Private Companies and Non-Profits Must Comply by Original Deadline. The Financial Accounting Standards Board FASB rejected the Pennsylvania Institute of CPA’s (PICPA) request for a two-year extension of the lease accounting standard’s due date.
The lease standard takes effect for nonpublic entities for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years starting after Dec. 15, 2022.
A Short History
The standard was initially issued in 2016, but its effective dates for nonpublic entities were delayed in two one-year deferrals:
- In November 2019, the FASB issued a deferral for nonpublic entities to recognize the challenges faced in the enactment of a major new standard.
- In June of 2020, the FASB passed the second deferral for nonpublic entities due to the coronavirus pandemic.
The PICPA’s Appeal
The PICPA’s recent appeal for deferral noted continuing COVID-19-related challenges including constraints in the labor market that have prolonged business disruptions. As a result, time and resources to comply with critical aspects of the leases standard are strained mainly because of the complexity of the related accounting issues, such as discount rate determination and embedded leases.
The plea by the PICPA also pointed out that time would be needed to review the effect on debt covenants, “… the COVID-19 pandemic has strained the viability of nonpublic entities including not-for-profits and decimated their balance sheets.” They added that considerable time would be needed to gather information required for reporting to the new standards.
Other Effects
Other industry experts note the time required to work with lenders seeking to waive or modify those covenants will be increased. Nonpublic entities’ demand for new financing has increased because of the pandemic making modifications and waivers even more challenging.
In denying the deferral, the FASB argued that the private companies’ financial statement users are ready for lease reporting to match their public company peers—public companies have already adopted the standard. FASB staff couched their final arguments in a feeling that even after a delay of two more years, there’s no guarantee that the private companies would have any more resources available than they have now. According to one report, FASB members voiced understanding of the difficulties of adopting a significant new standard. Still, they stated that they do not expect those challenges to improve with time.
Conclusions and Recommendations
This ruling offers closure. The uncertainty is gone, and at least now we know what has to be done. We recommend collecting the data you need starting right now to comply with the new standard.
LSL staff can offer guidance. Please click on this link: https://lslcpas.com/asc-842-lease-accounting/ to find customized solutions for tackling your lease accounting requirements.
