FASB and the Latest Accounting Standards Proposals

By August 7, 2019 Accounting
FASB and the Latest Accounting Standards Proposals

On July 17, 2019 the Financial Accounting Standards Board (FASB) voted to delay several major accounting standards – including credit losses, leases, hedging and long-duration insurance contracts – for private companies, nonprofits and smaller reporting companies. “Smaller reporting companies” refers to businesses that have either 1) a public float of less than $250 million, or 2) annual revenue of less than $100 million and no public float or public float of less than $700 million. The standards had already begun to take effect for public companies as of 2019.

In their meeting, FASB members voted to issue two proposals for public comment. One proposal delays the effective dates for landmark accounting standards which recently created (or amended) the credit losses (also known as “CECL” due to the current expected credit loss model in place), leases and hedging standards for the types of companies listed above. More specifically, the proposal allows private companies and nonprofits two extra years to implement the standards, rather than the typical one extra year.  The second proposal delays and staggers the effective dates of FASB’s long-duration insurance standard for large public companies as well as small public and private companies.

FASB members are drafting the two proposals and plan to issue them as soon as possible. Upon issuance, they are subject to a 30-day comment period.

Why is FASB proposing the delay?

According to the Journal of Accountancy’s Ken Tysiac, the abundance of new rules have sparked a number of significant challenges, particularly for private companies with limited financial reporting staffs.

Specifically, the FASB’s staff listed a number of factors contributing to the proposed delay:

  • Resource availability.
  • Time necessary to educate appropriate staff.
  • Opportunity to learn implementation issues from large public companies and SEC comment letters.
  • Application of difficult transition guidance.
  • Complexities in developing IT system solutions, IT expertise and effective business solutions and internal controls.

Unsurprisingly, most companies affected by the new codes and standards are welcoming the proposed delay. In 2018 a study asked most of the major life and annuity companies about the upcoming major accounting standards changes and the concerns regarding them. The survey revealed that, in various categories, over 91% of respondents indicated a need for more time. Respondents stated that additional time allowed for more testing, dry runs and assessments of how implementation of the standards would impact their financial results.

As such, FASB members explained that while companies had the ability to set up the new accounting order by the earlier effective dates, the delay offered a greater chance for education. Affected companies stated that increased time permitted them to improve their processes and entire business approach related to the new standards.

For example, the lease accounting standard requires extensive work to locate and collect lease contracts and extract the necessary data in order to perform the new accounting. However, the development of software to perform lease accounting under the new code has required more time than originally expected. On another note, smaller entities faced greater challenges in implementing the new complicated CECL financial modeling.

In fact, the concerns were severe enough for the American Institute of Certified Public Accountants’ (AICPA) Technical Issues Committee (TIC) to send a letter to FASB requesting a delay in the lease accounting standard effective date for private companies. The Associated General Contractors of America also issued a letter to FASB with a similar request.

Clearly, the FASB listened to the pleas for more time.

What other implications does it have?

Overall, the situation could also result in further-reaching implications. In an interview with Accounting Today, FASB chairman Russell Golden explained that the Board was considering whether to adapt a new philosophy regarding effective dates. The existing structure set an effective date for public companies and allowed for one additional year for private companies and nonprofits.

However, the raised concerns from private companies and nonprofits prompted a more intensive study of the effects of only one extra year. More specifically, the FASB attempted to discern whether smaller companies, nonprofits, private companies and smaller reporting public companies could benefit from more time. The Board analyzed resource availability, systems availability and uncertainty surrounding the accounting policies. Ultimately, the FASB determined that greater time periods allowed for more well-rounded and complete preparation and implementation, especially for private companies.

Golden clarified that the revised extra time philosophy would pertain only to major accounting standards. The one-year difference between public and private companies would remain intact for minor standards.

Who is FASB and what is the ASC?

With all of the talk of FASB and the new accounting standards set to take effect over the next few years, it is worth it to remind ourselves who FASB is and what they are setting out to achieve.

The Financial Accounting Standards Board

The Financial Accounting Standards Board operates as an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States following generally accepted accounting principles (GAAP). Additionally, the FASB is recognized by the Securities and Exchange Commission (SEC) as the accounting standard setter for public companies. The Board is also recognized by state accounting boards, the AICPA and other organizations in the field.

Overall, the FASB is a single part of a larger, independent nonprofit group which includes the Financial Accounting Foundation (FAF), the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC).

While FASB is focused on US accounting principles, they are actively working with the International Accounting Standards Board (IASB) to improve financial reporting and the comparability of financial reports worldwide. The IASB is responsible for the International Financial Reporting Standards (IFRS).

What is the ASC?

The FASB Accounting Standards Codification (ASC) is the source of authoritative GAAP recognized by the Board and applied to nongovernmental entities. Ultimately, the Codification came into fruition in 2009 following a five-year, 200-person effort. The three initial goals for the Codification included:

  • Simplifying user access by codifying all authoritative US GAAP in a single location.
  • Ensuring codified content accurately represented authoritative US GAAP as of July 1, 2009.
  • Creating an up-to-date codification research system for the released results of standard-setting activity.

The coding system was expected to: 1) reduce the time and effort required to solve accounting research issues, 2) mitigate risk of noncompliance through improved literature, 3) provide accurate information with real-time updates, and 4) assist the FASB with research and convergence efforts.

For a complete list of the current ASC visit FASB’s ASC website.

How Squar Milner Can Help

Navigating the complex accounting standards and developing optimal implementation procedures does not have to be a one-man job. Our experienced staff at Squar Milner is continuously up-to-date on accounting standards and well-equipped to help guide your company through the process. To see how we can help, contact us and someone from your local Squar Milner office will reach out.

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner.  All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.