Dive Brief:
- The Financial Accounting Standards Board (FASB) on Wednesday extended the implementation deadline for new lease accounting standards. The new standards were originally scheduled to take effect for private companies and nonprofits in January, but will now go into effect a year later, January 2021. Public companies are already implementing the new standards, which were mandatory for them at the beginning of this year.
- The extension also applies to two other changes: how banks record expected losses on loans, called the current expected credit loss (CECL) standard, and how long-term insurance contracts are valued.
- Organizations sought more time for compliance, but many are critiquing the delay. Analysts at Moody's, for example, said the delay would hinder the credit analysis process by compromising comparability between public and private companies. "Such delays will hurt reporting transparency, affecting a swath of non-financial corporations across different sectors," the analysts said.
Dive Insight:
Under the lease accounting changes, organizations must disclose operating leases on their balance sheet, both as an asset and a liability, in the same way that capital leases are treated. Operating leases are now disclosed as expenses on the income statement and in the footnotes to the financials.
FASB and its sister organization, the International Accounting Standards Board (IASB), adopted the new standards about three years ago as a way to increase transparency so investors and regulators would have a better idea how much liability a company has beyond what is shown on its balance sheet. Without full disclosure of these obligations, companies can appear healthier than they are.
Organizations have said the new process can be time-consuming, in part because many operational leases are embedded in other types of contracts, making them hard to identify. For example, a multiyear contract with a company to install and maintain an office copier typically includes an accompanying embedded lease.
Also time-consuming is gathering contract amendments and other documents related to the lease that have not had to be organized and accounted for in the past.
Companies can have hundreds or even thousands of leases, depending on their size and kind of business.
FASB said it had this work burden in mind when it proposed pushing back the deadline. "Based on what we've learned from our stakeholders," FASB Chairman Russell Golden said in July, "private companies, not-for-profit organizations, and some small public companies would benefit from additional time."
Banks oppose CECL
The new CECL standard applies to banks, who have been vocal opponents of the change.
The new standard requires banks to record expected future losses as soon as loans are issued. Currently, banks use what's known as the incurred-loss method, under which they measure a loan's expected credit losses at the time of recording. Banks will then look at historical experience, current conditions and forecasts to determine expected losses.
