CFO

FASB Standards: Speed Ahead or Tap the Brakes?

By Bridget McCrea for Brainyard
October 14, 2020
Compliance city

In short:

  • Private companies and not-for-profits can take extra time to get in compliance with revenue recognition and lease standards.
  • Weighed down by a pandemic and recession, CFOs may choose to put implementation off until the deadline is nearer. But is that the best path?
  • One wild card: COVID-19 could drive changes to what auditors look for.

Right now, finance teams can certainly be forgiven for shifting attention away from new accounting standards implementations. But that doesn’t mean these projects should stay stalled. Sure, FASB gave CFOs of private companies and not-for-profit organizations a reprieve by pushing the deadlines for revenue recognition and lease accounting compliance out by a year.

But if your team was making headway on these initiatives before the pandemic, finishing the job now might pay off.

The goal of FASB’s revenue recognition guidance, ASC 606, is to clarify and strengthen the principles governing how companies report to users of financial statements material information about the nature, amount, timing and uncertainty of revenue from customer contracts. As to leasing, the intention with ASC 842 is to close loopholes in ASC 840 that have led to many leased assets not showing up on balance sheets.

Kim Kushmerick, AICPA’s associate director for accounting standards, has been involved with FASB’s revenue recognition rules since they were originally issued in 2014. Over the six years since, there’s been a lot of discussion, several amendments and numerous deferrals. Kushmerick says COVID 19 made giving private companies — many of which hadn’t yet issued 2019 financial statements — and not-for-profits more time to comply just made sense.

Still, she says these requirements shouldn’t be anything new for CFOs at this point. And, it just makes sense to work on both concurrently.

“This is make-or-break time in terms of getting a handle on the types of contracts you have in place and how the new standard must be applied,” she says. And while they’re reviewing contracts to determine the impacts of the rev rec standard, finance teams can tackle the lease standards at the same time. At minimum, complete a preliminary audit of what’s in scope.

“You’re doing all of that digging, which requires a contract-by-contract review,” Kushmerick says, “Why not just do both at once?”

What’s the Scoop?

Here are the latest FASB deadlines for revenue recognition and leases standards:

script icon Private companies and not-for-profit organizations that have not yet applied the revenue recognition standard can do so for the annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Again, early applications are being accepted.
money icon Private companies and private not-for-profit organizations may apply the new lease standards for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Early applications are being accepted.

Check out FASB’s full list of COVID-delayed rules and standards.

While doing that review, remember that contracts will not only have varying payment terms, and thus different revenue recognition requirements. Some also come with leases. For example, even a straightforward shipping contract with a freight hauler could include an embedded lease for the vehicle.

Hurry, but Don’t Rush

Experts understand that CFOs are focused right now on the pandemic’s effects on revenue and reporting, including complying with PPP grant forgiveness requirements. Plus, whenever a standards body delays implementation deadlines, the rules may be tweaked in the interim.

Thus, Richard Jones, associate professor of accounting, taxation and legal studies in business at Hofstra University, says putting a pin in delayed FASB standards may not be such a bad idea.

“FASB hasn’t [said] it’s going to make adjustments to reporting for leases or for revenue recognition,” Jones said, “But you’ll still want to monitor the situation because some changes may come along with the delay.”

As a previous company, when FASB changed the rules, the new standards made life difficult for Suzanne Colvin. Now, Colvin is CFO at Egnyte, a provider of secure file sharing, content services and collaboration solutions. She says that, as the rules were delayed and changed, some of those pain points were in fact eased; now, she sees the possibility of additional rule changes as a reason to table compliance during this delay period.

“We waited to adopt until the last possible moment, hoping that the larger, public companies might request changes that would simplify things for us,” says Colvin. “As a private company, if you wait until later, then maybe you’ll get the simpler answer.”

Complex Standard

Under ASC 842, as many as 100 fields may need to be tracked per lease. Here’s how to get started.

Understanding the ASC 842 Lease Accounting Standard

The current environment could also get in the way of a CFO’s good intentions concerning revenue recognition compliance.

“With COVID-19 and other issues in play, you have to prioritize projects and allocate staff to them -- you can’t necessarily do everything,” says Colvin. “But you also don’t want to wind up dealing with surprises that you could have controlled.”

And let’s face it, while global pandemics and recessions are clearly beyond your control, adopting new accounting standards that were published years ago and delayed multiple times is within your domain.

“I don’t know that boards of directors and investors are going to have much patience with the CFO who overlooks this,” says Colvin. “If you’ve heard that this is a minor issue, and then you wait too long to get started, you could wind up lifting the hood and realizing that you have a real problem on your hands.”

