It has been a busy few years for the Financial Accounting Standards Board, completing new Accounting Standards Updates (ASUs) on revenue recognition, leases, and many other topics large and small. In this article, we will take a quick look at the changes coming and when they will take effect. We will take a deeper look at some of these updates in future articles as the effective dates become closer.
Revenue from Contracts with Customers
The new revenue recognition standard will change the way companies think about and record revenue. The core principle of the standard is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The standard also includes more robust disclosure regarding revenue recognition. The standard is effective for private companies for their fiscal years beginning after December 15, 2018.
The new leases standard drastically changes the way companies will account for leases, especially leases that used to be considered operating leases. On the lessee side, companies will record a “right-of-use” asset and lease liability for essentially all leases with a term of 12 months or more. The old operating vs financing test will still be used, but only to determine whether the lease is expensed on a straight-line basis (same expense each month) or using the effective interest method (interest and principal are recorded as if the company financed a purchase of the asset). The lessor model was not substantially changed with this standard. The standard is effective for most companies for their fiscal years beginning after December 15, 2019.
Long-term Debt: Current vs. Noncurrent
This project is not yet complete, but if it is issued as it tentatively stands, it could impact how companies classify debt as current or long-term. Under current standards, if a debt obligation is renewed or extended after the balance sheet date but before issuance of the financial statements, it can still be treated as long-term debt. If this standard passes as proposed, this would no longer be the case. The extension or renewal would need to be enacted before the balance sheet date for companies to be able to consider it long-term debt. This has the potential to impact covenant calculations. One exception that has been proposed is for a covenant violation. If the company receives a waiver after the balance sheet date for a covenant violation that would have triggered on-demand payment, the debt can be classified as long-term. This update is proposed to be effective for fiscal years beginning after December 15, 2020.