The Financial Accounting Standards Board (FASB) has proposed giving private companies and nonprofit organizations an extra year to implement the lease accounting standard. They have also proposed giving private franchisor companies an extra year to prepare for the revenue recognition standard. Both proposed 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 proposed delay of the lease standard’s effective date would be a welcome relief for private companies, nonprofits and their accounting firms who are grappling with the complexities of the lease standard and the wide-ranging impacts of COVID-19 on operations and finances. It is our hope that the proposal is swiftly approved by the FASB as finance teams need to focus on successfully navigating through and beyond the current pandemic.

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 the long-standing lease accounting rules, companies have kept most of these liabilities off their balance sheets, out of 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 include…

• 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 is currently years beginning January 1, 2021. However, the pandemic fallout is disrupting those plans, businesses told FASB.

What new effective date has been proposed?
The proposal would defer 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 December15, 2022.

Revenue recognition standard

Some franchise businesses have 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, Accounting Standards Update (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 have 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. In light of these concerns, FASB has proposed deferring the effective date for the revenue recognition standard by one year for private company franchise businesses, 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.

The FASB is welcoming comments on the proposal from now until May 6 - submit here.

We’ll keep you updated as more guidance comes out. Questions? Contact us. Visit our Coronavirus Resource Center for more information.