Credit Losses, Hedging, and Leases—Effective Dates for
Private Companies, Not-for-Profit Organizations and
Small Public Companies

Accounting Standards Update 2019-10—Credit Losses, Hedging, and Leases—Effective Dates for Private Companies, Not-for-Profit Organizations and Small Public Companies

 

Overview


On November 15, 2019, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that applied a change in philosophy to the effective dates for the following major Updates (including amendments issued after the issuance of the original Update):
  1. Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses), and, as a consequential amendment, Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill)
  2. Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (Hedging)
  3. Accounting Standards Update No. 2016-02, Leases (Topic 842) (Leases). 
Under this philosophy, a major Update is first effective for bucket-one entities, that is, public business entities that are Securities and Exchange Commission (SEC) filers, excluding entities eligible to be smaller reporting companies (SRCs) under the SEC’s definition. The Master Glossary of the Codification defines public business entities and SEC filers. All other entities, including entities eligible to be SRCs, all other public business entities, and all nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans) compose bucket two. For those entities, it is anticipated that the Board will consider requiring an effective date staggered at least two years after bucket one for major Updates. Generally, it is expected that early application would continue to be allowed for all entities.

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.

For existing major Updates not yet effective, determining whether an entity is eligible to be an SRC will be based on an entity’s most recent SRC determination as of November 15, 2019 (which is the issuance date of this Update), in accordance with SEC regulations. For example, because SRC status is determined on the last business day of the most recent second quarter, the most recent determination date will be June 28, 2019, for calendar-year-end companies. For future major Updates, the one-time determination will be based on an entity’s most recent SRC determination as of the date that a final Update is issued in accordance with SEC regulations.
 

Credit Losses


Credit Losses currently is not effective for any entities; early application is allowed for fiscal years beginning after December 15, 2018. Its mandatory effective dates are as follows:
  1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
  2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years
  3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. 
Following the effective date philosophy, the mandatory effective dates for Credit Losses in this Update are as follows (early application is allowed):
  1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 
This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (Goodwill). Those amendments maintain the Board’s intentional alignment of the mandatory effective dates for Goodwill with those for Credit Losses. Early application of Goodwill continues to be allowed for interim and annual goodwill impairment tests with a measurement date on or after January 1, 2017.
 

Hedging


Hedging currently is effective for some entities. Its effective dates are as follows (early application is allowed):
  1. Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Because Hedging already is effective for all public business entities, the Board retained the effective date for those entities, including SRCs. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the mandatory effective date for Hedging for all other entities by an additional year. Therefore, Hedging is effective for entities other than public business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed.
 

Leases


Leases currently is effective for some entities. Its effective dates are as follows (early application is allowed):
  1. Public business entities; not-for-profit entities 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; and employee benefit plans that file or furnish financial statements with or to the SEC for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Because Leases already is effective for all entities within (1) above (that is, including not-for-profit conduit bond obligors), the Board retained the effective date for those entities, including SRCs. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the effective date for all other entities by an additional year. Therefore, Leases is effective for entities within (2) above for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed.
 

How Do the Amendments Improve Current Generally Accepted Accounting Principles (GAAP)?


Since 2014, the Board has issued several major Accounting Standards Updates (typically referred to as broad projects on the FASB’s technical agenda). On the basis of feedback obtained from outreach with stakeholders and monitoring of implementation, the Board has gained a greater understanding about the implementation challenges encountered by all types of entities when adopting a major Update. The challenges are often magnified for private companies, smaller public companies, and not-for-profit organizations. The following factors (not all-inclusive) affect the severity of challenges encountered by those entities when transitioning to a major Update and the amount of time needed for implementation:
  1. Availability of resources (both internal and external)
  2. Timing and source(s) of education
  3. Knowledge or experience gained from implementation issues encountered by larger public companies
  4. Comprehensive transition requirements
  5. Understanding and applying guidance from post-issuance standard-setting activities
  6. The development or acquisition of:
    1. Sufficient information technology and expertise in creating and implementing new systems or effecting system changes
    2. Effective business solutions and internal controls
    3. Better data or estimation processes.
In response to those issues and requests to defer certain major Updates not yet effective for all entities, the Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). Those other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans.
 

Additional Information

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