Small public banks, privately held businesses, and credit unions could get extra time to implement three major changes to accounting standards.
The Financial Accounting Standards Board Aug. 15 issued a much-anticipated plan that would delay the date by which many businesses have to follow new accounting rules for reporting leases, recording losses on loans, and using hedge accounting.
If finalized, credit unions and banks that meet the Securities and Exchange Commission’s definition of a smaller reporting company would have until 2023 to comply with the current expected credit losses (CECL) accounting standard, a post-financial-crisis accounting rule that will force banks to record losses earlier on failing loans and other financial products.
A business qualifies as a smaller reporting company two ways: if it has a public float of less than $250 million or if it has a public float of less than $700 million and annual revenues less than $100 million.
Large publicly traded banks would still fall under the new rules starting in 2020.
The proposal would give private companies and not-for-profit organizations until 2021 to record on their balance sheets for the first time liabilities associated with leasing office space and heavy equipment. Public companies started following the new accounting rules in 2019.
Private companies and not-for-profit groups would also get more time to apply new rules that expand and simplify hedge accounting, a specialized accounting method that allows companies using derivatives for its risk management strategies to keep swings out of earnings. While many companies favor the changes ushered in by the 2017 update, FASB said it wanted to give smaller organizations the option for more time to apply the new accounting rules.
FASB said the proposal is part of a mindset change in setting effective dates for major new accounting standards.
Typically, when the board sets a compliance date, it offers private companies and not-for-profit organizations an extra year to adopt it. One year may not be enough, private and small businesses told FASB, especially with major, back-to-back accounting changes in recent years.
Now, FASB is considering giving private companies, smaller public companies, not-for-profit groups, and employee benefit plans at least two years reprieve.
“This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards,” FASB Chairman Russell Golden said in a statement.
FASB rarely delays major new accounting standards so significantly, but it has issued a crush of standards in recent years.
Many company, especially privately held businesses—told the board they didn’t have enough time or resources to do the job right.
The lease standard is an upheaval in accounting practice, requiring all businesses to report on their balance sheets for the first time the assets and liabilities from renting real estate, equipment, and vehicles. Because leasing is such a pervasive practice—businesses can rent everything from photocopiers to forklifts—the job of sorting through rental contracts turned out to be laborious. Public companies reported it was a bigger task than they expected. The same was true for private companies.
“The resources weren’t there for the private companies to deal with it,” said Heather Winiarski, shareholder at Mayer Hoffman McCann P.C.
The credit losses standard created a different set of concerns. It requires banks and other businesses to record on the day that they issue a loan what they expect their future losses on it will be. Many banks, lobby groups, and even lawmakers have raised alarm bells that this will force banks to tighten lending, which could exacerbate an economic downturn.
FASB maintains the new rules, which go into effect for large publicly traded banks in 2020, are an improvement over current accounting, which allows banks to record losses only after there is evidence they already have happened. This means when a customer misses payments. This rule came under fire in the aftermath of the 2008 financial crisis, when bank balance sheets looked robust despite signs the market was heading for a meltdown.
The new accounting standard is considered the biggest change to bank accounting in decades and is expected to take a lot of work to implement properly.
When FASB voted on July 17 to consider a delay, many smaller banks breathed a sigh of relief, said Graham Dyer, partner at Grant Thornton LLP.
“That news was met with probably pretty broad approval by most everybody,” Dyer said.
Some smaller publicly traded banks, however, were already deep in the weeds of the new accounting standard and may not want to wait three years, said Garver Moore, managing director at Abrigo, a company that helps banks implement CECL.
“They have internal incentives tied to it, a budget in place, people in place,” Moore said. “The notion of just stopping what they’re doing isn’t particularly attractive.”