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Introduction
BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting some alternatives and rejecting others. Individual Board members gave greater weight to some factors than to others.
BC2. Since 2014, the Board has issued several major Updates (typically referred to as broad projects on the FASB’s technical agenda). On the basis of feedback obtained from outreach with stakeholders and monitoring of implementation, the Board has gained a greater understanding about the implementation challenges encountered by all types of entities when adopting a major Update. The challenges are often magnified for private companies, smaller public companies, and not-for-profit organizations. The following factors (not all-inclusive) affect the severity of challenges encountered by those entities when transitioning to a major Update and the amount of time needed for implementation:
  1. Availability of resources (both internal and external). Private companies, smaller public companies, and not-for-profit organizations often have fewer dedicated internal resources and less access to external resources (primarily because of financial constraints) than larger public companies. Consequently, those entities often require more time to implement major Updates.
  2. Timing and source(s) of education. Many private companies, smaller public companies, and not-for-profit organizations and their auditors acquire valuable knowledge from observing implementation experiences of larger public companies. Consequently, those entities often require additional time to effectively and efficiently implement major Updates.
  3. Knowledge or experience gained from implementation issues encountered by larger public companies. It can take more than a year for private companies to learn about implementation issues, approaches, and best practices. Additional time also will allow those companies to have access to a full cycle of public company filings. Smaller public companies and not-for-profit organizations could benefit from this as well.
  4. Comprehensive transition requirements. Given the potential magnitude of change, often major Updates have lengthy and detailed transition approaches that differ by Topic and entity type and require time to understand and apply.
  5. Understanding and applying guidance from post-issuance standard - setting activities. For major Updates, the Board has committed to monitor implementation activities and provide additional guidance to clarify aspects of major Updates when necessary, which results in the issuance of additional guidance. That additional guidance requires time and effort to understand and apply.
  6. The development or acquisition of:
    1. Sufficient information technology and expertise in creating and implementing new systems or effecting system changes. Significant variations in information technology systems exist among companies in terms of their ability to implement a major Update. The knowledge and expertise necessary to modify or change systems require both financial expertise and systems change expertise, which can be more challenging for private companies, smaller public companies, and not-for-profit organizations to acquire and implement.
    2. Effective business solutions and internal controls. Companies may use the implementation of a major Update to develop lasting business solutions that provide both accounting and operational benefits. Additionally, implementing a major Update may require that companies reconsider their internal controls related to the accounting area. For private companies and smaller public companies, it is typical for fewer resources to be available to pursue these solutions in the time given to implement a major Update.
    3. Better data or estimation processes. Major Updates often require increased or new data along with different estimation requirements. While some companies may already collect the necessary data to transition to a major Update, others need additional time to improve their data quality or to establish processes to gather those data.
BC3. In response to these issues and requests to defer certain major Updates not yet effective for all entities, the Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). These all other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans.
BC4. The Board applied this philosophy to the effective dates for the following Updates:
  1. Update 2016-13 (Credit Losses) and, as a consequential amendment,
    Update 2017-04 (Goodwill)
  2. Update 2017-12 (Hedging)
  3. Update 2016-02 (Leases).
BC5. On August 15, 2019, the Board issued proposed Accounting Standards Update, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, with comments due by September 16, 2019. The Board received 99 comment letters. Overall, most comment letter respondents supported the proposed amendments, which are discussed below.
BC6. The Board also is addressing the application of this philosophy to the effective dates in Update 2018-12 (Insurance) in a separate Accounting Standards Update.
Benefits and Costs
BC7. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the benefits of improved information in financial statements.
BC8. The Board does not anticipate that entities will incur significant costs, if any, as a result of the amendments in this Update. The amendments defer certain effective dates related to the Updates referred to in paragraph BC4 while continuing to permit early application. The Board expects that the amendments will reduce implementation costs and improve the quality of implementation for entities electing the amended effective dates.
