On Wednesday, July 17th, the Financial Accounting Standards Board (FASB) unanimously approved a proposal to defer, for one year, the implementation date of ASC 842, Leases, for nonpublic companies.
The current implementation date for nonpublic companies is for years beginning after December 15, 2019, or calendar 2020. If the proposal is passed, ASC 842 would become effective for years beginning after December 15, 2020, or calendar 2021, for nonpublic companies. As a reminder, it is already effective for public companies. The proposal must go through a 30-day comment period, during which time the general public can offer their input, be it positive or negative. The proposal appears to have support both within the FASB and in the private sector.
What is ASC 842?
This accounting standard, issued in February 2016 as part of the convergence project with the International Accounting Standards Board, provides for virtually all leases to be capitalized and presented on the balance sheet. Previously, only capital leases were subject to such treatment. This pronouncement could have a significant impact on a company’s balance sheet, as the present value of the future lease payments would be included as an asset and liability. Many companies with financial covenants associated with bank financing could be impacted by seeing significant changes in their debt to equity ratios and perhaps tripping non-compliance with these ratios.
Why Might it be Deferred?
There are two main reasons for deferring implementation. First, companies just completed the implementation of the sweeping revenue recognition changes, commonly known as ASC 606. Significant resources were allocated by most companies to address ASC 606, thereby diverting attention away from the implementation of ASC 842. Second, once companies did start digging into complying with ASC 842, they realized it was much more involved than initially thought.
More on Lease Accounting
One of the biggest issues faced in the implementation of ASC 842 is determining the population of leases to be included in the liability calculation. Contracts must be reviewed to see if they contain lease elements, but very often, the actual contract may not be readily available to read.
Another issue companies face is choosing the right software to perform the intricate calculations. In the past two years, a number of options have sprung up, but it is difficult to determine which software best fits a company’s specific situation, whether it be integration with existing applications or familiarity of user interface.
In making this announcement, the FASB also mentioned that going forward, it may establish a 2-year deferral between public and nonpublic companies for future “major” standards such as ASC 606 and ASC 842. Stay tuned to see how this one plays out.
Under the presumption this deferral takes place, nonpublic companies will have an additional year to properly determine the impact of the new standard and take the necessary steps to ensure the standard is properly adopted.
For more information on this topic or if you need assistance with the implementation of the standard, please contact Al Erdmann, Partner, at 212-829-3215, [email protected] or by filling out the form below.
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