Another Lease Accounting Deferral – and More!

It’s all but official. On October 16th, the FASB voted to approve delays for private companies on three new accounting standards, one of which is Leases. The expected Accounting Standards Update (ASU), on which FASB voting will be the official action to implement the deferrals, is expected in November. By the way, the other two standards deferred under this vote are “credit losses” (or CECL) and “hedging”. As the effective date draws closer, we will certainly be posting about CECL, since some aspects apply to all companies.

The new effective dates for leases is fiscal years generally beginning January 1, 2021 or later. The current date of adoption previously was one year earlier. This leaves private companies with an extra year between adopting the massive revenue recognition re-write before needing to ink in the also massive lease accounting changes, so a full two-year gap.

Rather than a direct deferral action, the FASB established a framework that can be used in the future, with the goal of staggering effective dates of complex new standards. Toward this end, the expected ASU will introduce a “two-bucket approach” for determining effective dates for major standards. In Bucket 1 will be Public Business Enterprises (PBEs) that are SEC filers, though not certain smaller SRCs (smaller filers) as defined by the SEC. Bucket 2 will include private companies, not-for-profit entities, employee benefit plans (including those that file with the SEC) and SRCs.

The future ASU will establish that “major” accounting standards would become effective for entities in Bucket 2 at least two years (determined at FASB discretion) after the effective date for entities in Bucket 1. For interim reporting purposes, for Bucket 1 entities, the standard would become effective for all interim periods within the year of adoption, but for Bucket 2 entities would be effective for interim periods after the year of adoption.

This new framework for effective dates acknowledges that private companies and other non-SEC filers look to publicly available reporting of SEC filers, including SEC comment letters, as a tool to assist with the complexities and nuances of conforming to a significant new accounting standard. One matter to keep in mind, however, is that these delayed effective dates will apply only to major new standards, which means that one ought not to wait to the last minute to consider the adoption impact on your company.