What Business Owners Should Know About Recent Accounting Changes
Whether it is working from home, virtual school, or curbside pickup at your favorite restaurant, 2020 has had no shortages of changes and required adaptations. Accounting in 2020 is not exempt from these changes. Below are four changes business owners need to know about related to accounting changes in 2020.
1. Revenue recognition (ASC 606) was delayed. One of the Financial Accounting Standards Board’s (FASB) largest undertakings in recent history was finally set to go into effect for non-public entities with years ending December 31, 2019, only to be delayed one more time in June of 2020.
The problem? In the first six months of 2020, many companies wrapped up 2019 accounting, which included implementing ASC 606. Companies delayed in finishing 2019 due to COVID or with fiscal year ends in 2020 may not have implemented yet; however, another delay is unlikely. Either way, companies need to understand the effect the standard has on their financial statement. Perhaps the changes to 2019 were minimal (or unrecorded because of the delay), but as business slows and COVID’s effect on the company becomes more clear, it is crucial to understand the change and begin to plan for any year-end adjustment. Bank covenants may be harder to reach in 2020, and having a late change in revenue recognition may be hard to explain to the bank.
2. Revenue recognition rules changed. As noted above, ASC 606 is the standard everyone will use for 2020. The standard removed existing standards and many industry-specific standards from Generally Accepted Accounting Principles. This means companies need to be careful to accelerate or change their revenue recognition policies without fully understating ASC 606. A delay in completing work due to supply shortages or a delay in payment from customers could affect when revenue can be recognized.
3. In June, FASB also delayed the new lease standard (ASC 842). FASB had already delayed the standard by one year in November of 2019. The June delay makes the ever-pending Lease standard effective for years beginning after December 15, 2021, effectively 12/31/2022 year ends. However, a welcome delay from a reporting standpoint. One of the most significant issues with the lease standard is it will be affected by leases entered into now. ASC 842 requires virtually all leases to be added to the balance sheet as a lease asset and lease liability. Large leases or numerous leases could significantly change the look and feel of a balance sheet. COVID may change business practices between purchasing and leasing equipment. Leasing may become more enticing, but a lease signed today may end up balance sheet in the future.
4. Paycheck Protecting Program Loans. The CARES Act introduced companies to Paycheck Protection Program (PPP) loans. These loans have been beneficial to many companies; however, they have also been an administrative nightmare for banks, the SBA, and Congress. Slow and changing information has made the loans complicated to account for. The AICPA has sited four standards as options to determine the timing of recording the forgiveness of debt. The most conservative approach is to wait for the SBA to forgive the debt before recording the revenue officially. However, this could happen in a different fiscal year of receipt of the funds and payment of related payroll expenses.
Companies need to review their PPP related expenses and determine when is the most appropriate time to record the forgiveness. There will be advantages and disadvantages to recording the forgiveness in either year. Working through those is key to determining the right time for your company to record the forgiveness. Items to consider include taxable income levels, extra expenses incurred in one year, overall business outlook, and future operations plans. PPP guidelines are in a constant state of change, making planning complicated.
Questions about recent accounting changes?
Accounting has not been left untouched in the changes required by COVID. Keeping up to date on the changing accounting landscape is vital for business. Contact us today to discuss your situation.