October 18, 2019 — FASB Votes to Finalize ASUs on Amendments to the Effective Dates for Credit Losses, Derivatives and Hedging, Leases, and Insurance Standards

FASB Votes to Finalize ASUs on Amendments to the Effective Dates for Credit Losses, Derivatives and Hedging, Leases, and Insurance Standards

At its meeting on October 16, 2019, the FASB concluded deliberations on two proposed Accounting Standards Updates (ASUs) related to the amended effective dates for (1) the credit losses, derivatives and hedging, and leases standards1 and (2) the insurance standard.2 This journal entry summarizes the tentative decisions reached and related discussion of some responses to questions and other issues identified in the comment letters received.

Background

In August 2019, the FASB issued the two proposed ASUs to (1) change the manner in which it staggers effective dates for major standards and (2) amend the effective dates of some of its recently issued or amended major ASUs to give implementation relief to certain types of entities. See Deloitte’s July 18, 2019, Heads Up for more information about the tentative decisions that were included in the proposed ASUs upon their issuance.

Tentative Board Decisions

At this week’s meeting, the Board tentatively affirmed its decision to use a “two-bucket” approach for determining the effective dates of major accounting standards. The two-bucket approach would not apply to the hedging or leases standards because all public business entities3 (PBEs) were required to adopt those standards for fiscal years beginning after December 15, 2018. Under this approach, the buckets would be defined as follows:

Bucket 1 — All PBEs that are SEC filers4 (as defined in U.S. GAAP), excluding smaller reporting companies5 (SRCs) (as defined by the SEC).
Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.

The Board tentatively affirmed its decision to change the effective dates (assuming a calendar year-end) of certain standards on topics in the FASB Accounting Standards Codification (ASC), which is summarized in the table below (adapted from the FASB’s August 15, 2019, news release):

ASC Topic	SEC Filers	All Other PBEs	Private and All Other Entities
Derivatives and Hedging (ASC 815)	January 1, 2019	January 1, 2019	January 1, 2020 January 1, 2021
Leases (ASC 842)	January 1, 2019	January 1, 2019*	January 1, 2020 January 1, 2021
Financial Instruments — Credit Losses (ASC 326)	January 1, 2020 (Except SRCs January 1, 2023)	January 1, 2021 January 1, 2023	January 1, 2022 January 1, 2023
Financial Services — Insurance (ASC 944)	January 1, 2021 January 1, 2022 (Except SRCs January 1, 2024)	January 1, 2021 January 1, 2024	January 1, 2022 January 1, 2024
Bold indicates no change in effective date. *Also includes employee benefit plans and not-for-profit conduit bond obligors that file or furnish financial statements with or to the SEC.

In addition to tentatively affirming the above effective dates, the Board discussed and concluded deliberations on the following issues raised in comment letters:

SRC Threshold

Within the proposed ASU related to the effective dates of the credit losses, derivatives and hedging, and leases standards, the Board asked respondents whether “the population of SEC filers that are afforded a delayed effective date (that is, excluded from bucket one) [should] be entities eligible to be SRCs as defined by the SEC.” The Board discussed the feedback received from respondents, noting that some supported using a different definitional threshold (e.g., large accelerated filers, accelerated filers, or nonaccelerated filers). The Board determined that because the SEC may change these definitions in the near term, it should not use such definitions and should instead proceed with the SRC threshold given that its definition was revised by the SEC in 2018 and is generally understood by preparers. See Deloitte’s July 2, 2018, Heads Up for more information about the SEC’s definition of a smaller reporting company.

Broker-Dealers

The Board discussed the respondents’ concerns about broker-dealers being included in Bucket 1 when they are often small companies with resource constraints. The Board noted that the two-bucket approach will only affect the effective dates for the new credit losses standard and is expected to be immaterial for most broker-dealers. Therefore, the FASB decided that broker-dealers should not be exempt from Bucket 1. However, the Board acknowledged the concerns raised and will consider this feedback when determining effective dates for broker-dealers in future major accounting standards.

Effective Date for the Leases Standard

Some respondents noted that the proposed ASU related to the effective dates of the credit losses, derivatives and hedging, and leases standards would establish three buckets of effective dates within ASC 842. An SEC Staff Announcement, Transition Related to Accounting Standards Updates No. 2014-09 and 2016-02, which is codified in ASC 842-10-S65-1 and ASC 606-10-S65-1, states, in part:

[T]he SEC staff would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting . . . ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. [Emphasis added]

Because this paragraph includes specific dates that the proposed ASU does not modify, respondents indicated that it is unclear whether the affected entities would be allowed to apply the revised effective dates as drafted in the proposed amendments (i.e., for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021).

