Over the past few years, we have seen quite a few accounting standard updates (ASUs) issued by the Financial Accounting Standard Board (FASB). A few of these were big changes from existing accounting guidance (Revenue Recognition and Leases). With lease implementation on the horizon for most private companies this year, we wanted to look at that standard as well as a couple others that may be of importance to your company’s application of accounting standards.
ASU 2016-02 (Topic 842) Leases
The topic of leases has been discussed for several years now, including how many entities may now be required to show certain operating leases on the balance sheet. VonLehman has covered this topic in several articles and presentations which can be found HERE. To prepare for implementation, gather all lease agreements and amendments that the company has during 2021 and 2022 so you can begin to assess the impact of these inclusions on the balance sheet. If you have multiple leases, you may want to consider the assistance of lease software purchased by the company, or you can engage your CPA to assist with implementation.
Another important consideration is how many covenants are in your current debt agreements. The addition of new liabilities associated with these leases may cause some entities to fail covenants. Now is the time to talk with your lenders about how they will treat these new liabilities and how the covenants will be affected – rather than at or after year end when you realize the covenant failed. In addition to lenders, consider the other users of the financial statements and how prepared they are to see financial statements with additional liabilities.
ASU 2017-04 (Topic 350) Simplifying the Test for Goodwill Impairment
If your company has goodwill on the books, this can be treated in one of two ways. The first method, if elected (and is only permitted for private companies), follows treatment permitted on ASC 350-20, where goodwill is amortized on a straight-line basis over ten years and a one-step impairment test is performed at triggering events. The second treatment involves a two-step impairment test where an entity first compares fair value to carrying value of the reporting unit. If fair value is less than carrying value, the entity moves onto step two to determine the implied fair value of the reporting unit, then a write down of goodwill is recorded. For private companies especially, the second step of this process can be complicated and burdensome due to information needed to calculate the implied value and often limited resources available at private companies. If a company did not elect the private company alternative (ASC 350-20), after adoption of this ASU, the company would only perform a one-step impairment test by simply comparing the fair value and carrying value and recording a write down for impairment loss based on difference if fair value is less than carrying value. This ASU is effective for reporting periods beginning after December 15, 2021, with early adoption permitted. In short, if your business has goodwill and did not elect the private company alternative, adoption of this standard may simplify your annual impairment test reviews.
ASU 2020-04 (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Loans, notes, and a variety of hedging/derivative instruments often use various interbank offer rates (IBORs) in the computation of interest. While LIBOR’s remain a popular option, recently, many regulators across the globe have sought out more observable reference rates that are more objective in nature. A change in reference rate, whether associated with a lease, debt agreement, or derivative instruments, constitutes a contract modification; therefore, (thanks to Topic 606) the contract must be evaluated to determine if a new contract exists or if this change is simply a continuation of an existing contract. This ASU is effective for all entities with hedging or other contracts that reference LIBOR or a rate expected to be discontinued but only for those contracts existing as of December 31, 2022.
Because of the wide net of topics this ASU covers, there are many optional expedients an entity can elect, if qualified, depending on the nature of contracts affected. For example, depending on the nature of the contract (eg. Contracts that classify as leases or contracts that might be classified as receivables or debt) the accounting for the modification can vary. The important thing to remember is that any expedients applied must be consistently applied across all contracts within the same topic. The amendments in this ASU are effective between March 12, 2020, through December 31, 2022, as this ASU is intended to help with the transition from old reference rates to new reference rates. In addition to this ASU, ASU 2021-01 was issued pertaining to reference rate but with a much narrower scope pertaining to derivatives. This ASU was effective upon issuance. As these ASUs are broad in scope, consult with your CPA if you have concerns about reference rate reform and how that may impact your contracts or derivatives tied to an IBOR that is discontinuing.
ASU 2021-10 (Topic 832) Disclosures by Business Entities about Government Assistance
In 2020 and into 2021 and 2022, many businesses received some form of government assistance during the COVID-19 pandemic such as a PPP loan, Economic Injury Disaster Loan, employee retention tax credits, etc. For many businesses, especially those in for-profit sectors, government assistance was unchartered territory. This was an unprecedented time when it came to accounting for and disclosing the government assistance as existing accounting guidance was mum on treatment. As a result, many companies may have analogized the treatment of the assistance to grant or contribution models like International Financial Reporting Standards (IFRS). To provide more guidance in this area, the FASB issued this ASU which is applicable for all entities other than not-for-profits and employee benefit plans and requires the disclosure of the nature of transactions with governments, the accounting policies used to account for these transactions, as well as where in the balance sheet and income statements the government assistance is presented. In addition, any significant terms and conditions such as duration, commitments, contingencies, etc. should also be disclosed. As this standard is effective for reporting periods beginning after December 15, 2021, reports issued by your CPA for 2022 may include disclosures pertaining to government assistance if your business received government assistance in any reporting period presented.
These are just a few of the many ASUs that will soon go into effect. VonLehman hopes this overview can be a starting point to discuss any further questions or other ASUs on the horizon. For more information on these or other accounting standards, please contact Janessa Stecker at jstecker@vlcpa.com or Stephanie Allgeyer at sallgeyer@vlcpa.com.
Disclaimer: The information discussed herein is intended for use by non-public business entities as public business entities may have varying requirements and implementation dates.
