The Financial Accounting Standards Board (FASB) has proposed a historic change to its philosophy for establishing effective dates for major new accounting standards. Outcry from constituents indicates that small public companies and private entities generally need more time to adopt major changes to the accounting rules than larger public ones.
FASB wants to stagger effective dates
Historically, the FASB has set an effective date for public companies to adopt new accounting changes and then given nonpublic entities an extra year to implement the changes. A proposed philosophical shift would extend and simplify how effective dates are staggered between larger public companies and other companies.
The FASB has proposed grouping entities into two buckets:
Bucket 1: Large public companies. These are Securities and Exchange Commission (SEC) filers that don’t meet the SEC definition of smaller reporting companies (SRCs).
Bucket 2: Entities other than large public companies. These would include SRCs, private companies, nonprofit entities and employee benefit plans. Under the SEC definition, investment companies (including business development companies), asset-backed issuers and majority-owned subsidiaries of a parent company that’s not an SRC are not eligible for SRC status.
Under the proposed shift, the FASB would consider setting the effective dates of major accounting rule changes for Bucket 2 entities at least two years after the effective dates for entities in Bucket 1. If approved, the amended guidance for setting effective dates generally would apply to major Accounting Standards Updates (ASUs) going forward, and early application would continue to be permitted for all entities.
Reasoning for proposed change
The FASB has identified the following factors that affect the severity of challenges encountered by Bucket 2 entities when transitioning to a major standard:
- Availability of internal and external resources,
- Timing and sources of education,
- Knowledge or experience gained from implementation issues encountered by larger public companies,
- Comprehensive transition requirements, and
- Comprehension and application of guidance from postissuance standard-setting activities.
Implementation challenges also may be magnified as smaller, less-sophisticated entities develop or acquire 1) effective business solutions and internal controls, 2) better data or estimation processes, and 3) sufficient information technology and expertise in developing new systems or changing existing ones.
Proposed deferrals of recent updates
Proposed Accounting Standards Update (ASU) Nos. 2019-750 and 2019-760 were issued in August 2019. These proposals introduce the philosophical shift in setting effective dates and apply it to the following standards:
- ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
- ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
- ASU No. 2016-02, Leases (Topic 842), and
- ASU No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
The proposed ASUs would not change the accounting guidance related to these rules. They would simply extend the implementation dates for the updated accounting rules.
“Based on what we’ve learned from our stakeholders, including the Private Company Council and the Small Business Advisory Committee, private companies, not-for-profit organizations, and some small public companies would benefit from additional time to apply major standards,” stated FASB Chairman Russell G. Golden. “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.”
Comments on the proposed ASUs were due in September. Many constituents welcome a reprieve, so approval appears likely. If finalized, the extended effective dates would apply as soon as the FASB issues final standards, which is expected to happen before year end.