BC9. The amendments in this Update could potentially and temporarily increase costs for users of financial statements because they will increase the time under which entities are reporting using different standards. The potential increase in noncomparability is mitigated to the extent that entities are compared with similar entities that have the same required effective date (or that could elect to adopt early if entities in their peer group had an earlier required effective date). However, absent deferring the effective dates for the Updates referred to in paragraph BC4 for certain entities, these entities may have insufficient time to implement the Updates, which could affect the quality of financial information provided to users of financial statements and could be more costly for users in the long term.
Basis for Conclusions
Effective Dates
BC10. On the basis of the Board’s continued outreach, implementation activities, and stakeholder feedback, including comment letters received in response to the proposed Update, the Board supports a philosophy to stagger effective dates for major Updates. Using this philosophy, a major Update would first be effective for larger public companies (bucket one). All other entities (bucket two) would have a delayed effective date. It is anticipated that early application would continue to be allowed for all entities.
BC11. The Board also considered a separate three-bucket approach to apply its philosophy. This approach would have staggered effective dates between larger public companies, all other public companies, and all other entities (private companies, not-for-profit organizations, and employee benefit plans). The Board decided against this approach because smaller public companies often will have the same challenges as private companies in implementing a major Update. Additionally, having three buckets as opposed to two could introduce unnecessary complexity for entities in determining their effective dates and for users of financial statements.
Bucket One—Larger SEC Filers
BC12. The Board concluded that bucket one comprises public business entities that are SEC filers, excluding entities that are eligible to be SRCs as defined by the SEC, and that bucket-one entities will have the earliest effective dates. The Master Glossary defines public business entities and SEC filers. The Board used the Master Glossary definition of SEC filer as the starting point for bucket one because that definition is more restrictive than that for all public business entities. In other words, entities that meet the definition of an SEC filer are a subset of all public business entities. The Board typically has required that all public business entities implement a major Update before other entities, such as private companies. However, the Board required SEC filers to apply Credit Losses earlier than other public business entities because the definition of SEC filer is expected to capture more sophisticated public business entities that have sufficient resources to implement a major Update. The Board reasoned that non-SEC filer public business entities generally have less resources to implement a major Update. Additionally, some stakeholders observed that determining whether an entity is an SEC filer is simpler than determining whether a non-SEC filer is a public business entity, given the Board’s definition of a public business entity.
BC13. The Board then further reduced the population of entities in bucket one by considering existing regulatory and legal definitions for smaller entities that often face similar resource constraints as many private entities. Using an existing definition, rather than developing a new definition within the Codification, is expected to reduce the costs and complexity of introducing a size-based threshold for effective dates. The Board also considered it important to use an existing definition that is stable, rather than those subject to potential change in the near term. On the basis of those factors, the Board decided to leverage the current SEC definition of SRCs and to exclude entities that are eligible to be SRCs from bucket one.
BC14. To be eligible to be an SRC, an entity must be an issuer as defined by the SEC and cannot exceed established levels of public float, annual revenue, or both. Under the SEC definition, investment companies, asset-backed issuers, and majority-owned subsidiaries of a parent company that is not an SRC are not eligible to be SRCs. The thresholds to be eligible to be an SRC are relatively low compared with other SEC filers. However, entities that are eligible to be SRCs represent a substantial number of the overall U.S. filers. SEC requirements allow SRCs to provide reduced SEC disclosures in certain circumstances and to provide only two years of audited financial statements (as opposed to three for many other filers).
BC15. The Board acknowledged that situations will inevitably exist for which entities of similar size to entities eligible to be SRCs may nonetheless be within bucket one. For example, smaller nonissuer registrants and broker-dealers are required to file financial statements with the SEC. Consequently, those entities meet the definition of an SEC filer but are ineligible to be SRCs because they are not issuers in accordance with the SEC’s definition. Additionally, other small SEC issuers may be ineligible to be an SRC but may have slightly smaller peers that are eligible to be an SRC. Ultimately, the Board concluded that any size-based threshold that uses existing regulatory and legal definitions would exclude certain smaller public business entities from being permitted a deferred effective date (that is, be excluded from bucket one). On balance, those that submitted comment letters on the Board’s proposed use of the current SRC definition were supportive because the threshold is clear, is reasonable, and provides many smaller public business entities with implementation relief. The Board will continue to monitor the use of the SRC definition as a threshold for establishing effective dates, including whether future changes are needed to accommodate certain SEC filers that are of similar size to SRCs (such as certain broker-dealers).
