Accounting Rule Deferrals Soon to Be Issued on Credit Loss, Lease, Hedging and Insurance

On October 16, 2019, the FASB unanimously voted to finalize a set of split deferrals on new accounting rules for credit losses on loans, leases, hedging and long-term insurance contracts. These are four of the most significant new accounting standards introduced in decades. This vote comes amid pushback over credit loss rules by some banking groups and U.S. legislators.

With this decision, the new credit loss standard will go in effect as planned on January 1, 2020 for all large public companies that are SEC filers. Smaller public companies will have until 2023 to adopt the new standard. Banks are required under the guidance to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses.

Also, the FASB unanimously voted to finalize a second proposal to defer long-term insurance contracts for all companies, as well as give smaller and private companies a longer adoption period.

According to board discussions, final rules on the effective date changes on all four accounting standards will be issued mid-November.

This vote reflects a philosophical shift for setting reporting dates on major new standards, although this view will be monitored going forward. Some FASB members also noted they were concerned about the potential for comparability issues that could arise from the effective date split between public companies.

"I would also like to add two aspects to the basis [for conclusions] to describe our discussion. The first thing with respect to the smaller reporting company threshold that the board members believe that it’s important – as this is a newly established philosophy – that we study that going through to see anything that needs to be altered, expanded or reduced," said Russell Golden, FASB Chairman. "And then secondly that, in respect to broker dealers, we do look forward on a case-by-case basis, considering broker dealers on future effective dates, but in essence we would not including them here because we don’t believe – at least two of them – are all that significant to them and then leases is already effective," he added.

Effective Dates Have Been Set

The board’s vote means that it will issue as GAAP, Proposed Accounting Standards Update (ASU) No. 2019-750, Financial Instruments–Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and Proposed ASU No. 2019-760, Financial Services–Insurance (Topic 944): Effective Date.

The effective date of ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses) would be deferred by Proposed ASU No. 2019-750 from 2020 to 2023 for smaller reporting companies (SRCs) and from 2021 to 2023 for private companies and not-for-profit organizations. Also, ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2016-02, Leases (Topic 842) would be delayed from 2020 to 2021 for private companies and not-for-profits.

Proposed ASU No. 2019-760 will delay the rules for ASU No. 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts from 2021 to 2022 for public companies, 2021 to 2024 for SRCs and from 2022 to 2024 for private companies and not-for-profits.

Targeted rules relevant to life insurance and annuities contracts are provided in the insurance standard, which took the board 16 years to complete, as indicated by board discussions. To see its effects, financial statement users will have to wait more than five years. "It will not be fully implemented by all entities until 2024," said FASB member Christine Botosan. "And so I just want to make sure that we recognize that users have been waiting a really long time for transparent information that helps them to understand what’s going on financially with insurance entities. And it’s not just investors, it’s policy holders as well," she said.

In order to adopt the rules, Botosan said she was comfortable providing companies with extra time because accountants expressed concerns about needing to update their systems and technology. "It was a necessary delay in order to ensure that the implementation was done in an efficient and effective way and that it was going to have long-term operational benefits," she said.

SEC Announcement on Leases Issues is Requested

Some companies told the board that its proposed deferral raises a transition issue with the lease standard being currently effective for public companies. Unless the transition guidance in paragraph 842-10-S65-1 is updated, respondents said the leases standard could unintentionally have three separate effective dates. FASB staff accountants told the board they have communicated with SEC staff accountants to have it updated.

It has also been requested by FASB staff members that the SEC announce that it would continue to allow a company that otherwise would not meet the definition of a public business entity (PBE) except for a requirement that its financial statements or financial information be included in another entity’s filing with the SEC, to adopt the leases rules under the "all other entity" effective date.

The "all other" entity category enables those companies to adopt the rules 2021.

To learn more about these new accounting standards and how to prepare your business, contact Weaver today.