This article was originally published on April 16, 2020. It was updated to reflect ASU 2020-05, which was issued on June 3, 2020.
- FASB votes to delay the effective date of ASC 606, Revenue from Contracts with Customers, by one year for franchisors.
- FASB votes to amend the effective dates of ASC 842, Leases, by one year.
- New accounting election simplifies accounting for lease concessions related to COVID-19.
- The decision was made authoritative with ASU 2020-05, which was issued on June 3, 2020. See related article on a broader deferral to ASC 606.
Good news seems hard to come by as organizations are overwhelmed with the challenges of keeping their doors open. However, we found some.
Questions or Comments?
FASB is on the verge of bringing some welcome relief from the complex and time-consuming new revenue recognition and lease accounting standards. At the April 8, 2020 FASB board meeting, FASB voted to: (a) consider a one-year delay for franchisors in the effective dates of ASC 606, Revenue from Contracts with Customers; (b) consider a one-year delay for ASC 842, Leases; and (c) add guidance on accounting for lease concessions directly related to COVID-19.
Revenue recognition for franchisors
- FASB is adding a new research project to investigate timing of revenue recognition under Topic 606 for initial franchise fees (IFF), specifically applicable to franchisors.
- For franchisors that are not public business entities, FASB proposed deferring the effective date of ASC 606 by one year. Maybe this delay is not specifically due to COVID, but it is still good news! The proposed dates would shift to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Deferral is optional.
Lease accounting standard
FASB voted to consider amending the effective dates of ASC 842, the new lease accounting standard, by one year. This would apply for:
- Private companies and private nonprofit entities
- Effective for annual reporting periods beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022.
- Public nonprofits (defined by FASB as nonprofits that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market)
- If they have not yet issued financial statements, the effective date would be fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption will continue to be permitted.
Not surprisingly, some organizations may receive lease concessions because of the impact of COVID-19. In response, FASB developed a Q&A document to address a number of situations organizations are facing.
- The Q&A document acknowledges the practical challenges organizations may encounter given the unprecedented and global nature of COVID-19 and how government actions may permit or require forbearance.
- FASB staff provides for an election that may simplify the accounting for lease concessions resulting from the COVID-19 pandemic. Using this election, an entity will not be required to scrutinize each contract to conclude enforceable rights and obligations for concessions exist, and may also elect to apply or not apply the lease modification guidance in Topic 842 Leases (or Topic 840 Leases).
Subsequent to the board vote, FASB issued Accounting Standards Update 2020-05, which formally grants a one-year effective date delay for certain companies and organizations applying the revenue recognition and leases guidance.
Keep in mind, FASB did not defer ASU 2018-08, Accounting for Grants and Contributions, for nonprofit entities.
What should organizations do?
This deferral essentially gives some calendar year-end companies and many fiscal year-end companies the option to take one additional year to adopt the revenue recognition standards.
However, it’s important to note this is an optional election. You may continue to adopt ASC 606 as originally scheduled. Depending on where you are in the implementation process, it may make sense to continue as planned. Make a decision based on what is most cost effective and best meets the needs of your stakeholders.
How we can help
As always, CLA is here to help you through new accounting standards. Reach out if you would like to discuss ASC 606 and how this change impacts your organization.