Pandemic places accounting, auditing rules in flux

The coronavirus caused regulators, standard setters, and others to adjust requirements and effective dates.
By Ken Tysiac

Pandemic places accounting, auditing rules in flux
Photo by 97/iStock

After the COVID-19 pandemic raised concerns that harried company finance departments would struggle to implement new accounting standards, FASB voted to add a project to its technical agenda to propose delaying the effective dates of its standards on revenue recognition and lease accounting for certain entities because of challenges related to the coronavirus pandemic.

The board voted unanimously to consider amending the effective date of FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers, including subsequent amendments, for franchisors that are not public business entities.

FASB also voted unanimously to consider amending the effective date of ASC Topic 842, Leases, including subsequent amendments, for:

  • Private companies and private not-for-profit entities; and
  • Any not-for-profit that has issued or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market that has not yet issued financial statements. (FASB calls these public not-for-profits).

FASB directed its staff to draft a proposal with a 15-day comment period.

The lease accounting standard is scheduled to take effect for private companies and private not-for-profits for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. The proposal would defer the effective date for those entities to fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.

For public not-for-profits, the standard would delay the lease accounting standard effective date to fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

Franchisors have raised questions about the timing of revenue recognition under Topic 606 for initial franchise fees, which typically are paid in a lump sum to the franchisor when a franchise agreement is signed. The franchising industry has requested that FASB evaluate how to reduce the costs of implementation of applying Topic 606 to initial franchise fees.

For those entities, FASB plans to propose deferring the effective date for the revenue recognition standard by one year, so it will take effect for annual reporting periods beginning after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020. The proposal would make the amendment optional.

The board also added a research project to its agenda to evaluate how to reduce the costs of implementation of applying the revenue recognition standard to initial franchise fees.

FASB Chairman Russell Golden indicated that FASB will consider additional effective date delays, if necessary, as a result of the pandemic.

"We will continue focus and continue to monitor the progression toward transitioning to those standards that will be effective in 2021 and 2022 and beyond, as well as the sunset provision in the recently issued simplification regarding the transition from LIBOR," he said.

FINANCIAL INSTITUTIONS USING CARES ACT DEFERRALS WON'T VIOLATE GAAP, SEC SAYS

Meanwhile, the SEC cleared up uncertainty for preparers and auditors related to accounting provisions included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The CARES Act was signed into law on March 27 and contains a deferral for depository institutions of FASB's new accounting standard on credit losses and a suspension for financial institutions of FASB's troubled debt restructuring rules.

This development created an interesting question. Since FASB sets GAAP, would financial institutions that take advantage of these exceptions be violating GAAP? In a statement issued by the commission, SEC Chief Accountant Sagar Teotia answered this question. He stated that eligible financial institutions will not be in violation of GAAP if they take advantage of the deferrals or suspensions of two FASB standards as permitted in the new federal coronavirus relief law.

Section 4014 of the CARES Act states that no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with FASB Accounting Standards Update No. 2016-13Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, until the earlier of the end of the national emergency related to the pandemic or Dec. 31, 2020.

Section 4013 of the CARES Act permits a financial institution to elect to suspend troubled debt restructuring accounting under FASB Accounting Standards Codification Subtopic 310-40, Receivables — Troubled Debt Restructurings by Creditors, in certain circumstances, beginning March 1 and ending on the earlier of Dec. 31, 2020, or 60 days after the national emergency terminates.

FASB, a not-for-profit established in 1973, is recognized by the SEC as the accounting standard setter for public companies and sets standards for private companies and not-for-profit entities as well.

Sections 4013 and 4014 of the CARES Act left financial statement preparers and auditors wondering if companies that took advantage of the deferral and the suspension would be in violation of GAAP. Teotia said the SEC's Office of the Chief Accountant received inquiries from preparers and auditors asking if election of these narrow and limited options would be deemed to be in accordance with GAAP.

Teotia said that for entities that are eligible for and elect to apply Section 4013 or Section 4014 of the CARES Act, the SEC staff would not object to the conclusion that this is in accordance with GAAP for the periods when these elections are available.

