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Main U.S. accounting rulemaker proposes historic change to standard-setting philosophy

The Financial Accounting Standards Board (FASB) twice in August proposed to change its philosophy for establishing effective dates for major new accounting standards, a significant shift in its standard approach.

The board proposed the change in effort to extend and simplify how effective dates are staggered between larger public companies and other companies, following broad outcry from its constituents that they need more time to adopt new standards on credit losses, leases, hedging and long-term insurance contracts.

The philosophical change was proposed on Aug. 15, 2019, under Proposed Accounting Standards Update (ASU) No. 2019-750Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, and on Aug. 21 under proposed ASU No. 2019-760, Financial Services—Insurance (Topic 944): Effective Date.

Companies have until Sept. 16 and Sept. 20, respectively, to submit comments on the matter, the main text of the proposals state.

The potential change comes amid the board’s effort to help companies implement new accounting rules, much of which require the gathering of new, tough to get data and implementation help from software vendors. Rules for reporting credit losses on loans, for example, were developed in response to the 2007-2008 global financial crisis, the biggest financial meltdown since the Great Depression. The standard is a fundamental change for reporting losses from soured loans. Moreover, the new standard for reporting leases would bring about $3 trillion of lease liabilities on companies’ balance sheets, a major change from prior accounting requirements.

The philosophical shift would be a further step for the board, which typically makes the split for setting effective dates between public and nonpublic entities. Private companies (nonpublic entities), for example, determined by the private company framework, typically were granted an extra year from public companies of any size to adopt most new accounting changes.

Under the new philosophy, major accounting standards updates would typically be effective for larger public entities, specifically U.S. Securities and Exchange Commission (SEC) filers other than entities eligible to be Smaller Reporting Companies (SRCs) as defined by the SEC, two years before those major standards would be effective for “all other entities,” the board said.

All other entities, include entities eligible to be SRCs, all other public business entities and all nonpublic business entities (smaller public companies, private companies, not-for-profit organizations and employee benefit plans).

To be eligible as an SRC, an entity must be an issuer as defined by the SEC and may not exceed established levels of public float, annual revenue or both as defined by the SEC.

“Under the SEC definition, investment companies (including business development companies), asset-backed issuers, and majority-owned subsidiaries of a parent company that is not an SRC are not eligible for SRC status,” the proposals state.

For existing major standards not yet effective, determining whether an entity is eligible to be an SRC will be based on an entity’s most recent SRC determination in accordance with SEC regulations as of the issuance of this final updates on ASU No. 2019-750 and ASU No. 2019-760. For example, “it is anticipated that this date will be June 30, 2019, for calendar-yearend companies,” the document states.

If finalized, the proposed philosophical shift would apply to the following new standards:

  • ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses);
  • ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (Hedging);
  • ASU No. 2016-02, Leases (Topic 842) (Leases); and
  • ASU No. 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (Insurance).

Read our alert regarding the Proposed Accounting Standards Update (ASU) No. 2019-750.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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