1.  The Accounting Standards Codification is amended as described in paragraphs 2–5. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and deleted text is

struck out

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BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC2. The Coronavirus Disease 2019 (COVID-19) pandemic is adversely affecting the global economy and causing significant and widespread business and capital market disruptions. The Board is committed to supporting and assisting stakeholders during this difficult time.

BC3. The Board is issuing this Update as a limited deferral of the effective dates of the following Updates (including amendments issued after the issuance of the original Update) to provide immediate, near-term relief for certain entities for whom these Updates are either currently effective or imminently effective:

BC4. On April 21, 2020, the Board issued proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, with comments due May 6, 2020. The Board received 46 comment letters. Overall, almost all comment letter respondents supported the proposed amendments, which are discussed below.

Revenue from Contracts with Customers

BC5. On May 28, 2014, the Board issued Update 2014-09, with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities, certain notfor-profit (NFP) entities, and certain employee benefit plans. The effective date for all other entities was for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

BC6. In August 2015, the Board issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in that Update deferred the effective date of Update 2014-09 for all entities by one year. Public business entities, certain NFP entities, and certain employee benefit plans were required to apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities were required to apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption was permitted.

BC7. In accordance with the effective dates described above, public business entities, certain NFP entities, and certain employee benefit plans are already required to adopt the new guidance. In contrast, many private companies are currently preparing and having their first annual financial statements under the new guidance audited.

BC8. Stakeholders in the franchise industry raised concerns about adoption of the new guidance. Those stakeholders raised issues about applying Revenue to franchise agreements, specifically to revenue recognition of initial franchise fees. The initial franchise fee is a fee paid to a franchisor in exchange for establishing a franchise relationship, along with the provision of goods or services. This fee typically is paid in a lump sum to the franchisor when a franchise agreement is executed. The primary question raised by stakeholders is how to determine (a) the amount of the initial franchise fee that may be recognized as revenue upon the opening of the franchise location and (b) the amount of the fee that should be deferred for accounting purposes (and recognized as revenue over the franchise license period). The timing of the revenue recognition of the initial franchise fee can have a significant effect on a franchisor’s financial statements, particularly franchises that are in the start-up or growth phases. The FASB staff worked with this industry to facilitate a successful adoption, including numerous outreach meetings and the issuance of educational materials. Notwithstanding those efforts, the application of Revenue to initial franchise fees appears to continue to pose significant challenges for private companies.

BC9. In the amendments in the proposed Update, the Board had proposed deferral of the effective date of Revenue for franchisors that are not public business entities on the basis of stakeholders’ feedback in order to provide the Board with time to determine whether any cost-effective solutions to apply Revenue can be developed to address this issue. Contemporaneous with its decision to defer the effective date of the guidance, the Board also added a research project to its agenda to further explore the issue.

BC10. The Board observes that because the deferral is not mandatory, some franchisors that are not public business entities may decide to early adopt the guidance. Therefore, while the deferral may affect a subset of franchisors, the Board’s intent is that the research project would evaluate solutions that may reduce the cost of applying the guidance for all franchisors, not only entities that elect the deferral.

BC11. The Board received feedback through comment letters that many private companies and NFP entities are experiencing challenges with finalizing their transition to the new guidance because of the COVID-19 pandemic that are similar to the issues described below for Leases. Therefore, the Board decided to extend the deferral to certain entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Revenue, rather than limiting the deferral to franchisors.

Leases

BC12. In February 2016, the Board issued Update 2016-02, which was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities; NFP 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 (referred to as public NFP entities); and employee benefit plans that file or furnish financial statements with or to the SEC. For all other entities, Leases was effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

BC13. In November 2019, the Board issued Accounting Standards Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendments in Update 2019-10 deferred the effective dates for Leases for entities in the “all other” category by an additional year. Therefore, Leases was effective for all other entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application is permitted. The deferrals were provided in response to feedback from stakeholders and the Board’s monitoring of the implementation of major Updates, which provided a greater understanding of the implementation challenges encountered by all types of entities when adopting a major Update.

BC14. In Update 2019-10, the Board noted that challenges associated with transition to a major Update are often magnified for private companies, smaller public companies, and NFP entities. Those challenges have been significantly amplified by the current business and capital market disruptions caused by the COVID-19 pandemic. Therefore, the amendments in this Update defer the effective date of Leases for entities in the “all other” category and public NFP entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Leases.

BC15. 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 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 value of improved information in financial statements.

BC16. The Board does not anticipate that entities will incur significant costs as a result of the amendments in this Update. The amendments for Topic 606 defer the effective date, for a limited subset of entities, of generally accepted accounting principles (GAAP) that are not yet effective, while permitting application of that GAAP as of the original effective date. The amendments for Topic 842 defer the effective date of GAAP for one year for entities in the “all other” category and public NFP entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Leases while continuing to permit early application. On the basis of outreach with stakeholders, the Board expects that the amendments will reduce implementation costs for some organizations.

BC17. The Board believes that the amendments in this Update could potentially and temporarily increase costs for users of financial statements because of noncomparability resulting from different effective dates. However, the Board believes that absent the deferral of the effective dates in the amendments in this Update, some entities would not have had sufficient time to implement the guidance in Update 2014-09 and Update 2016-02 because that guidance was either effective or imminently effective, which could have affected the quality of financial information provided to users of financial statements and could have been more costly for those users in the long term.

