As finance teams in businesses large and small deal with the fallout of the COVID-19 pandemic, the last thing they need is to also wrestle with changes to accounting standards.
That seems to be the conclusion of the Financial Accounting Standards Board, at least when it comes to privately held companies.
On May 20, the FASB threw a lifeline by delaying the required implementation date of its ASC 606 (revenue recognition) and ASC 842 (lease accounting) standards for all non-public entities until 2021, while giving companies the option to comply now. The vote came after the American Institute of CPAs issued a comment letter through its Technical Issues Committee (TIC) citing both the damaging effect of COVID-19 on businesses and ongoing difficulties in implementing ASC 606, for franchisors in particular and smaller, private companies more generally.
The AICPA’s letter pointed to stay-at-home orders and slowed or stopped business operations, particularly in not-for-profit and healthcare firms, saying that the Technical Issues Committee’s “experience with their own clients has been that nearly all attention is focused on addressing entities’ survival through the months of decreased or non-existent operations. Management has had to turn all energy to understanding the various Federal relief packages offered and identifying the best options for their business.”
With regard to ASC 842, the letter asserts that “the cost and additional controls required to adopt ASC 842 can be onerous, and an additional one year for private companies to adopt would be appreciated. In addition, the FASB has had to delay the leases roundtable where lessons learned from public companies were expected to be discussed and TIC believes these discussions will be important in determining how private companies should approach adoption.”
The letter further asked that not-for-profit companies that have “issued or are conduit bond obligators for securities that are traded” also be given additional time to comply with the standard, pushing required implementation to fiscal years beginning after Dec. 15, 2019.
The extensions aren’t a panacea, but finance teams struggling with the fallout of the pandemic will likely appreciate the extra time.
“For private companies, which are often most impacted by coronavirus, and that have not yet transitioned to ASC 606, the delay will be a relief,” said Carrie Augustine, a CPA and product strategist for NetSuite. “On the downside, for consumers of financial statements, comparison of financials will be very challenging until everyone is working with the same standard.”
Indeed. While ASC 606 and 842 are steps in what most CPAs agree is the right direction, the years-long, extended transitions are making life harder for those whose business it is to assess the creditworthiness and acquisition value of private companies. Credit agencies like Moody’s have expressed concerns about the rolling timeframes for compliance, and others see implications for those using ASC 326 to forecast current expected credit losses.
In Brainyard’s recent surveys of financial and business leaders, we found in our December and April polls, and now in our June survey, that implementing new accounting standards is a priority for fewer than 20% of respondents — most of whom work in private firms with less than $50 million annual revenue. “Adherence to new standards” was in the lowest third of the to-do list, even before the pandemic. Top priorities in each of the three surveys were also consistent, though the order shifted somewhat: Producing better reporting, making better use of data, identifying areas for savings and implementing better back-office software.
Smaller private firms have long groused about the expense associated with meeting FASB’s reworked accounting standards, including software upgrades, the requirement for new controls and the time lost to staff retraining. Both ASC 606 and 842 have been more difficult to implement than FASB had intended or anticipated. Uncontemplated circumstances required clarification, which slowed implementation for publicly traded companies. While the lessons were learned, that delay, in turn, slowed the process of creating appropriate software updates and retraining CPAs.
The AICPA recognizes the downside of inconsistent compliance, saying it “understands that broader relief will result in additional diversity in reporting among private companies for a period of one year as it relates to revenue recognition and disclosures.”
Whether that diversity ends up being pushed out yet again in 2021 may depend on how quickly the economy recovers, and whether non-compliant companies see pushback from funding sources.
Art Wittmann is editor of Brainyard. He previously led content strategy across Informa USA tech brands, including Channel Partners, Channel Futures, Data Center Knowledge, Container World, Data Center World, IT Pro Today, IT Dev Connections, IoTi and IoT World Series Events, and was director of InformationWeek Reports and editor-in-chief of Network Computing. Got thoughts on this story? Drop him a line.