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Financial Reporting and Regulatory Update

Second Quarter 2020

From the FASB

Final standards

Effective date deferral of revenue recognition and lease accounting standards for certain entities

On June 3, 2020, the FASB issued ASU 2020-05, “Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities.” This ASU provides a one-year effective date deferral for certain entities applying the revenue recognition and lease guidance. All nonpublic business entities, including not-for-profit entities (NFPs), that have not yet issued or made available for issuance financial statements in which Topic 606 has been adopted may defer the adoption of Topic 606 by an additional year. For eligible entities, Topic 606 is now effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.

All nonpublic business entities, including NFPs, may defer the effective date of Topic 842 for an additional year. For these entities, Topic 842 is now effective for fiscal years beginning after Dec. 15, 2021, and interim periods in fiscal years beginning after Dec. 15, 2022. NFPs that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market also are eligible for a one-year effective date deferral if they have not yet issued or made available for issuance financial statements in which Topic 842 has been adopted. For this subset of NFPs, Topic 842 is effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

Effective date

This ASU was effective upon issuance.

Technical inquiries

Cash flow hedge accounting

On April 28, 2020, the FASB issued a staff Q&A, “Topic 815, Cash Flow Hedge Accounting Affected by the COVID-19 Pandemic,” in response to stakeholder questions regarding the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic when applying cash flow hedge accounting under Topic 815, “Derivatives and Hedging.”

Loan modifications

At its April 8, 2020, board meeting, the FASB discussed concerns related to effects of COVID-19 including interest income recognition. For institutions aiding borrowers affected by COVID-19, the FASB staff answered a question about interest income recognition for a fact pattern than involves providing a loan payment holiday during which no contractual interest would accrue. The fact pattern includes that the loan payment holiday is not a troubled debt restructuring (TDR) and would not be accounted for as a continuation of the old loan (that is, extinguishment accounting is not applicable). The FASB staff heard two views. In view one, the new effective interest rate of the loan would be applied prospectively from the date of the modification resulting in interest income being recognized during the holiday. In view two, interest income would be recognized using the contractual terms; thus, no interest would accrue during the payment holiday. The FASB staff believes both views are acceptable under GAAP. The tentative conclusions from the April 8 meeting include interest income. The FASB staff acknowledges diversity might exist for the loan modification question, and it believes disclosure of an entity’s policies for such transactions are key.

Staff Q&A on lease concessions related to COVID-19

At its April 8, 2020, board meeting, the FASB discussed concerns about effects of COVID-19. Related to leases, the board recognizes that lessors might be issuing broad-based and sweeping concessions, which create operational difficulties when applying the modification guidance in Accounting Standards Codification (ASC) 842/840. The FASB was asked whether any concessions related to COVID-19 must be accounted for under the ASC 842/840 modification guidance, citing the operational difficulties and complexities of assessing such concessions on a contract-by-contract basis. The FASB staff notes that ASC 842/840 did not contemplate the current scope of broad and sweeping modifications and concessions given by lessors. For concessions granted that are specifically related to COVID-19, the FASB staff indicates an entity could elect not to apply modification guidance, provided the cash flows in the modified lease are the same as or less than those in the original contract. The FASB staff also acknowledges judgment will need to be applied. On April 10, the FASB issued a FASB staff Q&A, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.” The FASB staff acknowledges diversity might exist for the leasing question, and it believes disclosure of an entity’s policies for such transactions are key.

For more information contact Crowe.