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Bloomberg Tax | More Time in Store for Loan Loss, Lease, Hedge Accounting Changes

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Bloomberg Tax

By Nicola White, Bloomberg
August 15, 2019

Small public banks, privately held businesses, and credit unions could get extra time to implement three major changes to accounting standards.

The Financial Accounting Standards Board Aug. 15 issued a much-anticipated plan that would delay the date by which many businesses have to follow new accounting rules for reporting leases, recording losses on loans, and using hedge accounting.

If finalized, credit unions and banks that meet the Securities and Exchange Commission’s definition of a smaller reporting company would have until 2023 to comply with the current expected credit losses (CECL) accounting standard, a post-financial-crisis accounting rule that will force banks to record losses earlier on failing loans and other financial products.

A business qualifies as a smaller reporting company two ways: if it has a public float of less than $250 million or if it has a public float of less than $700 million and annual revenues less than $100 million.

Large publicly traded banks would still fall under the new rules starting in 2020.

The proposal would give private companies and not-for-profit organizations until 2021 to record on their balance sheets for the first time liabilities associated with leasing office space and heavy equipment. Public companies started following the new accounting rules in 2019.

Private companies and not-for-profit groups would also get more time to apply new rules that expand and simplify hedge accounting, a specialized accounting method that allows companies using derivatives for its risk management strategies to keep swings out of earnings. While many companies favor the changes ushered in by the 2017 update, FASB said it wanted to give smaller organizations the option for more time to apply the new accounting rules.

Philosophy Change

FASB said the proposal is part of a mindset change in setting effective dates for major new accounting standards.

Typically, when the board sets a compliance date, it offers private companies and not-for-profit organizations an extra year to adopt it. One year may not be enough, private and small businesses told FASB, especially with major, back-to-back accounting changes in recent years.

Now, FASB is considering giving private companies, smaller public companies, not-for-profit groups, and employee benefit plans at least two years reprieve.

“This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards,” FASB Chairman Russell Golden said in a statement.

Time Crunch

FASB rarely delays major new accounting standards so significantly, but it has issued a crush of standards in recent years.

Many companies, especially privately held businesses—told the board they didn’t have enough time or resources to do the job right.

The lease standard is an upheaval in accounting practice, requiring all businesses to report on their balance sheets for the first time the assets and liabilities from renting real estate, equipment, and vehicles. Because leasing is such a pervasive practice—businesses can rent everything from photocopiers to forklifts—the job of sorting through rental contracts turned out to be laborious. Public companies reported it was a bigger task than they expected. The same was true for private companies.

. . .

To read the full article featuring Abrigo, visit Bloomberg Tax, “More Time in Store for Loan Lease Loss, Hedge Accounting Changes.”

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