18.7 Adoption of ASC 842 for an EGC That Elected Private-Company (Non-PBE) Adoption Dates
An EGC may elect to adopt new accounting standards on the basis of effective
dates that apply to a private company that is not a PBE (this provision is referred
to as the extended transition provision), including the option to first adopt a new
standard in annual financial statements. However, such an election is available only
for as long as the entity qualifies as an EGC. Questions have been raised regarding
the transition provisions applicable when an entity loses EGC status after the
effective date for a PBE but before the effective date for an entity that is not a
PBE. As discussed in paragraph
10230.1 of the FRM, the SEC staff generally expects an EGC that loses
its EGC status to comply with PBE requirements in the first filing after loss of EGC
status. Further, the staff encourages EGCs to (1) review their plans to adopt
accounting standards upon the loss of EGC status and (2) consult with the Division
of Corporation Finance if they do not believe that they will be able to comply on a
timely basis with the requirement to reflect new accounting standards. The scenarios
discussed below reflect our general understanding of how an EGC that elected to use
the extended transition provision would reflect the leasing standard after the
deferral of adoption dates for non-PBEs (i.e., under ASU 2019-10 and ASU 2020-05).
18.7.1 Scenario 1: Calendar-Year-End Registrant Loses Its EGC Status on December 31, 2021
Assume that a registrant is a calendar-year-end EGC; has elected
to take advantage of the extended transition provisions and adopt the leasing
standard by using a private company (non-PBE) adoption date; has elected the
Comparatives Under 840 transition method; and loses its EGC status on December
31, 2021. We believe that such a registrant should adopt the leasing standard in
its next filing after losing status on the basis of the guidance in paragraph 10230.1(f) of
the FRM, which states, in part:
Generally, if an EGC loses
its status after it would have had to adopt a standard absent the extended
transition, the issuer should adopt the standard in its next filing after
losing status. However, depending on the facts and circumstances, the staff
may not object to other alternatives.
We understand that given the
above facts, the SEC staff would not object if the registrant were to:
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Adopt ASC 842:
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For the annual period beginning on
January 1, 2021.
|
|
First present the application of ASC 842
in its:
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2021 annual financial statements
included in its 2021 Form 10-K.
|
|
Present the application of ASC 842 in
its summarized financial information (Item 302(a)) for
its:
|
2021 summarized financial information in
its 2021 Form 10-K. Further, we believe that the
registrant should provide clear and transparent
disclosures that the summarized financial information
for each quarterly period presented in its 2021 Form
10-K do not mirror the information in its 2021 Forms
10-Q for the current year.
Note that while the requirement in Item
302(a) only applies when a material retrospective change
has occurred, the SEC clarified that a registrant’s loss
of EGC status would represent a retrospective change
whose materiality would need to be evaluated because the
registrant would adopt ASC 842 in the Form 10-K for
“both the full fiscal year and interim periods within
that fiscal year.” See footnote 70 of SEC Final Rule No.
33-10890 for more information.
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|
Present the application of ASC 842 in
its quarterly interim financial statements for its:
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2021 comparable quarterly periods
presented in Forms 10-Q in 2022.
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18.7.2 Scenario 2: Calendar-Year-End Registrant Loses Its EGC Status on December 31, 2022
Assume the same facts as in
Scenario 1, except the registrant loses its EGC status on December 31, 2022. On
the basis of the guidance outlined in Scenario 1, we believe that the SEC staff
would not object if the registrant were to:
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Adopt ASC 842:
|
For the annual period beginning on
January 1, 2022.
|
|
First present the application of ASC 842
in its:
|
2022 annual financial statements
included in its 2022 Form 10-K.
|
|
Present the application of ASC 842 in
its summarized financial information (Item 302(a)) for
its:
|
2022 summarized financial information in
its 2022 Form 10-K. Further, we believe that the
registrant should provide clear and transparent
disclosures that the summarized financial information
for each quarterly period presented in its 2022 Form
10-K do not mirror the information in its 2022 Forms
10-Q for the current year.
Note that while the requirement in Item
302(a) only applies when a material retrospective change
has occurred, the SEC clarified that a registrant’s loss
of EGC status would represent a retrospective change
whose materiality would need to be evaluated because the
registrant would adopt ASC 842 in the Form 10-K for
“both the full fiscal year and interim periods within
that fiscal year.” See footnote 70 of SEC Final Rule No.
33-10890 for more information.
|
|
Present the application of ASC 842 in
its quarterly interim financial statements for its:
|
2022 comparable quarterly periods
presented in Forms 10-Q in 2023.
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18.7.3 Scenario 3: Calendar-Year-End Registrant Qualifies as an EGC on or After December 31, 2022
Assume the same facts as in
Scenario 1, except the registrant qualifies as an EGC through the end of the
transition period (i.e., through December 31, 2022) or later. We believe that
the registrant could:
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Adopt ASC 842:
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For the annual period beginning on
January 1, 2022.
|
|
First present the application of ASC 842
in its:
|
2022 annual financial statements
included in its 2022 Form 10-K.
|
|
Present the application of ASC 842 in
its quarterly interim financial statements for its:
|
2023 quarterly periods presented in
Forms 10-Q in 2023. The registrant is encouraged, but
not required, to present the 2022 comparable quarters
under ASC 842 in its Forms 10-Q in 2023. If the
registrant does not present the comparable quarters
under the new standard, the SEC staff would expect the
registrant to provide clear and transparent disclosures
that the prior-period information is presented on a
basis different from that of the current year.
|
In accordance with Item 302(a), a registrant is required to
provide summarized financial information related to the statements of
comprehensive income for each affected quarterly period and the fourth quarter
in the affected year when a material retrospective change has occurred. However,
the SEC clarified that if a registrant qualifies as an EGC and adopts ASC 842
for the first time in its annual report on Form 10-K, the change would not be
viewed as retrospective when the registrant provides disclosures in accordance
with Item 302(a), because an EGC is permitted to use non-PBE adoption dates and
ASC 842 permits non-PBEs to first adopt the leasing standard in an annual period
rather than an interim period. This scenario differs from Scenarios 1 and 2
above since the registrants in those examples had lost EGC status and were no
longer permitted to use non-PBE adoption dates.10
The above would apply for a registrant that qualifies as an EGC
on December 31, 2022, and subsequently loses its EGC status.
Footnotes
10
See SEC Final Rule No. 33-10890, footnote 70, for
additional information.