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December 10, 2019

2020 Accounting Preview

2020 Accounting Preview

As 2019 ends, we start to look ahead at some of the accounting changes companies will be dealing with in the New Year. The biggest development affecting year-end financial reporting in 2020 for public companies will be the update to accounting for credit losses. There are also some accounting changes on the horizon that could make reporting simpler.

For private companies and smaller reporting public companies, 2020 will be the time to work on implementing the leasing standard and adopting relatively minor accounting provisions. 

Below provides a preview of what public and private companies can expect from their 2020 accounting.

2020 Accounting changes for Public Companies

Credit Losses

Public business entities that meet the definition of a filer with the U.S. Securities and Exchange Commission (SEC), that are not Smaller Reporting Companies (SRC), will adopt accounting changes related to reporting of credit losses in 2020. The Financial Accounting Standards Board (FASB)’s Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (ASU 2016-13) applies to companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. Therefore, the provision will not just affect financial institutions that make loans, but will also affect other forms of receivables. Companies that have accounts receivable will need to consider and implement changes required by the new guidance.

The most significant change in the accounting update is the establishment of the Current Expected Credit Loss (CECL) impairment model for loans measured at amortized cost. ASU 2016-13 also amends the credit loss model for available-for-sale debt securities.

Intangibles and Goodwill

Another standard impacted by the recent delay of effective dates for SRCs is the simplification of goodwill. A public company that is an SEC filer that is not an SRC will be required to adopt the standard in 2020. ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (ASU 2017-04) streamlines goodwill impairment tests by removing the Step 2 requirement to calculate the implied value of goodwill if the Step 1 test failed. The update modifies the guidance so that there are now only two steps: an optional qualitative assessment of whether it is more-likely-than-not that goodwill is impaired, and a quantitative test of impairment based on the fair value of the reporting unit. If the simplification is beneficial for an SRC, or any other entity, it may be early adopted.

Accounting for Cloud-Based Software

ASU 2018-15, Intangibles – Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract clarifies which costs in a cloud-based software arrangement should be capitalized versus expensed when incurred. The change eliminates some diversity in practice and will require all companies to capitalize certain costs related to the implementation of cloud-based software. It also specifies guidance on amortization, presentation and disclosure. The update clarifies that the accounting for implementation costs depends on the stage of the project and the nature of the costs consistent with internal use software. It will also require most companies to track software costs by module or component.

Fair Value Accounting

Disclosures over fair value will be easier due to a change in ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update:

  • Eliminates required disclosures for transfers measured on a reoccurring basis between Level 1 and Level 2 of the fair value hierarchy, as well as disclosures about the processes used to measure valuations of assets and liabilities categorized at Level 3 of the fair value hierarchy.
  • Modifies disclosure of timing of a liquidation of an investee’s assets in certain scenarios.
  • Requires public companies to make additional disclosures about changes in unrealized gains or losses that are included in other comprehensive income for recurring Level 3 fair value measurements held at the end of reporting periods.
  • Public companies will also be required to include more quantitative information about significant unobservable inputs held at the end of the reporting period, including the range that the company used to develop fair value measures, and the weighted average of those inputs.
Other Accounting Changes

Several other narrow scope accounting changes also will take effect in 2020 for public companies.

Collaborative Arrangements - ASU 2018-18 helps companies that are heavily invested in research and development activities, such as biotech companies, clarify how some components of the new revenue recognition standard apply to their collaborative arrangements.

Consolidation Relief: ASU 2018-17 address challenges with related parties when applying the consolidation guidance under the variable interest entity (VIE) model. The changes in this update will benefit investment management companies and sponsors the most, and was intended to reduce the cost and complexity of financial reporting associated with consolidation of variable interest entities.

Retirement Benefits Disclosures: ASU 2018-14 modifies the required disclosures for sponsors of defined benefit plans and other postretirement plans to make the disclosures more effective. This includes removal of certain requirements and the addition of some disclosure requirements.

Collections: The definition of a collection is aligned with the definition used by the American Alliance of Museums Code assisting not-for-profit entities and other entities that hold collections of artwork and similar assets for public use.

Financial Instruments: ASU 2019-04 addressed several narrow scope issues related to recently issued financial instrument standards.

2020 Accounting Changes for Private Companies

Leasing Standard

Although the FASB officially delayed the leasing standard effective date until the 2021 calendar year, private companies need to be evaluating their transition to the new accounting requirements. In 2020, the focus should be on creating policies and controls, determining transition adjustments, and gathering disclosure information, so that 2021 can be dedicated to the actual adoption of ASU 2016-02, Leases (Topic 842). Keep in mind that public companies experienced the need for more software solutions and effort to properly implement the leasing standard than they initial expected, which was part of the compelling case made for delaying the date for private companies. Taking an earlier start approach may be critical in being able to implement and deliver timely Dec. 31, 2021 financial statements.

Derivatives & Hedging

ASU 2017-12, Derivatives and Hedging Topic 815, Targeted Improvements to Accounting for Hedging Activities is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The update may make hedge accounting more attractive, since it also simplifies the application of the hedge accounting in current GAAP.

Other Accounting Changes

Several other narrow scope accounting changes also will take effect in 2020 for private companies.

Benchmark Interest Rate: The London Inter-Bank Offered Rate (LIBOR) is effectively going away after 2021. Another benchmark rate will be added under ASU 2018-16, Derivatives and Hedging Topic 815, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Many contracts, loans, and other types of financial business arrangements may have references to LIBOR that will need to be modified.

Stock Compensation: ASU 2018-07, Stock Compensation Topic 718: Improvements to Nonemployee Share-Based Payment Accounting – Infrequent simplifies accounting for non-employee share-based payment awards.

Earnings Per Share: Under the new guidance, an entity will recognize the value of the effect of a down round feature in an equity-classified freestanding financial instrument (that is, instruments that are not convertible instruments) when the down round feature is triggered. That effect shall be treated as a dividend and as a reduction of income available to common stockholders in basic earnings per share.

Callable Debt SecuritiesASU 2017-08, Receivables—Nonrefundable Fees and Other Costs: Premium Amortization of Purchased Callable Debt Securities addressed concerns about losses recognized by a bond holder recording accounting losses when call options are exercised by issuers by modifying the amortization period for callable debt securities.

Fair Value Disclosure: Disclosures over fair value will be easier due to a change in ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Various disclosure requirements are eliminated for private companies as discussed above.

Collections: The definition of a collection is aligned with the definition used by the American Alliance of Museums Code assisting not-for-profit entities and other entities that hold collections of artwork and similar assets for public use.

Financial Instruments: ASU 2019-04 addressed several narrow scope issues related to recently issued financial instrument standards.

To Learn More

For more information about the accounting changes that could affect your 2020 accounting, please contact us.

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