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The FASB Proposes Changes to Standard-Setting Approach, Specifically Effective Dates

4 minute read
October 9, 2019

The Financial Accounting Standards Board (FASB) has proposed a historic change to its approach in establishing effective dates for new accounting standards. This proposal comes after constituents insisted that small public companies and private entities generally need more time to adopt major changes to the accounting rules than larger public ones.

Revising a Mindset

The FASB’s effective date for public companies to adopt new accounting changes provides nonpublic entities with an additional year to implement the changes. This shift in approach would extend effective dates and simplify how they are staggered between large public companies and others.

The two buckets the FASB has proposed are:

Bucket 1: Large public companies. These are Securities and Exchange Commission (SEC) filers that don’t meet the SEC definition of smaller reporting companies (SRCs).

Bucket 2: Entities other than large public companies. These would include SRCs, private companies, not-for-profit entities and employee benefit plans. Investment companies (including business development companies), asset-backed issuers and majority-owned subsidiaries of a non-SRC parent company are not eligible for SRC status under the SEC definition.

Under the proposed change, the FASB considers setting Bucket 2 entities’ effective dates for at least two years after those for Bucket 1 entities. Going forward, the amended guidance for setting effective dates would apply to major Accounting Standards Updates (ASU). If approved, all entities would also be permitted early application.

Challenges Create a Need for Change

The FASB have identified the following factors as increasing the challenges met by Bucket 2 entities when transitioning to a major standard:

Implementation challenges may be worse as smaller, less-sophisticated entities develop or acquire 1) effective business solutions and internal controls, 2) better data or estimation processes and 3) sufficient information technology and expertise in developing new systems or changing existing ones.

Recent Updates and Proposed Deferrals

The proposed Accounting Standards Update (ASU) Nos. 2019-750 and 2019-760 were issued in August 2019. These proposals introduce the changes in setting effective dates and applying them to the following standards:

Related to these rules, the proposed ASUs would not change the accounting guidance. For the updated accounting rules, they would simply extend the implementation dates.

Welcome Relief

“Based on what we’ve learned from our stakeholders, including the Private Company Council and the Small Business Advisory Committee, private companies, not-for-profit organizations and some small public companies would benefit from additional time to apply major standards,” FASB Chairman Russell G. Golden stated. “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.”

Comments on the proposed ASUs were due in September. This reprieve would be welcomed by many, so approval seems likely. If finalized before year-end as planned, the new effective dates would apply once the FASB issues final standards.

There have been several major changes to accounting rules in recent years. If you are struggling to keep up with these changes, contact us today to ask questions.

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