BC16. Broadly, U.S. filers determine their SRC eligibility annually on the last business day of their most recent second quarter. Entities that are eligible to be SRCs when a major Update is issued could subsequently lose their SRC status and vice versa. The Board acknowledged the importance of providing certainty about the effective date that an entity must apply for a major Update and, therefore, established a set date for determining SRC status. Without a set date for determining an entity’s status as an SRC, a change in that status would trigger an immediate change to the entity’s required effective date. The Board concluded that this would be unnecessarily costly, complex, and operationally burdensome. The Board decided that an entity’s SRC status should be based on its most recent determination of whether the entity is eligible to be an SRC as of the date a major Update is issued in accordance with SEC regulations.
BC17. Hedging and Leases currently are effective for public business entities; an entity’s eligibility for SRC status does not change the mandatory effective dates for those major Updates. However, an entity that is eligible for SRC status is given more time to adopt Credit Losses. Because the Board issued this Update on November 15, 2019, an entity is required to use its most recent determination of whether the entity is eligible to be an SRC (a one-time determination) as of November 15, 2019. For example, because SRC status is determined on the last business day of the most recent second quarter, the most recent determination date will be June 28, 2019, for calendar-year-end companies. The Board decided against penalizing an entity that initially qualifies as an SRC from applying the deferred effective date if the entity subsequently loses its SRC status. Therefore, an entity that is eligible to be an SRC as of that date will qualify for the deferred effective date in bucket two for Credit Losses, even if that entity subsequently fails to qualify as an SRC. In contrast, a public business entity that is an SEC filer but is ineligible to be an SRC as of its most recent determination as of November 15, 2019, must apply the earlier effective date (established for bucket one), even if it subsequently becomes an SRC.
Bucket Two—All Other Entities
BC18. Bucket two comprises all entities not within bucket one. These entities include entities eligible to be SRCs, all other public business entities, and all nonpublic business entities (private companies, not-for-profit organizations, and employee benefit plans). For those entities, the Board concluded that for major Updates, an effective date of at least two years after that for bucket one should be considered. However, the Board retains the flexibility on an Update-by-Update basis to increase or decrease that delay.
BC19. The Board decided to include public business entities that are (a) not SEC filers and (b) entities eligible to be SRCs within bucket two. The Board provided an extended effective date for those public business entities primarily for the reasons in paragraph BC2. The Board found that distinguishing between those public business entities, which often are less sophisticated than larger public business entities, and all nonpublic business entities is both arbitrary and unnecessarily complex. In other words, smaller public business entities often face the same implementation challenges as private companies.
BC20. Extending a deferred effective date to entities eligible to be SRCs in bucket two also eliminates an inconsistency that currently exists between the implementation time afforded to emerging growth companies (EGCs) and SRCs. The EGCs category was created by the Jumpstart Our Business Startups (JOBs) Act, which was signed into law in April 2012. On the basis of that law, an entity is an EGC for the first five years after it completes an initial public offering unless it exceeds certain thresholds. Among the accommodations provided to EGCs is an option to apply the “nonissuer” effective date for all accounting Updates. In recent history, the “nonissuer” date has been the effective date provided for private companies. Filers qualifying for EGC status may be substantially larger than SRCs, yet they are afforded the most time to adopt an Update. In contrast, SRCs previously had been given the same amount of time as other SEC filers. Extending the effective date to entities eligible to be SRCs in bucket two essentially equalizes the amount of permitted implementation time for (a) EGCs that take advantage of the deferred effective dates afforded to “nonissuers” and (b) those SRCs. The Board did not address the application of effective dates to EGCs in this Update (particularly what effective date is appropriate when an entity gains or loses its EGC status) because the effective date and determination of EGC status are governed by securities law.
