Privately Held Companies Get One-Year Extension on New Accounting Standard

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Most Significant Accounting Changes in 40 Years Now Set to Take Effect Dec. 15, 2020

 

October 18, 2019 | Written by Randyl Drummer | Originally published on CoStar

The Financial Accounting Standards Board, pictured here at a meeting in January 2019. (Financial Accounting Standards Board)

The Financial Accounting Standards Board, pictured here at a meeting in January 2019. (Financial Accounting Standards Board)

The Financial Accounting Standards Board, the U.S. accounting rules-setting body, is giving privately held companies and nonprofit organizations more time to prepare for new financial reporting standards that had been set to take effect in less than two months on property and equipment leases.

The Norwalk, Connecticut-based panel, which in July voted to consider proposals that would delay the effective dates of the new standards for leases, loans and hedge fund accounting for periods between one and three years, formally extended the implementation deadlines for one year, from after Dec. 15 of this year to periods starting after Dec. 15, 2020.

Financial and real estate professionals reported running into difficulty and unexpected issues in implementing or preparing for the new lease accounting standards, officially known as Accounting Standards Codification No. 842, better known to accountants as ASC 842. The standard requires companies to recognize most operating leases as liabilities or assets on their balance sheets where previously, companies could simply list lease transactions in footnotes in their financial reports.

The Financial Accounting Standards Board and its international rule-setting counterpart, the International Accounting Standards Board, issued the rule in 2016 to improve investor transparency into companies reporting the financial impact of lease transactions on their bottom lines. The rule took effect for publicly traded companies this year. With the addition of privately held companies, accounting experts have estimated the changes could transfer an estimated $3 trillion in property and equipment lease costs onto the corporate balance sheets of U.S. companies.

Privately held companies now have more time to prepare for the most significant accounting change in 40 years, according to industry experts at CoStar Real Estate Manager, who said companies should put the time to good use. Many publicly traded companies underestimated the time needed to gather lease data and get it into a proven system that can handle the complex calculations required to meet the new ASC 842 standard, said Matt Waters, CoStar director of lease accounting.

“Even with the one-year delay, private companies should not slow down their efforts to understand the requirements and get various department stakeholders involved in the compliance project,” Waters said in an email.

While companies asked the board for more time to comply, analysts at rating agency Moody’s said the delay would hinder credit analysis by compromising comparability between publicly traded and privately held companies.

The delays “will hurt reporting transparency, affecting a swath of non-financial corporations across different sectors,” Moody’s said in a statement.

The new rule, officially known in the United States as Accounting Standards Codification No. 842, better known to accountants as ASC 842, requires companies to recognize most operating leases as liabilities or assets on their balance sheets. Previously, companies could simply list lease transactions in footnotes in their financial reports. The international accounting rule-setting groups issued the rule in 2016 to improve investor transparency into company reporting of the financial impact of lease transactions on its bottom line.

Almost 40% of private firms were running behind schedule or had not even started planning for the changes as of April, according to a poll conducted by lease accounting software provider LeaseAccelerator of 350 finance and accounting leaders from U.S.-based privately held companies with $1 billion or more in revenue. Three-quarters of respondents said they found the new rules to be either as complicated or more complicated than expected.

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