standard at nonprofit colleges and universities. ”A question is occurring in the higher education environment on how to apply revenue recognition, specifically related to allocating the discount provided to students for tuition,” said Golden. “Should that be allocated all to tuition or between tuition and room and board? It is a very important conclusion for the not-for-profit higher education community.”
For that question, FASB isn’t likely to issue an exposure draft, but it would deal with the question through information on its website. “The staff is going to tell us how they’ve answered the question and we're going to ask them if there's any feedback and then they'll put that on our website,” said Golden. “On our website, we have an implementation website for various standards, so the information would go there. It's not one where we think there has to be a technical change in the codification. Think of it like a staff Q&A kind of thing.”