REGULATORS PROVIDE OPTIONAL EXTENSION

To make it easier for banking organizations to continue lending to households and businesses, federal bank regulators are providing an optional extension of the regulatory capital transition for FASB's new credit losses standard.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly announced the issuance of an interim final rule that would allow banking organizations to mitigate the effects of FASB's credit losses standard in their regulatory capital.

The federal regulators took action amid concerns related to the coronavirus pandemic's effect on banks' continued ability to provide loans to individuals and businesses. The new interim final rule states that banking organizations that are required to adopt FASB's credit losses standard this year can mitigate the estimated cumulative regulatory capital effects for up to two years, in addition to the three-year transition period that already is in place.

Alternatively, banking organizations can follow the capital transition rule issued by the banking agencies in February 2019. The changes took effect immediately, and the agencies will accept comments on the interim final rule for 45 days following the March 27 announcement.

ASB DEFERS EFFECTIVE DATES OF SEVERAL STANDARDS

In recognition of this challenging environment, the effective dates of seven private company auditing standards were delayed for one year as the result of a vote Monday by the AICPA Auditing Standards Board (ASB).

Delaying the effective dates of Statements on Auditing Standards (SASs) No. 134—140 provides relief to audit firms amid the challenges created by the coronavirus pandemic. The delay is designed to help firms with a high-quality implementation after the pandemic subsides.

The standards are primarily related to substantial changes to the auditor's report. The standards now will take effect for audits of financial statements for periods ending on or after Dec. 15, 2021.

Early implementation is permitted, and the ASB expressed its intent that SASs No. 134—140 be implemented at the same time. Firms that already have methodologies or tools in place and implementation planned may wish to move forward with those plans despite the change in the effective date, according to AICPA Chief Auditor Bob Dohrer, CPA, CGMA.

"The AICPA has heard from numerous small and midsize CPA firms that they and their clients are struggling due to the pandemic," Dohrer said in a news release. "We understand that many firms may not have the time or resources to focus on effective implementation of SASs No. 134—140 this year. We hope the deferral will offer firms relief and an opportunity to implement the standards in the highest-quality manner possible when the distractions from the pandemic have diminished."

SASs No. 134—140 are interrelated and, within this group, subsequent SASs amend previously issued SASs. The effective dates of SASs No. 134—140 were aligned so that they would be implemented at the same time. Accordingly, the ASB recommends that all these SASs be implemented concurrently.

CPA EXAM EMERGENCY TESTING PERIOD INVOKED

CPA Exam candidates will have additional opportunities for testing during an emergency testing period that is being invoked by the National Association of State Boards of Accountancy (NASBA), the AICPA, and Prometric.

Prometric closed its testing centers in the United States and Canada to protect its test takers and workers during the coronavirus pandemic. The test centers are scheduled to remain closed at least through May 1.

In anticipation of the reopening of test centers, NASBA, the AICPA, and Prometric have decided to invoke an emergency testing period. As part of this procedure, the 2020 second-quarter testing window will be extended from June 10 to June 30.

The decision was made with the understanding that candidates are concerned about their testing options amid the disruption caused by the pandemic.

NASBA also previously announced that all Notices to Schedule expiring between April 1 and June 30 will be extended through Sept. 30, 2020. NASBA is waiving all rescheduling fees.

GASB PROPOSES POSTPONING EFFECTIVE DATES

The effective dates of most GASB statements and implementation guides due to be implemented for fiscal years 2019 and later would be postponed under a proposal issued by GASB.

The full list of proposed effective date delays for state and local government accounting can be found here. Two of GASB's most significant recently issued standards — Statement No. 84, Fiduciary Activities, and Statement No. 87, Leases — would be included in the delays, if approved.

GASB considered the delays after numerous state and local government officials and public accounting firms requested relief. Many state and local government offices closed because of the pandemic, preventing access to information needed to implement GASB pronouncements.

Comments on the proposal will be accepted through April 30, and the board plans to consider a final statement for issuance on May 8.

SEC EXTENDS PANDEMIC-RELATED RELIEF

Relief provided to public companies, funds, and investment advisers affected by the coronavirus pandemic was extended by the SEC to cover a longer period.

Public companies now have a 45-day extension to file certain disclosure reports that otherwise would have been due between March 1 and July 1, according to an updated SEC order. A previous notice of relief issued March 4 covered the period from March 1 to April 30.

