New Accounting Standards Relieve Private Companies
On October 16, 2019, the Financial Accounting Standards Board (FASB), the board that sets the U.S. generally accepted accounting principles, voted to delay the effective date for the following significant accounting standards:
Accounting Standards Update No. 2016-02, Leases (Topic 842) (Leases)
This new standard requires most leased property to be carried on a company’s balance sheet as either a right of use asset or a capital asset, depending on the terms of the lease. Prior to this new standard, operating leases were not reflected on the balance sheet.
Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses)
This new standard requires that credit losses be based on expected credit losses over the contractual term of the financial asset, rather than when such losses are probable. In most cases, credit losses will be recognized earlier than in the past.
Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (Hedging)
This new standard simplifies and expands the eligible hedging strategies for financial and nonfinancial risks. It also enhances the transparency of how hedging results are presented and disclosed.
This decision provides additional implementation time for the following:
Public Business Entities (PBE) that are eligible to be considered as a Smaller Reporting Company (SRC) as currently defined by the Security and Exchange Commission (SEC)
Implementation of employee benefit plans
For leases, the FASB decided to defer the mandatory effective date by an additional year. Therefore, this standard will be effective for annual periods beginning after December 15, 2020 (January 1, 2021, for calendar-year-end companies) and interim periods within fiscal years beginning after December 15, 2021 (January 1, 2022 for calendar-year-end companies).
For credit losses, the FASB decided that this standard will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
For hedging, the FASB decided to defer the mandatory effective date by an additional year. Therefore, this standard will be effective for fiscal years beginning after December 15, 2020 (effective January 1, 2021, for calendar-year-end companies), and interim periods within fiscal years beginning after December 15, 2021 (January 1, 2022, for calendar-year-end companies).
For all entities, early adoption is still allowed. If you are unsure of how any of these standards apply to your business, please reach out to your contact at ECS for assistance.
About the Author - Dan Kats, Audit Manager, CLFP, recently joined ECS Financial Services, Inc. Dan has more than 11 years of public accounting experience with commercial, not-for-profit, and governmental entities providing audit and consulting services, such as financial statement audits and financial statement reviews. He has worked with a variety of entities, including equipment leasing and financing services companies, construction and real estate entities, universities, colleges, foundations, not-for-profit organizations, associations, retail, and professional services organizations, state agencies, and municipalities.