ASC 2020-05 Accounting Updates – What Have I Missed?

With many focusing on COVID-19, concerns about the health and safety of your families and employees, or concerns over the ability of your business to survive this pandemic, you may have missed some important accounting updates. These updates will provide relief for many organizations.

Revenue Recognition

To aid organizations required to adopt ASU 2014-09, but which have not yet issued financial statements under the new standard, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-05 in June 2020, permitting implementation to be deferred for an additional year.

Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers (Topic 606), was issued by FASB in May 2014. The new standard provides a single comprehensive revenue recognition framework and supersedes existing revenue recognition guidance. Included in the new principles-based revenue recognition model are changes to the basis for deciding the timing of revenue recognition. In addition, the standard expands and improves revenue disclosures. ASU 2014-09 became effective for private companies’ annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. This means that private companies’ 2019 financial statements would be audited under the new standard.

COVID

With the extension granted by ASU 2020-05, organizations that have adopted the ASU will implement the new revenue recognition standard for fiscal years beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020.

Lease Accounting

In February 2016, FASB issued ASU 2016-02 (“Leases”), effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for:

• Public business entities;
• NFP entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market ( “public NFP entities”); and
• Employee benefit plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission (SEC).

For all other entities, Leases became effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

In November 2019, the Board issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendments in Update 2019-10 deferred the effective dates for Leases for entities in the “all other” category by an additional year. Therefore, Leases became effective for all non-public entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application is permitted.

FASB understood the challenges that many private entities were facing with the transition to the new lease standard, and the impact of COVID-19 further magnified this challenge. As a result, FASB issued ASU 2020-05 in June 2020, which allows organizations an additional year to adopt and implement ASU 2016-02.

Therefore, non-public entities will have an additional year to implement the new lease standard; the effective date will be for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Hedge Accounting

FASB has addressed two issues related to cash flow hedge accounting affected by the COVID-19 pandemic:

Q1. When cash flow hedge accounting has been discontinued, may delays in the timing of the forecasted transactions related to the effects of the COVID-19 pandemic be considered rare cases caused by extenuating circumstances outside the control or influence of an entity?

The FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic. That determination will require judgment based on facts and circumstances. Consequently, for affected designated hedges, if the forecasted transaction is probable of occurring after the additional two-month period, an entity should continue to retain amounts previously reported in AOCI (Accumulated Other Comprehensive Income) associated with that forecasted transaction until that forecasted transaction affects earnings. However, that exception only applies to situations in which the forecasted transaction remains probable of occurring. When applying the exception, an entity should consider whether the forecasted transaction remains probable over a time period that is reasonable given the nature of the entity’s business, the nature of the forecasted transaction, and the magnitude of the disruption to the entity’s business related to the effects of the COVID-19 pandemic. If an entity determines that it is no longer probable that the forecasted transaction will occur within that reasonable time period beyond the additional two-month period, that exception would not apply and amounts previously reported in AOCI should be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.

Q2. If an entity determines that amounts deferred in AOCI should be reclassified to earnings in accordance with paragraph 815-30-40-5 because of missed forecasts related to the effects of the COVID-19 pandemic, should those missed forecasts be considered when determining whether the entity has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions?

Given the unprecedented nature of the pandemic, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. The FASB staff believes that this guidance did not contemplate forecasts changing so rapidly as a result of a pandemic. Determining whether the missed forecast is related to the effects of the COVID-19 pandemic will require judgment based on facts and circumstances. If an entity determines that a missed forecast is related to the effects of the COVID-19 pandemic, the entity would continue to account for those missed forecasts in accordance with paragraph 815-30-40-5 and disclose the associated amounts in accordance with paragraph 815-10-50-4C(f) (if the entity has adopted the amendments in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities) or paragraph 815-30-50-1(e) (if the entity has not yet adopted the amendments in that Update).

For assistance with implementing any of these updates, please contact your Marcum professional.