The SEC also issued orders that gave certain investment funds and investment advisers additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements. This extends the filing period covered by the SEC's original orders issued March 13.

Conditions for public companies to utilize the order include a current report of a summary of why the relief is needed in the particular circumstances for each periodic report that is delayed.

For investment funds and investment advisers, the conditions include notifying SEC staff and/orinvestors, as applicable, of the intent to rely on the relief. Investment funds and advisers generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur.

The SEC's Division of Corporation Finance also issued Disclosure Topic No. 9, which provides the division staff's views regarding disclosure and other securities law obligations that companies should consider with respect to the coronavirus pandemic and related business and market disruptions.

In addition, the SEC encouraged companies and other related persons to consider their activities in light of their disclosure obligations under the federal securities laws, including insider trading laws.

"Health and safety continue to be our first priority," SEC Chairman Jay Clayton said in a news release. "These actions provide temporary, targeted relief to issuers, investment funds, and investment advisers affected by COVID-19.

"At the same time, we encourage public companies to provide current and forward-looking information to their investors and, in these uncertain times, companies are reminded that they can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements."

SEC UPDATES STAFF GUIDANCE ON SHAREHOLDER MEETINGS

The pandemic has created challenges for company officials attempting to follow rules governing accountability to shareholders. In recognition of this, the SEC updated its staff guidance for conducting shareholder meetings during the coronavirus pandemic.

In the updated guidance, SEC staff addressed four main issues:

  • Changes in date, time, or location of shareholder meetings: The updated staff guidance says if an issuer has already mailed and filed its definitive proxy materials, it can notify shareholders of a change in the date, time, or location of its shareholder meeting without mailing additional soliciting materials or amending its proxy materials if it:
    • Issues a press release announcing the change and files the announcement as definitive additional soliciting material on EDGAR.
    • Takes all reasonable steps necessary to inform other intermediaries in the proxy process and other relevant market participants.
  • Virtual shareholder meetings: SEC staff guidance calls on issuers to provide timely notification to its shareholders, intermediaries in the proxy process, and other market participants of any plans for a virtual or hybrid meeting. The notification should include logistical details such as how shareholders can remotely access, participate in, and vote at such a meeting.
  • Presentation of shareholder proposals: The updated staff guidance encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 proxy season.
  • Delays in printing and mailing of full set of proxy materials: The updated guidance encourages issuers facing printing and mailing delays caused by COVID-19 to use all reasonable efforts to provide shareholders with material information in a timely manner so they can make informed voting decisions. However, such efforts should not endanger the health or safety of anyone involved.

In circumstances where delays are unavoidable due to COVID-19, SEC staff would not object to an issuer using the "notice-only" delivery option permitted by Exchange Act Rule 14a-16, even if the issuer can't meet all of the rule's notice and timing requirements, as long as shareholders are provided with proper notification and receive the proxy materials with enough time before the meeting to review the materials and exercise their voting rights under state law in an informed manner.

PCAOB PROVIDES OPPORTUNITY FOR INSPECTION RELIEF

Registered audit firms that request relief from PCAOB inspections as a result of the coronavirus pandemic will be granted up to a 45-day relief period, with the exception of providing the board access to audit documentation for certain engagements.

The PCAOB advised audit firms that wish to use all or part of the 45-day relief period to reach out to their designated PCAOB inspections point of contact. The board expects to fully resume inspections by May 11.

In a news release, the PCAOB said the pause will give audit firms the time, resources, and flexibility to work through significant matters with their issuer and broker-dealer clients. Meanwhile, the board said its inspections staff can continue its work by reviewing documentation for certain engagements remotely and preparing for inspections.

The board will continue to monitor the evolving situation and reassess its policies.

The board said its core considerations at this time of uncertainty are the health and safety of its employees and those with whom it interacts, and its statutory mission to promote audit quality.


Editor's note

CPAs and the clients and businesses they serve have been significantly affected by the coronavirus pandemic and its fallout on the business environment and economy. Here is a summary of noteworthy pandemic-related nontax news that affects CPAs. Information is current as of April 20.

About the author

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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