Delays FASB has proposed for effective dates for certain preparers for three major accounting standards represent an opportunity for company finance departments to implement the standards more thoroughly, review public company filings, and make process and business improvements.
FASB proposed delays in the effective dates for accounting standards for leases, credit losses, and derivatives and hedging. A delay in the effective date for long-duration insurance contracts also has been proposed. Depending on the standard, these proposed delays will affect private companies, small reporting companies, and not-for-profits.
This additional time can provide great benefits to companies that were struggling with how to implement multiple standards at the same time, including the new revenue recognition standard.
FASB has proposed an Accounting Standards Update (ASU) that would provide more time for adoption in the following circumstances:
- SEC filers: The hedge accounting and lease accounting effective dates would remain January 2019, and the credit loss effective date would remain January 2020, except for smaller reporting companies, whose credit loss effective date would be extended to January 2023.
- All other public business entities: The hedge accounting and lease accounting effective dates would remain January 2019, while the credit loss effective date would change from January 2021 to January 2023. The January 2019 effective date for lease accounting would also apply to employee benefit plans and not-for-profit conduit bond obligors that file or furnish financial statements with or to the SEC.
- Private companies and all others: The hedge accounting and lease accounting effective dates would change from January 2020 to January 2021. The credit loss effective date would change from January 2021 to January 2023.
An additional proposed ASU would extend the effective dates for long-duration insurance contracts to Jan. 1, 2022, for calendar-year-end public business entities and Jan. 1, 2024, for all other entities with a calendar year-end.
Here’s how companies can take advantage of delays for the three standards that will be addressed in the first proposed ASU, if the delays are approved.
For companies that do not have large accounting staffs, it is very challenging to adopt accounting changes. There may only be a few people involved in implementation efforts. “Companies have had such a focus on revenue under Topic 606, which has taken much longer than expected, so many companies are behind on lease accounting,” said Jessica Everage, CPA, senior manager, Audit Professional Practices at Cherry Bekaert LLP. “Everyone is happy about this proposed deferral.”
A major challenge in implementing the lease standard is the amount of work needed to review lease contracts and identify what qualifies as a lease. Many companies that have started this effort are realizing there is a lot more work to do than they thought to capture all the lease data. “The extra time will help companies identify the entire population, even those who are far into their implementation process,” Everage said.
In addition, although software vendors have come up with lease accounting solutions, the extra time will help them and their customers. “Although the vendors are doing a good job, their products may not be fully built. They now have more time to review the functionality, add features, and offer a more complete product,” Everage said. Also, companies will have more time to choose the best software for their needs. “They may not know what features they really need until they have the time to apply the software to their business situations,” she said.
Everage believes that the leasing standard is somewhat different from the other standards that FASB has proposed for deferral because application of the accounting to normal transactions is not an issue. “However, certain situations and unique transactions are causing some confusion in applying the standard, such as sale leasebacks,” she said. She suggests that private companies use their extra time to consult with auditors on complex transactions, along with looking at SEC filing disclosures for guidance.
Lease accounting processes and controls will likely need to change. “Companies need to add processes for transition, along with new controls for everyday lease accounting,” Everage said. Having additional time gives companies the opportunity to focus on this critical area. “Accounting firms should encourage their clients to create an implementation plan with a timeline, process steps, and milestones,” Everage said.
Overall, in Everage’s experience, practical application of the new lease accounting standard can take longer and require more resources than expected. Many companies are still in the initial stages. “Companies should continue moving as if they were on the original timeline and not use the deferral as an excuse to put off implementation efforts for another year,” she said. “If you’ve already started implementation, keep at it and don’t stop. If you haven’t started, don’t wait.”
Derivatives and hedging
“There is a major distinction between the hedging standard and leases and CECL, because hedging is optional, an election,” said Gautam Goswami, CPA, national assurance partner at BDO. “Companies need to use the delay to educate themselves about what is changing.”
In his experience, far fewer people are aware of the requirements of the hedging standard compared with a standard like leases. Goswami recommends that people use the additional time to break down the standard into its pieces and make sure they understand it. “For example, there are changes in the timing of completing certain documentation requirements, but there is very little relief in the contents of the documentation,” he said.
