The Financial Accounting Standards Board (FASB) has learned some tough lessons in 2019 about the differences between pie-in-the-sky planning and on-the-ground reality when it comes to implementing new accounting rules.
Earlier this year, the accounting standard-setter began voting to delay the implementation of a handful of new rules for smaller companies, such as private lenders and credit unions. Last week, the Board issued a tentative opinion approving the extensions. The Board indicated that the official Accounting Standard Update (ASU) will arrive mid-November.
The issues involved include a new accounting standard for credit losses that appears particularly nettlesome, the “current expected credit losses” (CECL) standard issued in 2016. It came about in the wake of the financial crisis in the late 2000s as a way to force banks to provide information in a timelier manner, and the new rule requires lenders to provide estimates of expected losses over the life of the loans in their portfolios. As a result, some companies may need to boost their reserves for loan losses, which would cut their earnings and raise their cost of capital.
Not surprisingly, the banking industry has expressed reservations over CECL as it relates to all lenders, not just smaller companies. After Capitol Hill caught wind of those concerns, legislative proposals sprung to life in Congress intended to manipulate CECL’s implementation.
For public business entities that file financial statements with the Securities and Exchange Commission (SEC) but do not qualify as so-called smaller reporting companies, CECL will go into effect for fiscal years and interim periods beginning after Dec. 15, 2019. All other businesses now have until Dec. 15, 2022, to implement CECL.
Meanwhile, the FASB also delayed implementation of new standards for lease and hedge accounting for private companies and nonprofits until the fiscal year and interim periods beginning after Dec. 15, 2020.
Why the delays? Ernst & Young described the “significant challenges” with implementation communicated to the FASB thusly: “the availability of resources; timing and source of education; lessons learned from the implementation issues encountered by larger public companies; understanding and applying guidance from post-issuance standard setting; and the development of sufficient information technology, effective business solutions and internal controls.”
According to FASB Chairman Russell Golden, the ability of smaller companies to learn from the experiences of their larger counterparts played a key role in this case. The thinking goes that compressed timelines for implementation make it more difficult for the smaller companies to absorb such lessons.
Given the latest hiccup and the struggles of some publicly-traded companies to implement the new lease-accounting standard, it seems clear the Board will continue to face scrutiny over the phased implementation of its new standards.