ASC 842 remains effective, with no delay in implementation date

The question of delaying the effective date of the new lease accounting standards was back on the table – should the effective date of ASC 842 be deferred another two years for private companies and certain not-for-profit organizations?

Request for Deferral

The petition made by the Pennsylvania Institute of Certified Public Accountants (PICPA) to the Financial Accounting Standards Board (FASB) in September 2021 cited continuing challenges related to the COVID-19 pandemic as the cause of a need for an additional deferral. Specifically, the PICPA believed that many private companies simply have not had adequate time to prepare for such a significant change, as pandemic-related staffing shortages and other critical day-to-day business challenges remained. The PICPA also argued that lost revenues and increased costs resulting from the pandemic could continue to cause companies to seek new sources of financing – an effort that could be complicated by the significant pending balance sheet impacts of ASC 842, which could directly factor into debt covenant calculations.

Because of these challenges, private companies are expected to rely more heavily on their accountants and CPAs for adoption. This poses further challenges, as accounting firms and CPAs have not been unimpacted by the pandemic and the “great resignation.” Labor shortages also impacting these businesses would limit their capacity to assist clients with adoption and could increase risks of impairing independence.

Considering the Petition

The Private Company Council (PCC) of the FASB considered the petition during their September 28, 2021 meeting. Opinions on an additional deferral were mixed. All PCC members who are users and one practitioner did not support the deferral. While, two members who are practitioners along with one member who is a preparer supported considering the deferral because of current labor shortages impacting practitioners’ capacity to assist clients.

The FASB Weighs In

The petition for deferral was presented to the FASB in its meeting on November 10, 2021. While FASB staff sympathized with the challenges faced by preparers and practitioners, they recommended against the additional deferral for several reasons. The two primary reasons boiled down to:

• Users of financial statements do not want to wait any longer and expect the information provided under ASC 842 to offer better insights. The users are the ones absorbing the costs of deferral, due to noncomparability between entities and lack of additional insight.
• The Board believes it provided adequate time to prepare for adoption, considering the initial effective date and two subsequent deferrals. It has been six years since the standard was issued, and it will be nearly seven years before the first required annual reporting date.

Board members also noted that the concerns raised by the PICPA were related to resource constraints of practitioners, not preparers, and there was no guarantee that would improve two years from now. Other concerns were related to guidance that had not significantly changed from ASC 840 to ASC 842 and to issues for which practical expedients have been provided under ASC 842.

Request for Deferral Denied

Ultimately, the Board voted unanimously against granting an additional deferral. ASC 842 remains effective for private companies and certain not-for-profit organizations (who have not early implemented) for fiscal years beginning after December 15, 2021.

FASB Chair Richard Jones appreciated the receipt of this request as it allowed the Board to bring certainty to the effective date. FASB Vice Chairman Jim Kroeker also noted, “It’s time to move on.”

For assistance implementing the new standards or if you have questions about ASC 842’s impact on your business, please reach out to our lease accounting standards experts.

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