Understanding the effects of Accounting Standard Updates (“ASUs”) on your organization can be a daunting and complex task. The requirements for implementation may seem intimidating, but we offer advisory services in the arena of technical accounting to determine the best way to adopt and implement necessary changes. Two of the most significant ASUs affecting businesses and organizations requiring implementation over the next two years are: the new lease accounting standards and revenue recognition criteria.
The Financial Accounting Standard’s Board (“FASB”) issues ASUs in order to communicate changes to the FASB Codification. Each ASU explains the following: 1) how the FASB has changed United States Generally Accepted Accounting Principles (“U.S. GAAP”), including each specific amendment to the FASB Codification, (2) why the FASB decided to change U.S. GAAP and (3) background information relate to the change and when the changes will be effective and the transition method.
In February 2016, the FASB released ASU 2016-02, Leases, a highly anticipated leasing standard for both lessees and lessors. Under this update, a lessee will recognize right-of-use assets and related lease liabilities on the balance sheet for all lease arrangements with terms longer than 12 months. Both finance and operating leases recognized on the balance sheet will be measured at the present value of the lease payments.
Lease accounting for lessors remains largely consistent with previous U.S. GAAP, but has been updated for consistency with the new lessee accounting model and with the new revenue standard, ASU 2014-09 (see below).
For public entities, this new standard is effective for periods beginning after December 15, 2018; for all other entities, it takes effect for periods beginning after December 15, 2019.
In March 2014, the FASB released ASU 2014-09, Revenue from Contracts with Customers. Under this new standard, revenue from contracts with customers is recognized based on the application of a principle-based model. The new, five-step model is as follows: (1) identify the contract, (2) identify the performance obligations, (3) determine transaction price, (4) allocate transaction price to performance obligations, and (5) recognize revenue as performance obligations are satisfied.
Public entities are required to apply the new revenue recognition standard for annual reporting periods beginning after December 15, 2017. For nonpublic entities, this new standard must be adopted for annual reporting periods beginning after December 15, 2018. If you have not yet implemented this ASU, we are available to assist you in implementing the necessary changes.
These are just two examples of ASUs that require updates to your company’s accounting policies. We are happy to assist you in answering any questions regarding technical accounting issues such as implementation of accounting standards updates or any of our other assurance and advisory services. For more information, please contact Kristi Yanover, Partner, at (858) 558-9200, or any member of our Assurance & Advisory Team.