The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2020-05, giving private companies and nonprofit organizations an extra year to implement the lease accounting standard. This ASU also extends the implementation of the revenue recognition standard for both private franchisor companies and private entities for an extra year. Both changes are in light of the recent challenges brought on by the global coronavirus pandemic.

Relief for private companies, nonprofits and their accounting firms

This guidance comes after a proposed delay of the standards’ effective dates was released April 8, 2020. The delay is a welcome relief for private companies, nonprofits and their accounting firms who are grappling with the complexities of the new standards and the wide-ranging impacts of COVID-19 on operations and finances.

Lease standard

Check out our blog, written in February 2016 (when the changes were first introduced) for a detailed description of the changes to lease accounting under ASU 2016-02. Under the long-standing lease accounting rules, companies have kept most of these liabilities off their balance sheets, out of the direct sight of investors and creditors.

The new leasing standard, which took effect January 1, 2019 for calendar year publicly traded companies and not-for-profit conduit bond obligors, presented dramatic changes to the balance sheets and disclosures of lessees. These changes included …

• New requirement for companies to record all leases as “right-to-use” assets with corresponding liabilities (no distinction between operating and capital leases is made on the balance sheet under the updated guidance), unless the lease term is less than 12 months
• As with the new revenue recognition standard, qualitative disclosures under the new lease accounting standard are extensive, greatly expanding disclosures to assess the amount, timing, and uncertainty of cash flows arising from leases.

For privately held calendar year end companies, the effective date was slated to be years beginning January 1, 2021. However, the pandemic fallout has disrupted those plans, businesses told FASB.

What is the new effective date?
The guidance delays the effective date for private companies and most not-for-profits to years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Revenue recognition standard

Some franchise businesses had also been asking for relief from the revenue recognition standard. The revenue recognition standard affects all entities (public, private and not-for-profit) and states that, under the accrual basis of accounting, you should only record revenue when an entity has substantially completed a revenue generation process, in other words—you should only record revenue when it has been earned. As our blog mentions, ASU 2014-09, Revenue from Contracts with Customers (Topic 606) will likely have a significant impact on companies that offer guarantees (other than warranties that the product will function as specified), or are in the media, machine manufacturing, construction, and software industries.

Impacted businesses lobbied for changes in the standard, due to the pandemic, saying it has the potential to harm over 100,000 franchise businesses around the country. Additionally, private companies and organizations in other industries sought relief from applying the revenue standard during these unprecedented times. In light of these concerns, FASB amended the original proposal (limiting the delay in the effective date to just private company franchisors), to deferring by one year for most private companies and organizations who have not yet applied the revenue recognition standard, so it would take effect for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.

Questions? Contact us.