Application to Existing Major Updates
BC21. The following paragraphs illustrate the amendments to the effective dates of Credit Losses, Hedging, and Leases. Note that the application to Insurance is provided in a separate Update.
Credit Losses
BC22. Credit Losses currently is not required for any entities. Its effective dates are as follows (early application is allowed):
  1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
  2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years
  3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
BC23. Following the effective date philosophy, the mandatory effective dates for Credit Losses are as follows:
  1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
BC24. The amended effective dates for Credit Losses result in an additional three years for implementation for entities within bucket two as compared with those in bucket one. However, all entities must apply Credit Losses within interim periods immediately following the effective date. In contrast, for Hedging and Leases, nonpublic entities are required to apply the amendments in those Updates in interim periods after their first fiscal year of adoption. Allowing an additional year for interim reporting for Hedging and Leases essentially provides these nonpublic entities with an extra year for their implementation. Effectively, this gives nonpublic entities three years to apply each of these major Updates.
BC25. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test in Goodwill. The Board issued Goodwill to simplify the subsequent measurement of goodwill. In that Update, the Board decided to align the mandatory effective dates with those for Credit Losses. That alignment allows an entity to first adjust the carrying amount of its loan portfolios (and, therefore, the carrying amount of the associated reporting unit) before testing for goodwill impairment, eliminating the potential double counting of losses associated with the loans. Therefore, the effective dates for Goodwill have been amended in this Update to maintain that intentional alignment. Early application of Goodwill continues to be permitted for interim and annual goodwill impairment tests with a measurement date on or after January 1, 2017.
Hedging
BC26. Hedging currently is effective for some entities. Its effective dates are as follows (early application is allowed):
  1. Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
BC27. Because Hedging already is effective for all public business entities, including SRCs, the Board decided to retain the effective date for public business entities. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the mandatory effective date for Hedging for all other entities by an additional year. Therefore, Hedging is effective for entities other than public business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed.
Leases
BC28. Leases currently is effective for some entities. Its effective dates are as follows (early application is allowed):
  1. Public business entities; not-for-profit entities 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; and employee benefit plans that file or furnish financial statements with or to the SEC for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
  2. All other entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
BC29. Because Leases already is effective for all entities within (1) above, including SRCs, the Board decided to retain the effective date for those entities. Some comment letter respondents suggested that the Board defer the effective date for Leases for not-for-profit entities that have issued or are conduit bond obligors. The Board considered that request and ultimately rejected expanding the deferral because Leases already is effective for those entities and many entities have implementation efforts under way. Additionally, those entities may have interim reporting requirements and different fiscal year-ends; therefore, delaying the effective date could cause confusion and add complexity to the effective date requirements.
BC30. The Board also decided, consistent with having bucket two be at least two years after the initial effective date, to defer the effective date for all other entities by an additional year. Most comment letter respondents noted that the additional year would provide those entities with necessary time to learn from public companies and effectively implement Leases, given implementation challenges and delays in software solutions for lease accounting. Therefore, Leases is effective for entities within (2) above for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application continues to be allowed.
Application to Future Major Updates
BC31.The Board developed the effective date philosophy described above for major Updates that have been issued but are not yet effective. The Board also considered how effective dates may be established for future major Updates using this philosophy. While the Board anticipates that it will continue to consider this philosophy for future major Updates, the establishment of effective dates will continue to be determined in connection with standard-setting activities on an Update-by-Update basis. In other words, in some circumstances, the Board may establish effective dates for future major Updates that vary from the effective date philosophy after thoroughly considering the costs and benefits of a major Update. Additionally, the Board will monitor (a) the effect that applying the philosophy may have on financial statement users and (b) whether the SRC threshold continues to be appropriate for future major Updates.

Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.

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