Privately held companies will get an extra year to comply with sweeping new rules on how they add up liabilities from renting storefronts, heavy equipment, and vehicles, U.S. accounting rulemakers agreed Wednesday.
Instead of adopting new lease accounting rules in 2021, private companies and many not-for-profit groups can choose to wait until 2022, the Financial Accounting Standards Board unanimously voted. In addition, if a private company or not-for-profit group hasn’t yet adopted FASB’s major new revenue recognition accounting standard, it also could elect a one-year deferral.
“I have sympathy for what many of the companies are burdened with right now,” FASB member Sue Cosper said of the board’s extensions.
The chaos from the ongoing coronavirus pandemic spurred the accounting rulemaker to consider giving private companies more time to adopt the lease accounting standard, ASC 842. Without a deferral, companies would be wrestling with a massive accounting change at the same time that many are struggling to stay afloat. Public companies adopted the rules in 2019, and most reported that tallying all their leases and reporting them as assets and liabilities on their balance sheets for the first time was a much bigger undertaking than they expected.
FASB released a proposal offering the extension in mid-April and it received wide support.
Narrow Revenue Delay Expanded
The proposal also contained a separate, narrower deadline extension on its revenue recognition standard for privately held franchisers because of a technical, franchise-specific question that cropped up long before the coronavirus spurred a global health and economic crisis.
The move offered franchisers like Orange Theory Fitness and California Closet Co. until annual periods beginning after Dec. 15, 2019, to overhaul how they account for the top lines of their income statements. Because of the typical timing of when these companies draw up their financial statements, the proposal meant they wouldn’t have to follow the revenue standard, ASC 606, until 2021.
Once the board floated this idea, several other groups asked for extensions on the revenue standard, too. They cited the challenges of moving to a completely new set of accounting rules while dealing with remote workers and securing government loans to stay in business.
FASB agreed. The extension would benefit privately held companies and not-for-profit companies that haven’t already moved to the new revenue-accounting standard. This largely means companies and organizations that have financial years ending June 30.
The decision, which is slated for publication next month as a final update to U.S. accounting rules, will give companies flexibility. If an organization was well on its way to using the new revenue rules, it could continue down that path or could choose a bit of breathing room, said FASB member Marsha Hunt.
“Entities are going to make the decision that is in their best interest, from a cost perspective,” Hunt said.