The Financial Accounting Standards Board (FASB) has issued for public comment a proposed Accounting Standards Update that would grant a one-year effective date delay for certain private companies and organizations applying leases and revenue recognition guidance. The proposal would provide immediate, near-term relief for certain private entities affected by the COVID-19 pandemic with regard to compliance with the following standards: (1) Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Revenue); and (2) Accounting Standards Update No. 2016-02, Leases (Topic 842) (Leases).
“The FASB’s proposal to delay time-sensitive standards would provide a measure of relief to certain companies and organizations focused on the COVID-19 crisis,” stated FASB Chairman Russell G. Golden in a news release. “It’s the first in a series of steps the Board is taking to ensure our stakeholders can successfully implement GAAP guidance during this time.”
Leases. The Leases effective date deferral would be limited to private companies, private not-for-profit organizations, and public not-for-profit organizations that have not yet issued their financial statements. The proposed deferral is limited to: (1) entities for whom Leases is currently effective and that have rapidly approaching year-end dates; and (2) entities for whom the effective date for Leases is imminent.
In Accounting Standards Update 2019-10, the Board had noted that challenges associated with transition to a major Accounting Standards Update are often magnified for private companies, smaller public companies, and not-for-profit entities. Those challenges have been significantly amplified by the business and capital market disruptions caused by COVID-19, the proposal states. Moreover, the Board had previously scheduled a roundtable discussion to assist private companies in their efforts, but this roundtable has been postponed because of the pandemic, and the Board anticipates that the earliest it could be held would be later this year.
Accordingly, the proposed Accounting Standards Update would provide private companies and private not-for-profit organizations with the option to apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-for-profit organizations that have not yet issued financial statements would have the option to apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Revenue. The proposed effective date deferral for revenue recognition would be limited to private company franchisors. Those stakeholders would have the option to apply the new standard for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
The proposal notes that stakeholders in the franchise industry had raised issues about the adoption of the new guidance in Revenue to franchise agreements. Specifically, stakeholders have raised issues with regard to revenue recognition of initial franchise fees, the timing of which can have a significant effect on a franchisor’s financial statements, particularly franchises that are in the start-up or growth phases. Although the FASB staff has worked with the industry to facilitate a successful adoption, the proposal observes that the application of Revenue to franchise fees continues to pose significant challenges for private companies. As a result, the Board has proposed to defer the effective date of Revenue for franchisors that are not public business entities to provide the Board with time to explore whether a cost-effective solution to apply Revenue can be developed to address this issue.
Request for comments. Stakeholders are encouraged to provide comments on the proposed Accounting Standards Update by May 6, 2020.
Accordingly, the proposed Accounting Standards Update would provide private companies and private not-for-profit organizations with the option to apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-for-profit organizations that have not yet issued financial statements would have the option to apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Revenue. The proposed effective date deferral for revenue recognition would be limited to private company franchisors. Those stakeholders would have the option to apply the new standard for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
The proposal notes that stakeholders in the franchise industry had raised issues about the adoption of the new guidance in Revenue to franchise agreements. Specifically, stakeholders have raised issues with regard to revenue recognition of initial franchise fees, the timing of which can have a significant effect on a franchisor’s financial statements, particularly franchises that are in the start-up or growth phases. Although the FASB staff has worked with the industry to facilitate a successful adoption, the proposal observes that the application of Revenue to franchise fees continues to pose significant challenges for private companies. As a result, the Board has proposed to defer the effective date of Revenue for franchisors that are not public business entities to provide the Board with time to explore whether a cost-effective solution to apply Revenue can be developed to address this issue.
Request for comments. Stakeholders are encouraged to provide comments on the proposed Accounting Standards Update by May 6, 2020.