16.3 Impact of ASC 842 Adoption Dates on Other Entities’ Financial Statements or Financial Information Required in a Registrant’s Filings
At the July 20, 2017, EITF meeting, the SEC staff announced that it
would not object when certain PBEs elect to use the non-PBE effective dates solely
to adopt the FASB’s revenue and leasing standards. The staff announcement clarifies
that the ability to use non-PBE effective dates to adopt the revenue and leasing
standards is limited to the subset of PBEs “that otherwise would not meet the
definition of a public business entity except for a requirement to include or
inclusion of its financial statements or financial information in another entity’s
filings with the SEC” (referred to herein as “specified PBEs”).
While the staff announcement is written in the context of specified
PBEs, the principal beneficiaries of the relief will be registrants that include
financial statements or financial information prepared by specified PBEs in their
own filings. Regulation S-X rules under which such filings may be prepared could
include:
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Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
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Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
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Rule 3-14, “Special Instructions for Financial Statements of Real Estate Operations Acquired or to Be Acquired.”
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Rule 4-08(g), “Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
Under the leasing standard, there is one adoption date for PBEs and
another (later) adoption date for non-PBEs.
In November 2019, the FASB issued ASU 2019-10, which, among other things,
amends the effective dates of ASC 842 for non-PBEs to fiscal years beginning after
December 15, 2020, and interim periods within fiscal years beginning after December
15, 2021. At the 2019 AICPA Conference on Current SEC and PCAOB Developments, the
SEC staff announced that it would not object if specified PBEs adopt ASC 842 by
using ASU 2019-10’s timelines that apply to non-PBEs. This position was subsequently
codified in ASU
2020-02. We understand that the SEC staff will not object if
specified PBEs adopt ASC 842 on the basis of the additional deferral of the
effective dates of ASC 842 for non-PBEs to fiscal years beginning after December 15,
2021, under ASU
2020-05.
Example 16-1
Company A, a publicly traded manufacturer,
holds equity method investments in three of its nonpublic
suppliers. After applying the Regulation S-X significance
tests, A has determined that it must include summarized
financial information for Suppliers X, Y, and Z (under
Regulation S-X, Rule 4-08(g)) in its SEC filing. The only
reason X, Y, and Z meet the definition of a PBE is because
they are required to include their financial information in
A’s SEC filing (i.e., they qualify as specified PBEs).
Consequently, X, Y, and Z plan to use the non-PBE adoption
dates of the revenue and leasing standards when preparing
their own stand-alone financial statements. When including
the summarized financial information of X, Y, and Z in its
own SEC filing, A is not required to adjust the suppliers’
financial statements to reflect the PBE adoption date of the
revenue and leasing standards.
Connecting the Dots
Including Financial Statements or
Financial Information of Specified PBEs
A registrant that has passed certain significance tests
required by SEC Regulation S-X may need to include in its SEC filing the
financial statements or financial information of another entity. We believe
that, in a manner consistent with Topic 11 of the SEC Division of
Corporation Finance Financial Reporting Manual (FRM), it is also appropriate
for the registrant to use financial information prepared by specified PBEs
that apply non-PBE adoption dates when performing these significance tests.
However, on the basis of paragraph 3250.1(m) of the FRM, if pro forma financial
information is being prepared under SEC Regulation S-X, Article 11, to
reflect the acquisition of a significant business, the registrant must still
conform the acquired company’s adoption dates and transition methods to its
own in the pro forma presentation for the periods after adoption.
Further, non-PBEs are permitted, as a practical expedient,
to use the risk-free rate as their discount rate when applying ASC 842 (see
Section 7.2.3). At
the October 21,
2020, CAQ SEC Regulations Committee joint meeting with the
SEC staff, the SEC staff discussed the impact of an acquired company’s use
of this practical expedient to adopt ASC 842 when a registrant must evaluate
the acquired company for significance and, in some cases, provide separate
financial statements for the acquired company. The SEC staff indicated that
it would not object if a registrant uses financial statements that reflect
the risk-free rate practical expedient to measure significance, since doing
so would result in higher ROU assets and thus would yield a higher measure
of significance under the asset test. The risk-free rate practical expedient
should be “the only difference between those financial statements and a PBE
set of financial statements.” However, the SEC staff stated that financial
statements provided in accordance with SEC Regulation S-X, Rule 3-05, are
PBE financial statements and thus may not reflect the risk-free rate
practical expedient. Therefore, a registrant would need to assess whether an
adjustment to use the relevant incremental borrowing rate that would apply
to each lease (as opposed to using the risk-free rate) would be material and
necessitate revision before such financial statements are provided in
accordance with Rule 3-05.