FASB Defers Effective Date for ASC 842 in Response to COVID-19
In a move to counter the effects of the COVID-19 pandemic on the implementation of certain accounting standard updates, FASB has on June 3rd announced the issuance of Update 20-05, Effective Dates for Certain Entities. This has an immediate effect with regard to GAAP-compliant financial statements.
As well as setting new deadline dates for the implementation by “non-public business entities” of ASC 606 Revenue from Contracts with Customers, the Update 20-05 more importantly for the leasing community sets out to alleviate the time constraints contained in the original ASC 842.
The highlights of Update 20-05 all revolve around completion dates and can best be summarised as below but is applicable only if there has been no financial statement raised or issued prior to June 3rd incorporating where relevant ASC 606 or ASC 842. For purposes here and in the Update 20-05 a public business entity is a business entity as defined in the Master Glossary in the FASB’s Codification. Neither a not-for-profit entity nor an employee benefit plan is a business entity. These effective date changes should not be viewed as a reprieve but as an opportunity to get the transitions to and compliance with the standards perfect particularly concerning ASC 842 – implement a robust future prove software solution that gives you control over lease management, lease negotiation and lease accounting.
ASC 606 Revenue from Contracts with Customers
The update allows any non-public business entity to take advantage of a revised effective date for compliance for fiscal years beginning on or after December 15th, 2019 and interim periods within fiscal years beginning 15th December 2020. Prior to the update, the dates referred to 2018 and 2019 respectively.
ASC 842 Leases
Regarding not-for-profit entities that are traded, listed or quoted on any exchange or over the counter market the effective dates have moved out by a year from December 15th, 2018 to December 15th 2019 where ASC 842 has not been adopted in any financial statement issued or available for issuance.
All other entities other than Public Business Entities or Employee Benefit Plans that file financial statements with or to the SEC have the option of working to the revised effective date one year later than previously required – fiscal years beginning after December 15th 2021 and interim periods in fiscal years after December 15th 2022.
Conclusion and How to make the best use of the additional time available
The pandemic itself together with the measures taken by governments throughout the world have highlighted the advantages a business can enjoy with a well-managed current database of its lease contracts, conditions and commitments. Companies need to be proactive in managing obligations as well as reactive to any opportunities or threats faced in this COVID-19 dominated climate. Flexibility can be realised by understanding and taking advantage of options regarding lease contracts – early terminations, rental holidays, reduced payments may be available to reflect reduced needs for or reduced funds available to finance property or equipment during the lockdown or any recession that might follow.
Critically ease of access to lease rental payment commitments will greatly assist in entities making use of the PPP (Paycheck Protection Program) when reporting the loan element applied to any rent.
Any alleviation on lease terms or obligations whether negotiated with the lessor or proscribed by law will need to be recorded and will likely require the accounting for relevant leases to be recalculated. Even the “borrowing rate” applied to a recalculation may be artificial as today’s COVID-19 reflected rates may not be representative of the world today let alone going forward.
A lease accounting platform such as the robust, tested, and proven solution available from Innervision will allow a business to quickly leverage and harness that lease information and be compliant with ASC 842 or where appropriate IFRS 16.
Your business should be well on the way to compliance with the new accounting standards but the interruption to priorities resulting from the effects of the pandemic in the workspace coupled with the benefits of Update 20-05 give businesses time to appreciate the importance of a dedicated lease accounting solution and proactive lease portfolio management. Hopefully, there will never be another time like this but seizing the opportunity presented now will give possible savings today and definite economies in the future.
As we proceed through these troubled times your business needs to have in place systems, actions and resources such that with ease you can;
- Alert the accounting function of any rental concessions negotiated or triggered.
- Apply a revised realistic discount rate.
- Report any necessary disclosures or impairments to reflect the effects of the pandemic
- Be aware of any clauses that might be triggered as a result of the pandemic – not just rent reductions but also terminations and holidays.
- Account for revised lease end dates resulting from payment holidays
To learn more about how Innervision’s globally recognised lease accounting solution can be leveraged to help simplify lease accounting compliance and provide you with full control over lease management, lease negotiation and lease accounting requirements, request a call back from one of our Lease Accountancy Experts by clicking the link below.