Before the creation of the Private Company Council (PCC) in 2012, the Financial Accounting Standards Board (FASB) required large multinational public companies and smaller public and private companies to implement a major standard concurrently. Shortly after the PCC commenced activity, it recommended, and the FASB approved, a one-year staggered GAAP implementation period between the large public companies and the private companies. This proved highly beneficial. Moving forward to 2019, the FASB has once again voted on a proposed philosophical shift that would alter the current standard-setting approach and allow smaller companies additional time to adopt a major standard.
The proposed change will permit all entities, other than large public companies, to adopt a new standard at least two years after an accounting standard becomes effective for an SEC filer (large publicly-traded company). The FASB proposal intends to stagger effective dates between large public companies and others by utilizing the following two buckets:
- Bucket One would include all SEC filers except smaller reporting companies (SRCs) that meet the definition under GAAP.
- Bucket Two would include all other entities, such as:
- All other public business entities (PBEs) including SRCs
- Private companies
- All not-for-profit organizations
- All employee benefit plans
What sparked the effective date evolution?
As previously noted, PCC provided insight to the FASB of the challenges faced by private companies when implementing major standards. Further, the FASB has closely monitored issues organizations may face during the implementation of major standards and found that a majority of the challenges arise from entities listed under Bucket Two.
The FASB identified the following factors affect the severity of challenges encountered by those entities when transitioning to a major standard:
- Availability of internal and external resources
- Timing and source(s) of education
- Knowledge or experience gained from implementation issues encountered by larger public companies
- Comprehensive transition requirements
- Understanding and applying guidance from post-issuance standard-setting activities
- The development or acquisition of:
- Sufficient IT and expertise in developing new systems or changing existing ones
- Effective business solutions and internal controls
- Better data or estimation processes
In response, FASB provided an additional year to private companies and organizations. Subsequently, the FASB realized that one year might not be enough, which lead to the proposed changes to the standard-setting approach. Overall, if the proposal is finalized, companies falling under Bucket Two will benefit from staggered effective dates, which hopefully helps make a smoother transition when implementing major standards. As Russell G. Golden, FASB Chairman, stated: “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.”