Businesses are gearing up for some of the biggest accounting changes in decades. Meanwhile, the Financial Accounting Standards Board (FASB) is focused on making sure companies know how to implement them properly.
3 big changes
After years of watching the FASB develop major new accounting standards, businesses now have to start following them. First up is the sweeping revenue recognition standard, which goes into effect in 2018 for public companies. Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, is the result of more than a decade of work to eliminate the reams of industry-specific guidance in U.S. Generally Accepted Accounting Principles (GAAP). It provides a single method to tally the top line in income statements.
Then ASU No. 2016-02, Leases, will hit public company balance sheets in 2019. The lease standard will require businesses to report on their balance sheets the costs of renting storefronts, heavy equipment and factories. For some companies, this change is expected to make balance sheets balloon.
Finally, a new method to tally losses on bad loans will begin to go into effect in 2020. ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments, is the FASB’s chief response to the 2008 financial crisis. The credit loss standard scraps current accounting requirements that prevent banks from recognizing losses until they have already happened. Instead, under the new current expected credit loss (CECL) model, banks will be required to look to the foreseeable future, consider all losses that could happen over the life of the loan, trade receivable or security in question, and book expected losses.
Private company struggles
The FASB is giving private companies an extra year to implement each of these major changes. The additional time allows smaller companies to learn from public companies that have already updated their accounting systems and practices. Despite this reprieve, the Private Company Council (PCC) has been asking the FASB to give private companies even more time to implement new and proposed accounting rules.
The PCC’s latest request on July 11 was unusual, however. It related to a proposal private companies almost universally support and are eager to adopt if the FASB finalizes it: Proposed ASU No. 2017-240, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities, published by the FASB in June. This proposal would let private companies avoid using the consolidation guidance for variable interest entities for some common control lease arrangements and similar legal structures.
Some private companies are worried about their ability to absorb yet another revision to U.S. GAAP. Even though most private companies seem to favor an exception to the consolidation guidance and many want to adopt it early, FASB Chairman Russell Golden is sensitive to the pace of change and will consider it during final deliberations for the consolidation standard.
A slower pace of change ahead
Golden and other FASB members have said that the board no longer plans to continue its aggressive pace of standard-setting. Instead, the FASB plans to focus, for the near term, on efforts to ensure smooth implementation of the standards that have been issued.
“The board specifically staggered the implementation [of these three major updates], and not every standard will have a significant impact on every company,” Golden told reporters before his speech in June at a Financial Executives International conference in Philadelphia. “We’re closely monitoring the progress of the implementation, and we’re looking at the level of inquiries we’re getting, as well as the questions the firms are getting. We’re in constant contact.”
The FASB also is proceeding cautiously before adding any new major projects to its agenda. Last year, the FASB identified four potential, large-scale accounting projects it may address in the future:
- Intangible assets,
- Pensions and other postretirement benefits,
- Distinguishing between liabilities and equity, and
- Overhauling the guidance for performance reporting and cash flows.
The FASB will decide later this year which projects it will take on. But, during a recent speech at the AICPA Not-for-Profit Conference, FASB member Christine Botosan reminded the audience that deciding to consider changes to accounting for a specific area won’t result in the immediate release of new standards. “As you all know, the board does not move at the speed of light,” she said. “So even after whatever projects we decide to add get added, it’s going to be multiple years before you see any real effect from those projects.”
Botosan added that she wanted to put conference attendees’ minds “at rest.” She reassured them that no major accounting changes were planned for any time soon.
The FASB has already set up special groups to tackle questions on some of the trickier parts of the revenue recognition and credit loss standards. Although the board didn’t establish a group for the lease standard, it has been fielding questions from the public, and the FASB plans to propose some minor revisions to the lease standard later this summer. Contact your accounting advisor for additional assistance getting your financial reporting systems and practices ready to implement these major updates.
Sidebar: 2 FASB projects in limbo
Over the next few years, businesses will be busy implementing the new revenue recognition, lease and credit loss standards. And many accounting departments lack the bandwidth to tackle additional changes to the accounting rules. As a result, the future of two proposed updates is now uncertain.
- Classifying debt
Businesses told the Financial Accounting Standards Board (FASB) that the amended guidance in Proposed Accounting Standards Update (ASU) No. 2017-200, Debt: Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent), would make more debts look like they were due immediately. They argued that the change would upend debt-to-equity ratios and turn off investors and lenders. The lack of support has caused the FASB to pause its work on the project for the next few months.
After reviewing the feedback submitted in comment letters and from direct conversations with auditors, businesses and analysts, the FASB agreed that it would do more research. The board plans to reconvene to discuss this issue further in September.
- Expanding inventory disclosures
The FASB also issued Proposed ASU No. 2017-210, Inventory: Disclosure Framework — Changes to the Disclosure Requirements for Inventory, in January 2017. The proposal calls for more detailed financial statement footnotes about inventory stockpiles. It was intended to help investors, analysts and creditors evaluate one of the most significant assets on many companies’ balance sheets.
Although two retail industry trade groups submitted comments, not a single retail company wrote to the FASB by the time comments were due in March. Given the importance of inventory data to analysts’ evaluations of the financial prospects of retailers, the FASB thought companies would pay close attention to the board’s proposed requirements for inventory disclosures.
“It would be difficult for me to draw any conclusions based upon the low number of people, particularly preparers, that responded to the document,” FASB member Lawrence Smith said. “I don’t know how we’re going to evaluate this on a go-forward basis.”
FASB Chairman Russell Golden also expressed caution about proceeding without more information. “The clear omission of feedback from retailers was surprising,” Golden said.
Given the relatively low response rate to the proposal, however, FASB members agreed that they need to do more work before determining the project’s next steps. Golden asked the FASB’s research staff to gather more information by talking to individual retail companies and retail industry analysts.