The standard is intended to address complexities in the current model for hedging activities and provides welcome relief in key areas, including what can be hedged and furthering the ability to carry out subsequent effectiveness assessments qualitatively if certain conditions are met, but it is still not a simple standard. “In the past, many companies did not have the resources and threw up their hands and said, ‘it’s too complicated,’” Goswami said.
Since the revised standard provides targeted relief, he said it may be beneficial to deploy resources to assess and determine whether it makes sense to apply the revised standard, especially if it is for the first time. Related processes and documentation may have to change, and there are requirements for timing of the documentation and when hedge effectiveness assessments must be completed and updated. “Documentation in many instances is more manual than systemic,” he said, “but there are also fair value inputs and quantitative methods of assessing hedge effectiveness, e.g., regression, to be considered in applying the standard that may be more system driven.”
“There is less availability of third-party assistance in this area as compared with leases or CECL because it is elective,” Goswami said. He recommends that companies use the extra time to review, reflect, and consider performing dry runs. While FASB may provide additional implementation guidance and clarification through additional ASUs and stakeholder outreach, there is no formal Transition Resource Group like the one for CECL.
“Companies should also use this time to evaluate how they can take advantage of the amendments provided in the revised standard to better align their financial reporting with management objectives and risk management strategies,” Goswami said. “They should educate their audit committee and board about the changes in what can be hedged, along with the accounting and internal control changes that will be required.”
The CECL standard has implications for all companies, not just banks. It requires complex financial modeling. To address many implementation questions and concerns, FASB has a CECL Transition Resource Group, has provided implementation Q&A’s on its website, and has promised more educational assistance.
“Some companies are very well versed on the standard and are farther up the learning curve. But others, like some smaller banks, may not be as far along,” said Raj Mehra, executive vice president and CFO for The Freedom Bank of Virginia. “This delay allows companies to catch up on the standard itself, attend industry conferences where CECL is a big part of the agenda, and listen to experts and their peers.” In addition, he recommends attendance at roundtables offered by accounting firms, which may include their clients that have already implemented CECL.
Mehra believes that there is no one area in CECL that is most challenging and that CECL is a paradigm shift. “CECL is another way to record loan losses, but banks are not used to looking at the life of a loan for loss reserves,” he said.
The allowance for loan losses is already a critical accounting policy. “External auditors must be comfortable with how it is recorded, and you must have the right controls,” Mehra said. “There may be a heightened focus from CECL, but controls should be rigorous already.”
Delays provide additional time for design of changed processes and internal controls.
Companies must evaluate and choose the models that make the most sense, and the models should rely on valid source data. “The delay provides more time to do testing, make sure procedures are in place, and do parallel runs,” Mehra said.
Some banks are using vendors for modeling. There could be some backlog related to use of vendors. The delay in the effective date will help banks affected by the vendor backlog and will give vendors additional time to work out any kinks in their models.
Mehra agrees with FASB that the delays will enable smaller companies, their auditors, and other stakeholders to benefit from seeing what SEC registrants that have implemented CECL have done. “It behooves all companies to review filings and disclosures of registrants,” Mehra said. “Voluntary disclosures beyond those mandated by the standard are probably going to be provided by some companies because stakeholders need to understand the impact of the new standard on the financial statements.”
The additional time should also be used to further educate internal and external stakeholders on the impact of the standard. These internal stakeholders include the board, senior management, internal audit, IT, and operational departments that supply the data to populate the models. Externally, shareholders and analysts will need to understand changes to the loan loss reserve and other changes upon the adoption of the CECL standard.
“Analysts are already asking about CECL,” Mehra said. “Although a few publicly traded banks may be providing disclosures, detailed disclosures are not out there yet because the standard is not effective. When registrants start reporting, including providing voluntary disclosures, there could be a trickledown effect from analysts and publicly traded banks may find it helpful to provide additional disclosures.”
Overall, for CECL, as with the other standards, Mehra’s advice on how to make the most of the effective date changes is, “Keep the momentum going, and don’t wait until the end.”
— Maria L. Murphy, CPA, is a freelance writer in North Carolina. To comment on this article or to submit an idea for another article, contact Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com), the JofA’s editorial director.