Our take: The effective dates for two important FASB standards may be delayed, but that doesn’t mean CFOs can’t make incremental progress. With a few simple steps, they can juggle this responsibility while also ensuring business continuity and financial health during this period of uncertainty.

What to Do Now

Here are 5 steps in the right direction:

1. Scope the project. “Do a thorough technical review to figure out what’s expected and how it’s going to change the way you report,” says Colvin. If you don’t have the time or resources to manage this internally, enlist outside help.

She suggests that CFOs speak with their auditors or a technical advisory service that handles this type of work.

“They can help you do an initial evaluation and determine the impacts,” she said. “Use the advice from your auditors or a third-party firm to get a better idea of where the landmines are. That was key for both Egnyte and for my last company.”

2. Think beyond forecasts and financial results. It’s hard not to get mired in the numbers right now, but Colvin strongly recommends factoring in disclosures, metrics and key performance indicators (KPIs) when working toward compliance. For example, instead of focusing on debits and credits and how compliance will impact your balance sheet and income statement, consider exactly how the standards changes will affect the way you’re using your existing metrics and KPIs.

The importance of these impacts can’t be understated, yet they’re often overlooked in the rush to comply with new standards. With a full year to work through some of these deeper issues, though, “we’ve been busy” is not going to fly as an excuse if real problems come to light.

“When you start [incorporating into] your financial results the things required by the new leasing standards, your internal metrics can go sideways,” Colvin cautions. “That can create chaos in the organization.”

For example, if your customer arrangements include an embedded lease, under the new leasing standards, you could end up with a material change in the timing of your revenue, impacting your mix of recurring and nonrecurring revenue, a common KPI.

“Another example, in certain circumstances under the new leasing standards, is that a portion of what was previously rent or operating expense will become interest expense, impacting expense percentages and EBITDA KPIs,” says Colvin.

3. Approach tech tools with cautious optimism. Our data shows that CFOs are making the case for more finance technology, even as companies are cutting back and preserving cash. That makes sense. The practical technologies finance teams are bullish on can ease some standards-related pain points. Colvin cautions, however, that it’s unlikely these solutions will solve all of your standards compliance issues immediately. It often takes providers some time to optimize their tech to address new rules. We should note, though, that the value of these tools often goes well beyond accounting standards compliance.

4. Read what peer companies have to say. Companies that are already in compliance with the new standards are rightfully proud of that and likely talking about their challenges and successes.

“Look at what other companies have disclosed about it in their footnotes,” says Kushmerick. “It’s always helpful to see how other people are thinking about it.”

5. Figure out which areas of your business will be impacted. For revenue recognition, now is a good time to start reviewing all of your company’s contracts, determining what your revenue streams are and figuring out which standards apply to specific transactions.

“There are no shortcuts here,” said AICPA’s Kushmerick. “You need to really look at what your contracts are and go through the process of applying the standards. That’s not easy.”

Fortunately, there are educational resources available to help companies navigate the complexities of the new rev rec, lease and other standards. “Don’t feel like you have to go this alone,” Kushmerick says. “Take advantage of what’s out there, read other companies’ footnotes, and talk to people who have already been through it.”

Where to Find Help

The AICPA’s resources include:

bulb icon Revenue Recognition Standard: Details, upcoming deadlines, webinars, including specific resources for auditors.

Accounting for Leases: Details, upcoming deadlines, webinars and self-study courses.

COVID-19 Resources: PPP resources and a CARES Act stimulus calculator.

More to Come?

Hofstra’s Jones follows both accounting and auditing trends and says there could be a delay in a new rule clarifying how auditors manage issues related to the pandemic. For example, there’s now a need to develop assurance that clients have accurately reported the pandemic’s impacts on financial health and performance, for the specific period being audited.

“Auditors may be more demanding and require additional documentation of significant estimates related to the pandemic,” Jones says. “Get ready to provide more information to your auditors and work with them to make sure they can perform their work related to your disclosures and reports.”

Ultimately, Jones says the decision to move forward on the delayed standards or to wait depends on how much work has already been completed.

“If you feel prepared to meet leasing and/or rev rec guidance, and if there’s no reason to put that off, then move forward with your reporting,” says Jones. “However, if you need the extra time, take it. It can only help.”

Bridget McCrea is a Florida-based freelance writer who writes about business, technology, and finance. She’s the author of five books and a contributor to publications like Logistics Management, Supply Chain Management Review, tED Magazine and Florida Realtor.

Mark Bianco

For more helpful information from the Brainyard and our friends at Grow Wire and the NetSuite Blog, visit the Business Now Resource Guide.

  

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