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Updated revenue recognition guidance was supposed to be implemented by private companies and most nonprofits in the fiscal year 2019 and updated lease guidance was supposed to be implemented in the fiscal year 2021. But the coronavirus crisis has prompted the Financial Accounting Standards Board (FASB) to give certain entities an extra year to make the changes, if needed.
What is the expanded deferral option?
On April 8, the FASB agreed to issue a proposal that would have postponed the effective dates for revenue recognition guidance for franchisors only and lease guidance for private companies and nonprofit organizations that haven’t already adopted them. In a surprise move, on May 20, the FASB voted to extend the delay for the revenue rules beyond franchisors to all privately-owned companies and nonprofits that haven’t adopted the changes. FASB members affirmed a similar delay on the lease rules. FASB issued the new standard that applies to certain entities that have not yet issued their financial statements or made their financial statements available for issuance as of June 3, 2020.
The optional “timeout” is intended to help resource-strapped private companies, the nation’s largest business demographic, better navigate reporting hurdles amid the COVID-19 crisis.
What are the changes with revenue recognition?
Under the changes, all private companies and nonprofits that haven’t yet filed financial statements applying the updated revenue recognition rules can opt to wait to apply them until annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), replaces hundreds of pieces of industry-specific rules with a principles-based five-step model for reporting revenue.
FASB members extended the revenue deferral to more private companies and nonprofits to help those in the process of closing their books when the COVID-19 crisis hit. Private entities told the board that adopting the standards amid the work upheaval created by the pandemic layered on unforeseen challenges. In today’s conditions, compliance may need to take a backseat to operational issues.
What is the latest with leases?
Last year, the FASB deferred ASU No. 2016-02, Leases (Topic 842), for private companies from 2020 to 2021. This standard requires companies to report — for the first time — the full magnitude of their long-term lease obligations on the balance sheet.
The FASB’s recent deferral will allow private companies and private nonprofits that haven’t already adopted the updated lease rules to wait to apply them until fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Public nonprofits that haven’t yet filed financial statements applying the updated lease rules can opt to wait to apply the changes until fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The new revenue recognition and lease accounting rules will require significant changes to your organization’s systems and procedures. If you haven’t yet adopted these rules, we can help facilitate the transition. For additional information, call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.