Private Companies Get Extra Time to Overhaul Lease Accounting

April 8, 2020, 8:32 PM

Private companies are about to get an extra year to tally up their rented photocopiers, forklifts, and factories and report them on their balance sheets for the first time.

The Financial Accounting Standards Board unanimously agreed Wednesday to offer private companies until 2022 to comply with major new lease accounting rules, ASC 842, they were supposed to follow next year. The proposal will be released for an unusually short 15-day comment period.

The economic turmoil caused by the coronavirus spurred the U.S. accounting rulemaker to take swift action.

“Many of the small businesses impacted by this potential deferral are the exact kind that ought to be focusing on preserving their businesses,” FASB Vice Chairman James Kroeker said as members met by videoconference.

FASB published the lease accounting standard in 2016 and codified it as ASC 842. It came after years of debate about the best way to make companies transparently report the money they have tied up in rental payments for office towers, vehicles, and heavy equipment.

Under long-standing lease accounting rules, companies kept most of these liabilities off their balance sheets, out of sight of investors and creditors. Public companies adopted the new rules in 2019, swelling their balance sheets by millions. Private companies were supposed to follow the new rules in 2021, but pandemic fallout is disrupting those plans, businesses told FASB.

Rent Woes

FASB members also tackled one of the biggest challenges about the leases standard in a time of economic turmoil—accounting for rent concessions.

Many retailers have been forced to close their stores and are asking landlords for breaks such as rent discounts or deferrals. The National Retail Federation told FASB last week that changing lease contracts to reflect new rent could trigger complex accounting rules under ASC 842. They pleaded for relief.

ASC 842’s rules around lease modifications didn’t anticipate massive disruptions like the current one, FASB acting technical director Shayne Kuhaneck said Wednesday, and businesses shouldn’t have to go through leases one by one to account for the changes.

Instead, businesses can elect to account for lease concessions related to Covid-19 as though enforceable rights and obligations for those concessions existed, and they can can elect to not apply the lease modification guidance, which would have forced companies to remeasure all their affected leases—a major undertaking, FASB said.

FASB will put this guidance on its website in the coming days, a spokeperson said.

“It’s going to be really well received,” Matt Waters, director of lease accounting at real estate management advisory CoStar Group, said of the forthcoming guidance. “It will be of really large benefit to companies like retailers and restaurants, who are heavily affected by the COVID-19 situation and they have sometimes thousands of locations and thousands of leases.”

Franchisers and Revenue

Separately, FASB unanimously agreed to propose deferring by one year the date by which privately held franchisers have to follow the sweeping new revenue recognition rules in ASC 606.

The deferral will go out for a short public comment period before getting finalized.

The change will allow franchisers like Church’s Fried Chicken Inc., Pure Barre LLC, and California Closet Co. to get until 2021 to comply with the revenue recognition standard. Published in 2014, the new revenue standard gets rid of reams of longstanding industry-specific rules on how businesses calculate the top line in their income statements.

Franchisers were long accustomed to immediately book as revenue the fees new operators paid them to set up stores and train workers. The new rules would change that practice and, in some cases, franchisers wouldn’t book any upfront revenue at all. They told FASB this could make them look financially weaker than they really are.

FASB said it would work to figure out franchiser’s concerns but agreed to consider an extension as a short-term fix.

Elephant in the Room

FASB didn’t discuss the current expected credit losses (CECL) accounting standard Wednesday. The $2 trillion coronavirus relief package President Donald Trump signed into law (Public Law 116-136; see BGOV Bill Summary) on March 27 included an optional delay for banks to follow what’s considered the biggest change to bank accounting in decades.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com

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