By Deby MacLeod, CPA, CGMA
May 21 Update: The FASB has voted to officially delay the effective dates for the Leases (Topic 842) and Revenue from Contracts with Customers (Topic 606) standards. The Leases (Topic 842) standard is now effective for private companies and private not-for-profit (NFP) entities for fiscal years beginning after December 15, 2021. The standard is effective for public NFPs that have not yet issued financial statements (or made them available for issuance) for fiscal years beginning after December 15, 2019.
The Revenue from Contracts with Customers (Topic 606) standard has been delayed for franchisors that are not public business entities and all entities that have not yet issued financial statements (or made them available for issuance) for fiscal years beginning after December 15, 2019.
Early adoption is still permitted for both standards.
To provide accounting relief and clarity during the COVID-19 crisis, the FASB published an exposure draft on April 21, 2020, with proposals to delay the effective dates for Leases (Topic 842) and Revenue Recognition (Topic 606). The comment deadline for these proposals is May 6, 2020.
Leases, Topic 842
The FASB has proposed allowing the option to defer implementation of Topic 842, Leases, for one year for entities in the “all other” category, that have not yet issued their financial statements. Included in the “all other” category are private companies and private not-for-profit (NFP) entities as well as public NFP entities.*
The proposed new effective date for entities in the “all other” category (excluding public NFPs) would be fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. For public NFPs, the new effective date is fiscal years beginning after December 15, 2019, including interim periods for those fiscal years.
In addition, FASB has issued a Q&A document to help stakeholders account for lease concessions provided during the COVID-19 pandemic. One specific topic addressed is the application of lease modification guidance in Topic 840 and guidance in Topic 842, which requires that a lease be accounted for as a new lease if negotiated modifications in terms and conditions change the economics of the lease for the remainder of the lease term.
Due to the expansive disruptions and the expected volume of lease concessions made related to the COVID-19 crisis, the FASB recognized that applying the lease modification requirements to each contract for which concessions were made because of the pandemic would be complex and costly for both the lessee and lessor.
Therefore, instead of having to analyze each contract to determine whether enforceable rights and obligations for concessions exist, an entity may elect to apply or not apply the lease modification guidance. The election should be applied consistently to leases with similar characteristics in similar circumstances. The FASB lease Q&A is located here.
Revenue Recognition, Topic 606
The FASB has proposed optionally postponing the effective date of ASC 606, Revenue From Contracts with Customers, for franchisors that are not public business entities. The franchising industry has raised questions about the timing of revenue recognition for initial franchise fees paid as a lump sum when the franchise agreement is signed.
The timing of the revenue recognition for these fees can significantly affect the franchisor’s financial statements, including during an entity’s start-up or growth phases. A deferred effective date would provide the FASB time to explore the possibility of a more cost-effective solution to this issue. The proposed optional deferred effective dates are for annual reporting periods beginning after December 15, 2019 and interim reporting periods within annual periods beginning after December 15, 2020.
Please contact your Clark Nuber service team for more information and updates.
*Public NFP entities are those that have issued or are conduit bond obligors for securities traded, listed or quoted on an exchange.
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