ASU 2020-05: Revenue and Lease Standard Deferrals

In June 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-05. This update provided a one-time, optional deferral for the effective dates of two accounting standards. The measure was introduced as a form of relief for certain organizations to help them cope with the challenges and business disruptions caused by the COVID-19 pandemic.

Entities Eligible for Deferral

The deferral options in ASU 2020-05 were not available to all organizations; eligibility was restricted to specific entities that had not yet adopted the new standards. For the revenue recognition standard, the deferral was aimed at private companies and certain not-for-profit (NFP) entities. A condition for this eligibility was that the entity had not already issued its financial statements, or made them available for issuance, reflecting the adoption of the new revenue rules as of June 3, 2020.

For the lease accounting standard, the eligibility criteria were slightly different. The deferral was available to private companies and private NFP entities. It also extended to public NFP entities, provided they had not yet issued financial statements reflecting the adoption of the new lease standard by the June 3, 2020 date. The FASB clarified that posting interim financial information to the Electronic Municipal Market Access (EMMA) system did not automatically make an NFP ineligible, but issuing full, GAAP-compliant financial statements would.

Revised Effective Dates for Revenue Recognition

The update modified the timeline for adopting Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. This standard establishes a comprehensive framework for recognizing revenue when entities transfer goods or services to customers, aiming for a more consistent application across different industries. Under the relief, eligible private companies and NFPs were permitted to defer adoption to annual reporting periods beginning after December 15, 2019.

This deadline has since passed, and the standard is now effective for all entities. This was an option, not a mandate; entities were still permitted to adopt the standard based on the original effective date if they were prepared to do so.

Revised Effective Dates for Leases

A similar deferral was offered for the implementation of ASC 842, Leases. The objective of ASC 842 is to increase transparency in financial reporting by requiring organizations to recognize lease assets and lease liabilities on the balance sheet for most leases. This change was designed to eliminate what was often referred to as off-balance-sheet financing associated with operating leases.

ASU 2020-05 pushed back the original deadline for entities still navigating the complexities of the new standard. For private companies and private NFP entities, the effective date was deferred to fiscal years beginning after December 15, 2021. For public NFP entities that had not yet issued their financial statements, the new effective date was for fiscal years beginning after December 15, 2019.

Financial Reporting and Disclosure Implications

Choosing to take advantage of the deferrals offered by ASU 2020-05 came with specific financial reporting responsibilities. An entity that elected to delay the implementation of either ASC 606 or ASC 842 was required to communicate this decision within its financial statements. This requirement ensured that users of the financial statements were aware of the accounting policies being applied.

The disclosure was made in the notes to the financial statements, where the entity was required to state that it had not yet adopted the new accounting standard and identify the specific standard being deferred. The disclosure was also required to provide information about its expected timeline for adopting the new guidance.