FASB Proposes One-Year Delay of ASC 842, Leases, (ASC 842) for Private Companies
Currently, for calendar-year private companies, the effective date for ASC 842 is January 1, 2020. In May 2019, the AICPA wrote a letter to the FASB asking them to consider delaying the effective date of ASC 842 for private companies for one year. The AICPA received feedback from private companies who were struggling to adopt in the stipulated time frame.
Some of the reasons cited, include:
- Many companies have just completed their adoption of, or are currently in the process of adopting, ASC 606, Revenue from Contracts with Customers.
- By adopting only one year after public companies, private companies will not have the benefit of processing “lessons learned” from public company implementations, which includes the SEC comment letter process.
- The potential need to change internal controls and systems for capturing relevant contracts is significant.
- Companies will need time to consider whether modifications of debt covenants will be necessary, and then will need time to negotiate with lenders.
- Lack of sufficient internal resources to meet the requirements.
On July 17, 2019, the FASB unanimously approved a proposal to defer the effective date of ASC 842 for private companies for one year. If this is ultimately approved, ASC 842’s effective date for a calendar-year private company would be January 1, 2021.
Possible Next Steps for Private Companies
Such a deferral is aimed at providing private companies with sufficient time to accurately work through the implementation of ASC 842, which will require most leases (and certain service agreements) to be recorded on the balance sheet.
However if a private company has begun, or is about to begin, their implementation process, they might find it worthwhile to:
— Continue the process of capturing the appropriate data points of their current lease agreements, such as:
- Commencement date,
- Lease terms,
- Renewal options, and
- Lease payments.
— Continue to analyze any potential embedded leases, as this can be a time consuming process involving different departments within an entity.
— Prepare an estimated calculation of the right-of-use asset and lease liability so they can identify any potential loan covenant issues with lenders.
It is a rare event for the AICPA to request such a deferral from the FASB. Due to the numerous implementation difficulties that have been experienced, it appears that the implementation time frame can be significantly more extended than many initially thought. If non-public companies put off their implementations for another 10-12 months, they may find themselves unable to adopt on a timely basis, even on the deferred date.