With transition deadlines fast approaching on new revenue recognition and lease accounting rules from the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) has opted to clarify some confusion among certain private businesses regarding their specific deadlines for the new standard. One specific area that was unclear was the deadline for private companies whose financial statements are being filed with the SEC solely as part of another public company’s filing, such as an initial registration statement, or an IPO.
FASB requires public business entities (PBEs) to adopt new revenue recognition requirements for annual reporting periods beginning December 15, 2017 (or January 1, 2018 for calendar-year reporting companies). Private businesses have an additional year before they have to comply. The deadline for PBEs to comply with FASB’s lease accounting rule is December 15, 2018 (effectively January 1, 2019 for calendar-year reporting filers) — again, with an additional year granted to private companies. Chris Wright and I wrote about the new lease standard here.
The confusion stemmed from FASB’s definition of a PBE, which includes all entities whose financial information is included in an SEC filing. This raised a question among a certain segment of companies that operate as private entities, except for the fact that their financial statements were to be included in another company’s filing. SEC rules, for example, require companies going through an IPO, to provide financial statements for all significant recent acquisitions.
Although such companies technically meet FASB’s definition of a PBE, the SEC has gone on record that it would not object to such companies adhering to the private companies’ deadline for the revenue recognition and lease accounting requirements. The SEC staff announcement was included in the FASB Emerging Issues Task Force’s July 20 meeting agenda, and can be found at this link.
It also should be noted that the new FASB revenue and lease rules still apply to all business entities. The SEC ruling merely offers private companies in transition during the implementation period the option of adhering to the later, private company deadline.
As Chris Wright and I wrote in May, getting the accounting standard transition process started early will enable management to develop an efficient and timely plan, as well as involve internal auditors early and enable them to have a voice at the table and offer strategic guidance to ensure orderly controls transition and project management monitoring. The one year extension for certain companies should be seen not as a “reprieve” but as an opportunity. An early start will provide sufficient lead time to enhance processes, upgrade support systems and prepare stakeholders for the coming change.
Certainly, this ruling will be welcome relief to those companies who, in prepping for an IPO, have a number of initiatives on their plate; but although this affords companies a bit more time to prepare for the revenue recognition and leases deadlines, it is not in any way intended as an exemption or carve out. Our Guide to Public Company Transformation is a good “IPO user manual” and can be found here.