The COVID-19 pandemic has significantly impacted the global economy, and U.S. businesses are no exception. On June 3, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities. ASU 2020-05 was issued as part of the FASB’s effort to support businesses and recognize the difficulties they are facing during this time. This ASU provides a limited deferral of the effective dates for adopting these two major standards previously issued, including the subsequent amendments to those standards.
Revenue from Contracts with Customers (Topic 606)
In 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provided new comprehensive guidance for revenue recognition. The main principle of the new standard is that an entity should recognize revenue in the amount that it would expect to receive in exchange for goods or services transferred to the customer. Upon subsequent amendments, the ASU was effective for public business entities, certain nonprofit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2017. For all other entities, the ASU was effective for fiscal years beginning after December 15, 2018.
Prior to the COVID-19 pandemic, concerns surrounding implementation had already been raised by stakeholders in the franchise industry, leading the FASB to consider further exploration of the issue. Once the pandemic occurred, other private companies and nonprofit entities began raising their own concerns of implementation due to the challenges introduced by COVID-19. In response to this feedback, the FASB issued ASU 2020-05.
The amendments in ASU 2020-05 affect franchisers that are not public business entities, nonprofit entities, and other entities that have not yet issued financial statements reflecting adoption of the new revenue recognition guidance. These entities may defer application to fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Leases (Topic 842)
In 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which contained new lease accounting guidance to eliminate off-balance sheet financing and increase the transparency and disclosure of lease transactions. Upon subsequent amendments, the ASU was effective for public business entities, certain nonprofit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2018. For all other entities, the ASU was effective for fiscal years beginning after December 15, 2020.
Prior to the COVID-19 pandemic, the FASB was already working on addressing concerns raised by private companies and nonprofits. The FASB acknowledged that the difficulties surrounding the implementation of such a significant update were worsened by COVID-19, which also prevented the FASB from holding a planned roundtable discussion. In response to these concerns, the FASB issued ASU 2020-05.
The amendments in ASU 2020-05 affect entities in the “all other” category (those that are not public business entities, certain nonprofit entities, and certain employee benefit plans), as well as public nonprofit entities that have not yet issued financial statements reflecting adoption of the new lease accounting guidance. These entities may defer application for one year. Entities in the “all other” category may defer to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Public nonprofit entities that have not yet issued financial statements reflecting adoption may defer to fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Contact ARB
The professionals at ARB are here to help you through a smooth transition to the new revenue recognition and lease accounting standards. Contact us today to discuss your needs and compliance strategy.
by Gisèle N. Couturier, CPA
