On Wednesday, June 3, 2020, the Financial Accounting Standards Board (FASB) issued an update that delayed effective dates of its revenue recognition and lease accounting standards for certain entities in response to the coronavirus pandemic. By delaying the implementation of the two highly significant standards, FASB aims to help ease the pressure on financial statement preparers in the current economic environment.
Accounting Standards Update (ASU) 2020-05 defers the required effective dates of FASB’s new major revenue recognition accounting standard (ASC 606, Revenue from Contracts with Customers) and lease accounting rules (ASC 842, Leases).
The ASU comes in response to a proposal put forth by FASB in April to defer the effective date of the revenue recognition and lease standards in response to the pandemic. Under the proposal, the change would only affect franchisor businesses in order to rectify a technical, franchise-specific question that emerged pre-coronavirus.
However, after FASB announced the idea, several other groups asked for extensions on the revenue standard as well. Ultimately the Board decided to extend the deferral to all private companies and not-for-profits. These entities were expected to begin applying the revenue recognition standard last year, but will now be able start applying the new standard this year. Note that public companies have been using the new revenue recognition standard since 2018.
The Board first issued the new revenue recognition standard in 2014 as part of a major convergence project with the International Accounting Standards Board. It was set to take effect for public companies in 2017 and private companies in 2018. However, many companies had difficulty adjusting to the extensive changes and in 2015, FASB voted to push back the dates for public companies until 2018 and for private companies and most not-for-profits until 2019 or 2020, depending on their reporting period.
With the ASU issued on June 3, private companies and private not-for-profit organizations that have not issued their financial statements now have an extra year to apply the revenue recognition standard. The effective date will now be for fiscal reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Early application will continue to be permitted.
Public companies implemented the new lease standard at the start of 2019 and private companies and not-for-profits were to follow suit at the beginning of this year. Last October, FASB decided to postpone the effective date of the leases standard for private companies and not-for-profits, though it had already taken effect for public companies. It is now pushed back for another year.
Per the new ASU 2020-05, private companies and many not-for-profits that have not issued their financial statements can wait until 2022 to adopt the new lease accounting rules. For these entities, the effective date will be for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early application will continue to be permitted.
For public not-for-profits (not-for- profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market) that have not yet issued financial statements (or made them available for issuance), the effective date will be fiscal years starting after December 15, 2019, including interim periods within those fiscal years.
How can Squar Milner help?
Please be sure to discuss and coordinate with your Squar Milner Audit advisors to determine how the latest update may affect you. We are willing to work with you to improve our accounting strategies in response to the latest ASU.
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.