3.3 Transition to New Accounting Standards | DART – Deloitte Accounting Research Tool

The transition provisions related to the adoption of a new accounting standard for PBEs may differ from those for nonpublic entities, resulting in an earlier effective date for some PBEs. Since entities, other than EGCs, undertaking an IPO may be required to apply public-entity guidance for all periods presented in the financial statements, a nonpublic entity may be required to retrospectively change and accelerate its adoption date of a new accounting standard to that required for a PBE.

EGCs are not required to accelerate the adoption of new accounting standards and are allowed to adopt the new or revised accounting pronouncements as of the effective dates for private companies or nonissuers (i.e., non-PBEs), provided that such standards apply to nonissuers. However, an EGC that adopts a new standard on a delayed basis must fully comply with all accounting and disclosure requirements applicable to PBEs for that standard. See Section 1.6 for more information about EGCs.

In November 2019, the FASB issued ASU 2019-10 as part of its implementation of a new “two-bucket” framework for determining the effective dates for certain future major accounting standards. Under this framework, the two buckets are:

Bucket 1 — All PBEs that are SEC filers (as defined in U.S. GAAP), excluding 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 FASB decided that for future major accounting standards, the effective date for entities in Bucket 2 would be at least two years after the effective date for entities in Bucket 1. Under this framework, a registrant may qualify as an SRC in its IPO and thus may be eligible for a different adoption date than entities in Bucket 1. Further, an entity that is filing an initial registration statement would not be considered an SEC filer and thus would be in Bucket 2. However, when the registration statement is declared effective, the entity would be considered an SEC filer and would need to apply the Bucket 1 adoption dates unless it qualifies as an SRC or EGC. As discussed at the July 2020 CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff encourages, but does not require, use of Bucket 1 adoption dates in the financial statements included in the IPO registration statement.

The two examples below illustrate our understanding of the application of the transition requirements for the new credit losses standard (ASC 326).

Example 3-1

Non-SRC/EGC Registrant Files an Initial Registration Statement on Form S-1

Registrant A is a calendar-year-end company that does not qualify as an SRC or EGC. On March 1, 2021, A files its initial registration statement on Form S-1, which includes audited financial statements for the three years ended December 31, 2020. Registrant A’s initial registration statement is declared effective on May 10, 2021.

Registrant A may apply the Bucket 2 adoption date for the financial statements included in its IPO registration statement and any pre-effective amendments. Therefore, such financial statements do not need to reflect the new credit losses standard. However, the SEC staff has continued to emphasize the importance of providing transition disclosures in accordance with SAB Topic 11.M (SAB 74) when adopting new standards, since such companies would expect to adopt the new guidance immediately after their IPO.
Registrant A must apply the Bucket 1 adoption date for the financial statements included in filings after the initial registration statement is declared effective. Therefore, its financial statements included in its March 31, 2021, Form 10-Q must reflect the adoption of the new credit losses standard as of January 1, 2020.

Example 3-2

SRC/EGC Registrant Files an Initial Registration Statement on Form S-1

Assume the same facts as in the example above except that Registrant A qualifies as an SRC when it files an initial registration statement.

Registrant A may apply the Bucket 2 adoption date for the financial statements included in its initial registration statement. Therefore, such financial statements would not need to reflect the new credit losses standard.
Registrant A may continue to apply the Bucket 2 adoption date for the financial statements included in filings after the initial registration statement is declared effective. Therefore, A may continue to apply the Bucket 2 adoption date for the financial statements included in its March 31, 2021, Form 10-Q.
Registrant A will be required to adopt the new credit losses standard for fiscal years beginning after December 15, 2022, and interim periods therein.

Connecting the Dots

Non-EGC private entities may want to consider how their timeline for a potential IPO may affect their plans related to adopting a new accounting standard. For example, when a non-EGC calendar-year-end private entity has elected to file an IPO after adopting a new accounting standard by using the required effective date for non-PBEs or Bucket 2, the SEC will require the entity to retrospectively adjust its financial statements and accelerate its adoption date to the required PBE or Bucket 1 effective date. Accordingly, a non-EGC private entity that expects to file an IPO may consider early adoption (unless it believes that it will qualify as an SRC and the applicable standard also defers adoption dates for SRCs).

The financial statement impacts of adopting ASC 842 are significantly affected by the adoption date, since all lease liabilities are discounted on the basis of the discount rate on that date. As discussed at the July 2020 CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff reiterated its view that “an IPO registration statement of a non-EGC should apply the PBE adoption dates for all standards that apply the PBE definition, including Topic 842. However, if an entity believes it has a reasonable basis to support an alternative conclusion under GAAP and SEC rules and regulations, the staff is available for consultation.” Thus, even if a non-EGC undertakes an IPO several years after adopting ASC 842 (e.g., an IPO in 2026 after adoption of ASC 842 in 2021), it would need to push back the adoption date of ASC 842 to the PBE adoption date if the difference in adoption dates would have been material.