Some private companies that technically meet the definition of a public business entity have some breathing room to adopt two major FASB accounting standards.
The businesses may choose to follow the standards for revenue recognition and leases at the same time as other private companies instead of the earlier dates required for public businesses, the FASB said on September 29, 2017.
The option applies to businesses that meet the definition of a public business entity because they include, or must include, their financial statements with the SEC filings of public business entities, the FASB said in Accounting Standards Update (ASU) No. 2017-13, Revenue Recognition (Topic 605), Revenue From Contracts With Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017, EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.
Two types of businesses are likely be affected by the update, private companies that recently were acquired by a public company and private companies in which a public company has made a sizeable investment.
In both situations, the companies are considered public business entities for financial reporting purposes. The distinction is important when it comes to adopting the much-watched revenue recognition and lease accounting standards because the FASB allows private companies an extra year compared to public companies to comply with the new requirements.
The publication of the update follows an announcement SEC Deputy Chief Accountant Sagar Teotia made on July 20 at a meeting of the FASB's Emerging Issues Task Force (EITF).
At the time, Teotia said the SEC staff "would not object" to certain specific organizations complying with the FASB's revenue recognition standard, published in May 2014 as ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), and the lease accounting standard, published in February 2016, as ASU No. 2016-02, Leases ( Topic 842), at the same time that private companies and other qualifying entities comply with them. Statements by SEC officials to the EITF that alter the requirements of U.S. GAAP are considered amendments to GAAP at the moment the statements are made. The FASB, by practice, follows the SEC staff statement by releasing an ASU that formally adds the staff announcement to the FASB's Accounting Standards Codification.
"This announcement is applicable only to public business entities that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity's filing with the SEC. This announcement is not applicable to other public business entities," the FASB's update reads.
The FASB's Master Glossary says a business is considered a public business entity if it is required by the SEC to file or furnish financial statements, or does file or furnish financial statements, including voluntary filers. It also includes other entities whose financial statements or financial information are required to be or are included in a filing.
"An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity's filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC," according to the glossary.
The FASB's revenue standard gets rid of reams of industry-specific guidance in U.S. GAAP and comes up with a uniform method for businesses and other organizations to record the top line in their income statements. It goes into effect for public companies in 2018. Private companies must comply with it for annual statements in 2019 but have until 2020 for quarterly reports.
The leases standard is the culmination of years of debate about whether and how businesses should record liabilities associated with renting real estate, equipment and vehicles. The standard, which goes into effect in 2019 for public companies, is expected to greatly inflate balance sheets. Private companies and other organizations have until 2020 to follow it for annual reports and until 2021 for quarterly filings.
The implementation process for both standards has required extra work for companies of all sizes.
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