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Does FASB’s deferral of 4 standards affect you?

Nov 19, 2019

In recent years, the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) have been in discussions centering around granting smaller companies more time to implement new accounting standards.

On November 15, 2019, the FASB made this a reality, issuing ASU 2019-09 and ASU 2019-10, which defer the effective dates for four major standards for certain entities. The new effective dates provided by the update depend on the type of entity that you are. For a typical privately held company, the updated effective dates are shown in the table below. Companies that meet the definition of a public business entity, a smaller reporting company, or that have securities traded on an exchange open to the public should read on to see how this update will impact your effective date.

Changes in effective date (for calendar year end private companies)


Standard Original effective date New effective date

ASU 2017-12, Derivatives and Hedging January 1, 2020 January 1, 2021

ASU 2016-02, Leases January 1, 2020 January 1, 2021

ASU 2016-13, Financial Instruments - Credit Losses January 1, 2022 January 1, 2023

ASU 2018-12, Financial Services - Insurance January 1, 2022 January 1, 2024

Sounds great, but why?

The effective date deferral was proposed in an effort to provide smaller companies relief in implementing major new accounting standards. As part of the considerations, the FASB and public commenters noted that financial statement preparers need time to develop new or updated accounting policies, design and implement internal controls, implement new systems or processes, and transition to the new standards. As major new standards can be complex and costly to implement, it was important for the FASB to consider allowing additional time for smaller companies with lesser resources than their public company counterparts to transition to the new standard.

What if I’m already ready?

If you’re ready to implement the new standards, you still can. All entities are still allowed to early adopt, so you could stick with the original effective date. If you’ve started and have some momentum gathered in the implementation process, you should consider if it is going to be more effective to continue the course that has been established rather than set it aside. This might include training, software installation or process implementation. Regardless of how far along in the process you may be, it may be much more effective to complete those projects than to put them on hold and try to pick back up where you left off. After all, while these standards are being deferred, they are not going away altogether. By continuing you could either (a) early adopt and be done with it or (b) you could simply give yourself some breathing room and focus your attention on other aspects of the business.

What about Revenue Recognition?

Unfortunately, the key accounting standard that was NOT included in this deferral proposal is ASC 606 (Revenue Recognition). The FASB was clear that this standard will not be deferred. For private companies, this standard is in effect and December 31, 2019 financial statements will be required to be reported under the new revenue recognition guidance in ASC 606. For many companies, revenue recognition under ASC 606 looks very different than under legacy US GAAP (ASC 605). The deferral of the four standards noted above allows companies to focus on ensuring revenue recognition and the related disclosures are accurate.

Does this create a precedent for future standards?

Yes. The FASB has decided that smaller companies would, as a general rule, not be required to implement future accounting standards for at least two years after the effective date for public companies. Additionally, these entities would not have to apply the standards to interim periods in the year of adoption, but rather would apply them to interim periods beginning in the fiscal year after the year of initial adoption. SEC filers would still have to apply the new standards to the interim periods within the fiscal year of adoption. It is important to note, however, that this is not anticipated to be a be a blanket format, and the FASB intends to make effective date determinations on a standard-by-standard basis moving forward.

Am I a PBE and what is an SRC?

Good question – and an important distinction.

In 2013 the FASB added Public Business Entity (PBE) to its master glossary. According to that definition, a PBE is an entity that meets any one of five criteria as defined in ASU 2013-12, Definition of a Public Business Entity.

In other word, an entity is a PBE if it is required to file or furnish financial statements with the SEC or other regulatory agency, or has issued or is a conduit bond obligor for securities that are traded, listed or quoted on an exchange or over-the-counter market.

All not-for-profit entities and employee benefit plans are not subject to those criteria and, therefore, cannot be a PBE by definition. However, it is important to note that some accounting standards also include the use of the term “public entity,” which is different than a PBE and needs to be separately evaluated. In some cases, an entity (including a not-for-profit entity) may be a non-PBE but may also meet the definition of a “public entity.” For example, a not-for-profit entity that is a conduit bond obligor would fall into the definition of a public entity and is subject to the earlier implementation dates.

An SRC (smaller reporting company) is a public entity with a public float of less than $75 million. Historically, entities have been required to determine whether they qualify as an SRC as of the last business day of their second fiscal quarter on an annual basis. For purposes of the effective date deferral update, the FASB has decided to allow for an entity to use its most recent determination for assessment as to whether or not it meets the definition of an SRC and “freeze” its status so that the determination need not be continuously reassessed for purposes of evaluating the adoption date of a new standard.

In addition to ASU 2013-12 as a resource, the AICPA published a Q&A on the definition of a public business entity that offers additional definitions (e.g., a security, an over-the-counter market, a conduit bond obligor, etc.) to assist entities in evaluating whether they meet one of these definitions.

The following table outlines the impacts of the update as it applies to each entity type noted above.

Changes in effective date (for calendar year end entities)

Standard Entity type Original effective date New effective date
ASU 2017-12, Derivatives and Hedging PBEs
All Other Entities
January 1, 2019
January 1, 2020
No change
January 1, 2021
ASU 2016-02, Leases PBEs and Public Entities
All Other Entities
January 1, 2019
January 1, 2020
No change
January 1, 2021
ASU 2016-13, Financial Instruments - Credit Losses PBEs that are SEC filers
PBEs that are SRCs
Non-SEC filer PBEs
All Other Entities
January 1, 2020
January 1, 2020
January 1, 2021
January 1, 2022
No change
January 1, 2023
January 1, 2023
January 1, 2023
ASU 2018-12, Financial Services - Insurance SEC Filers, excluding SRCs
Non-SEC filer PBEs and SRCs
All Other Entities
January 1, 2021
January 1, 2021
January 1, 2022
@January 1, 2022
January 1, 2024
January 1, 2024

Conclusion

All entities should be aware of the definitions used in future accounting standards updates to determine which effective date applies to them. Since the FASB will be considering effective dates on a standard-by-standard basis, entities should not assume that because they fall into the later effective date bucket for one standard means they fall into the later effective date bucket for all standards. Each standard should be evaluated thoroughly and independently.

Additionally, the FASB understands that the forthcoming accounting standards will have a major impact on entities. This should be an indicator that entities should not take lightly the impact that these standards may have on their business. Entities should carefully evaluate new accounting standards early in the process and seek assistance as needed to ensure they have fully implemented and conformed to each new standard in accordance with each standard’s respective effective dates.

If you have questions about whether or not you qualify as a PBE, public entity, SRC, or other, or have questions about the upcoming new accounting standards, please contact your Wipfli representative.