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29 July 2019
As reported in Bloomberg, FASB will soon be considering whether the mandatory adoption dates for major new accounting standards should be delayed for small public companies and privately held businesses. According to the article, testimony from some small business finance professionals at a recent meeting of the Financial Accounting Standards Advisory Council indicated that, while they may be comfortable following the same rules as bigger companies, smaller companies "don't have the same resources as large public companies so they need extra time to implement significant new accounting rules." However, there seemed to be a fair amount of pushback from some commentators at the meeting, which could impact FASB's decision.
The possibility of staggering effective dates is expected to be considered by FASB in July. The idea would be to require large public companies to adopt new standards in the first year, while smaller public companies could delay until the second year and privately held businesses until the third year. The "back-to-back accounting changes for how to recognize revenue, reporting liabilities from leases, and calculating losses on loans," has likely been the trigger for these "pleas for help for more time."
But what will FASB consider to be a small public company? According to one of the speakers, the idea would be to leverage existing legal definitions, so presumably they would apply the definition of "smaller reporting company" (see this PubCo post) or perhaps even use the concept of non-accelerated filer (see this PubCo post). Some commentators questioned whether it made sense to make the delay available to all private companies. To illustrate the point, they raised as an example "unicorns," which may have much greater resources available than many smaller public companies. And, one commentator observed, many unicorns have a significant amount of activity from a number of investors (including big mutual funds) that would not receive key financial information on a timely basis. With that in mind, some commentators suggested that perhaps distinctions should be drawn based on size rather than on public or private status.
According to the article, if the change were adopted, "the staggering could apply to standards where the effective dates have been set but not yet taken effect. It could potentially give private companies extra time on lease accounting as well as the much-watched current expected credit losses (CECL) accounting standard, which is considered the biggest change to bank accounting in decades. New lease accounting for private companies is set to take effect in 2020, and CECL for small public companies and private companies is set for 2021."
Investors commented at the meeting that they were concerned about the absence of comparability that staggering would create for users and regulators. One investment manager remarked that he "consistently ask[s] for the same rules because it makes it simpler for investors….One suggestion is just move the date back for everyone to make it more consistent." Another commentator observed, however, that private companies tend to benefit from delayed application because they learn from the experience of public companies that adopt the standards first. In light of the comparability issue, several commentators seemed to prefer that delays be made available on a case-by-case basis, instead of on a categorical basis, which would also provide more flexibility.
Another commentator expressed concern that the investment community would shun smaller public companies that did not apply the latest standards. In response, another participant remarked that EGCs—which may elect to defer compliance with new or revised financial accounting standards until non-reporting companies (or companies that have filed IPO registration statements) would be required to comply with them (see this PubCo post)—don't seem to be shunned. One commentator asked rhetorically whether this conversation would even be happening but for the issuance of three major new standards within a year.
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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