By Keith C. Peterka, CPA
In May 2020, the Financial Accounting Standards Board (FASB) took bold action as the COVID-19 pandemic repercussions swept across the U.S. business landscape: the board voted to delay the effective date for revenue recognition for private companies that had not yet issued December 2019 financial statements. The FASB realized that many private companies were fighting for survival and that a crisis of historical proportion was not the time to implement a new revenue recognition standard. At the FASB meeting, members stated that ASC 606 did not have a material impact on private companies, and that in addition to a one-year delay for revenue recognition the FASB also would delay the implementation date for lease accounting (ASC 842) for fiscal years beginning after Dec. 15, 2021, and Dec. 31, 2022, for private companies with a calendar year-end.
Listening to FASB board members share their thoughts on the immaterial impact of ASC 606 clearly illustrated to me that the FASB has recalibrated its mission in the decade since Robert Herz served as its chair. There is no argument regarding the technical capabilities of Herz, who was a senior PwC partner and a member of the International Accounting Standards Board (IASB), but it was under Herz’s leadership that the FASB’s focus was on convergence of U.S. GAAP with international standards. It was through convergence efforts that the FASB set aside well-established U.S. GAAP for a goal of one high-quality accounting standard. This conviction paved the way for new revenue and leasing standards.
Times have changed. The leasing project was undertaken with the understanding that the current standard does not meet the needs of financial statement users, but this premise is simply not factual for private companies and their stakeholders. Since the FASB’s first exposure draft issued in 2010 and a second draft in 2013, significant developments have occurred for private companies that are noteworthy. One major change was the FASB and the Private Company Council (PCC) release of the Private Company Decision – Making Framework, A Guide for Evaluating Financial Accounting and Reporting for Private Companies. This framework acknowledges that private companies and their stakeholders have significant differences from the stakeholders of the issuer’s community. The framework highlights differences such as access to management, investment strategies of the primary users, accounting resources, and how private entities obtain information regarding new accounting guidance. One of the stated purposes of the guide is as follows: “The Guide is intended to be a tool to help the Board and the PCC identify differential information needs of users of public company financial statements and users of private company financial statements and to identify opportunities to reduce the complexity and costs of preparing financial statements in accordance with U.S. GAAP.”
We have seen what happens when accounting standards are implemented that provide minimal value to private companies with the adoption of ASC 606.
The current FASB board is correct in its assessment of the immaterial impact of the new revenue standard on financial statements. However, what was not immaterial was the implementation cost. The cost for private companies may not have reached the six and seven figures that many in the registrant community spent, but the cost in dollars and resources was significant. This was further amplified at the AICPA 2020 ENGAGE conference, where Tom Groskopf, technical director at the AICPA’s Center for Plain English Accounting, polled nearly 400 participants if the value from the new revenue standard exceeded the cost of implementation. Only 10% believe it was worth the investment!
With the COVID-19 pandemic, private companies have a long road back to recovery and prosperity. There are lessons to be learned from this pandemic regarding business processes and operational issues that will need to be addressed and will take precedence before implementing costly new accounting standards. Now is the time for the profession to demand an indefinite deferral on the new leasing standard for private companies.
The reasons are clear.
The adoption of the leasing standard will exceed the cost and effort of the revenue standard. The leasing standard will likely result in confusion about private company financial statements since ASC 842 will require adjustments to the financial statements, which may not be understood by users. In addition, ASC 842 has the potential to trigger banking covenant violations that could be costly to private companies. While ASC 840 may not be a perfect standard, there is little doubt that a new leasing standard will provide little benefit to the private company stakeholders. There was chatter at the recent PCC town hall at the virtual ENGAGE conference of companies taking GAAP exceptions for the new lease standard or moving to a new reporting framework. Shouldn’t that be an indication to the FASB that a converged leasing standard is not needed and certainly not wanted?
The AICPA’s Technical Issues Committee has been warning both the FASB and the PCC of the negative impact of ASC 842 to private companies. Now is the time for CPAs to contact the FASB and the PCC, and their state societies to request a permanent deferral. Private companies’ focus for the coming years should be on strengthening their balance sheets, improving operations and revenue, supply chain reliability, and creating jobs; not implement costly accounting standards from a bygone error of convergence.
Keith C. Peterka, CPA, is a partner at Anchin Block & Anchin LLP in New York City. He can be reached at firstname.lastname@example.org.
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