The FASB staff noted that, on the basis of its conversations with the SEC staff, the Board expects that this issue will be resolved in a public announcement by the SEC.

The Board also discussed feedback from some respondents that the proposed ASU continues to require employee benefit plans and not-for-profit conduit bond obligors that file or furnish financial statements with or to the SEC to adopt the leases standard with the original effective dates (i.e., these entities were not provided additional relief for adopting the standard). Respondents observed that such entities generally do not have interim reporting requirements and therefore the leases standard will be first presented in their annual financial statements, which may not be issued until mid- to late 2020 for calendar-year-end companies. The FASB staff and Board decided that although these entities may not have yet filed their financial statements reflecting the adoption of the leases standard, it will not defer the effective dates for these entities since they most likely have already begun implementation efforts and such decision might cause confusion for entities.

SRC Determination Date

Within the proposed ASU, “[t]he determination of whether an entity is eligible to be a smaller reporting company shall be based on an entity’s most recent determination in accordance with SEC regulations as of {add exact date that a final Update on effective dates is issued — for example, December 15, 2019}.”

In its discussion of the feedback received related to the date an entity determines whether it meets the definition of an SRC, the FASB tentatively affirmed the decision that the date should be “locked down” so that if an entity loses its SRC status after the issuance of the ASU, the FASB should not be required to change the effective date of major standards.

Connecting the Dots

Provided that the final ASU on effective dates is issued on November 30, 2019, a calendar-year-end entity must use its most recent SRC determination on June 30, 2019. If the entity met the definition of an SRC on June 30, 2019, the entity would apply the effective dates in Bucket 2 of the standard (e.g., the entity would adopt the new credit losses standard on January 1, 2023). If on June 30, 2020, the entity determines that it would no longer meet the definition of an SRC, the entity would still be permitted to use the effective dates in Bucket 2 of the standard, with early adoption permitted.

Effective Dates for ASU 2017-04

Some respondents noted that the effective dates for ASU 2017-04 6 were originally aligned with the effective dates provided in the new credit losses standard but were not revised in the proposed ASU on effective dates. Specifically, paragraph BC61 of ASU 2017-04 states, in part, that “[a]ligning the effective dates of the guidance in this Update with the CECL guidance allows an entity to first adjust the carrying amount of its loan portfolios . . . before testing for goodwill impairment, eliminating the potential double counting of losses associated with the loans.”

The Board tentatively decided to align the effective dates of ASU 2017-04 with the proposed effective dates of the credit losses standard. The table below summarizes the tentative change in effective dates for ASU 2017-04, assuming a calendar-year-end entity:

SEC Filers	All Other PBEs	Private and All Other Entities
January 1, 2020 (Except SRCs January 1, 2023)	January 1, 2021 January 1, 2023	January 1, 2022 January 1, 2023
Bold indicates no change in effective date. Early adoption will still be permitted.

Next Steps

The Board directed the staff to draft final ASUs for a vote by written ballot with an expected issuance in mid-November.

For more information about the October 16, 2019, meeting, see the meeting handout and the summary of tentative Board decisions.

Appendix — Definitions

The ASC master glossary defines a public business entity as follows:

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

The ASC master glossary defines an SEC filer as follows:

An entity that is required to file or furnish its financial statements with either of the following:

The Securities and Exchange Commission (SEC)
With respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section.

Financial statements for other entities that are not otherwise SEC filers whose financial statements are included in a submission by another SEC filer are not included within this definition.

SEC Regulation S-K, Item 10(f)(1), defines a smaller reporting company, in part, as:

[A]n issuer that is not an investment company, an asset-backed issuer (as defined in § 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

(i) Had a public float of less than $250 million; or

(ii) Had annual revenues of less than $100 million and either:

(A) No public float; or

(B) A public float of less than $700 million.

See Deloitte’s July 2, 2018, Heads Up for more information about the SEC’s definition of a smaller reporting company.

Footnotes

FASB Proposed Accounting Standards Update, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.

FASB Proposed Accounting Standards Update, Financial Services — Insurance (Topic 944): Effective Date.

See the definition of this term in the appendix.

See footnote 3.

FASB Accounting Standards Update No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.