Privately held companies may get more breathing room to comply with two significant accounting standards as they grapple with business challenges from the coronavirus pandemic.
The Financial Accounting Standards Board released a proposal Tuesday that gives private companies an extra year to follow major new lease accounting rules. The board also offered an extension to privately held franchisers facing the new rules to tally their revenues.
The lease accounting standard, published as ASC 842 in 2016, requires companies to report rented assets like storefronts, heavy equipment, and fleets of trucks on their balance sheets for the first time. It is a major undertaking for most businesses because leasing is such a pervasive practice.
Private companies were supposed to overhaul their accounting in 2021. The proposal would give privately held companies and certain not-for-profit groups until 2022.
As businesses struggle with remote workforces and broken supply chains, and some ask their landlords for breaks on rent, FASB reasoned they needed more time to deal with a big accounting undertaking.
Many business changes, particularly concerning rent, trigger accounting questions that businesses need more time to answer, said Jennifer Booth, vice president of accounting at LeaseQuery, a company that helps businesses implement the new accounting standard.
“We’ve had a lot of questions from customers like, ‘There’s been a change to my payments, how do I account for that?” Booth said. “That’s what everybody’s dealing with now.”
The proposed optional revenue deferral applies only to privately held franchisers. It attempts to offer relief on a narrow part of ASC 606 that has been challenging to chains like Pure Barre LLC and Church’s Fried Chicken Inc. Specifically, the franchisers had trouble figuring out how to account for fees new franchises pay to them to set up new outlets.
Under old accounting rules, franchisers typically recognized up front the whole fee—which averages around $36,000—a new entrepreneur pays them to open a shop, gym, or chain restaurant. The new accounting generally makes franchisers spread out the fees over time. For some companies, this could delay the full recognition of initial franchise fees for as long as 10 or 20 years, according to the International Franchise Association.
Although the franchiser could have the money in its bank account, it could look broke on paper, which would affect how state franchise regulators view them. In some cases, the regulators could make them put money into escrow and essentially tighten their cash flows, said Suzanne Beall, the organization’s vice president of government relations.
“We’re really grateful for them taking a look at this,” Beall said.
FASB is also researching a cost-effective accounting solution for privately held company franchise fees but offered a delay in the meantime. If finalized, privately held franchisers could hold off on following the new revenue requirements until annual periods beginning after Dec. 15, 2019.
Comments on the proposal are due May 6.