Revenue from Contracts with Customers

Deferral of the Effective Date

BC18. The amendments in this Update defer, for one year, the required effective date of Revenue for certain entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Revenue. Those entities may elect to adopt the guidance for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020.

BC19. The Board decided that it is not mandatory for an entity to apply this deferral. That is, entities may elect to follow the effective date in ASU 2015-14, which is annual reporting periods beginning after December 15, 2018. Because of the timing of the issuance of this Update, the Board observes that entities may have already completed their financial statements under Revenue or may be near the completion of their audits. The Board did not want to disrupt the implementation for those entities.

Initial Franchise Fees

BC20. The proposed deferral of the adoption of Revenue for franchisors was primarily related to questions raised by stakeholders in the franchise industry about the timing of recognizing revenue for initial franchise fees. The initial franchise fee is a fee paid to a franchisor in exchange for establishing a franchise relationship, along with the provision of goods or services. This fee is typically paid in a lump sum to the franchisor when a franchise agreement is executed. Before the adoption of Revenue, under Topic 952, Franchisors, the initial franchise fee typically was recognized when the franchise location opened. Because of the existence of industry-specific GAAP, franchisors historically have not had to assess whether pre-opening services represent separate deliverables.

BC21. Under Revenue, a franchisor should determine whether the pre-opening activities (for example, training, site selection, and so forth) contain any distinct goods or services. The transaction price is then allocated to distinct performance obligations on the basis of standalone selling prices. If the franchisor determines that some or all of the pre-opening services are distinct, then it would recognize allocated revenue when (or as) those services are performed (that is, typically before the opening of the franchise).

BC22. When implementing Revenue, the question raised by the industry is whether an initial franchise fee relates to a single performance obligation for the license of intellectual property, which must be spread over the term of the license arrangement, or whether the initial franchise fee may be allocated to separate performance obligations associated with the activities of the location opening. Because the allocation of revenue depends on determining whether the goods or services are distinct (which some, all, or none may be), as well as determining the standalone selling price for each performance obligation, the answer may differ from franchisor to franchisor.

BC23. In November 2018, the FASB staff issued an educational paper ¹ on this issue. That paper describes the analysis required to be performed under Topic 606 and also explains that when assessing the guidance, entities should consider the facts and circumstances of their specific arrangements and not overgeneralize. Franchise arrangements vary considerably. Determining whether pre-opening services are distinct will depend on “what” the franchisor is doing. That is, the franchisor should understand the nature of the services it is performing and whether some, none, or all of those services are distinct in order to arrive at an appropriate accounting conclusion.

BC24. Despite educational efforts on this issue, the Board observes that many in the industry have continued to struggle with applying Revenue to initial franchise fees. The industry has raised concerns about the significant cost of adopting the guidance and potential diversity arising in how preparers and auditors are applying the guidance. Some stakeholders provided feedback that some audit firms interpret that Revenue requires franchisors to defer the initial franchise fee over the term of the franchise license, without considering whether pre-opening activities are distinct services. Stakeholders also asserted that preparers that believe that a portion of their pre-opening activities are distinct have incurred significant costs in analyzing and documenting the nature of the services. Therefore, the amendments in this Update defer the effective date of the guidance to provide the Board with time to explore a cost-effective solution to apply Revenue for this issue.

Leases

BC25. The development of systems to effectively implement Leases may be delayed for some entities because of constraints on internal and external resources. Although many public business entities did not have fully operating lease systems to transition to Leases, they were able to perform manual workarounds with their available resources. Many entities in the “all other” category do not have those resources. Considering the current state of the economy and business priorities, it is unclear whether even large public business entities would have been able to effectively implement Leases during this pandemic considering the imminent effective date. Further complicating the situation is that many leases will be renegotiated and restructured to temporarily alleviate some of the financial burden on certain lessees until the economic effects of COVID-19 are resolved. Therefore, the Board anticipates that accounting resources will be spending a significant amount of time over the next several months supporting and negotiating changes to lease contracts as opposed to supporting the implementation of Leases.

BC26. Because of those challenges, the Board considered whether to defer the effective date of Leases for certain entities because of business disruptions from COVID-19, specifically for those in the “all other” category and public NFP entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Leases. The Board decided that a deferral for these limited entities was needed at this time because of the rapidly approaching year-end or financial statement issuance dates for public NFP entities and because the effective date for entities in the “all other” category is imminent.

Private Companies and NFP Entities, excluding Public NFP Entities

BC27. The Board had planned to consider potential ways to assist private company and NFP stakeholders in a public roundtable in May 2020. The purpose of the roundtable is, in part, to obtain further feedback on critical implementation areas from public companies and public company auditors to determine whether Board action would be required to simplify the application of Leases without compromising its objectives for private entities and NFP entities. This roundtable has been postponed because of the COVID-19 pandemic, and the Board anticipates that the earliest it could be held would be later this year. This delay, compounded with the possibility of a backlog of normal operating activity increasing in the summer months, would provide the Board with insufficient time to perform the necessary actions to assist private company and NFP stakeholders before Leases is effective for those entities (if implementation-related activities are necessary).

BC28. The amendments in this Update defer the effective date of Leases by one year for entities in the “all other” category. Therefore, Leases is effective for those entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Board believes that this deferral ensures that there is adequate time for those preparers to implement Leases, considering that the effective date for entities in the “all other” category is imminent. Early application continues to be permitted, which means that an entity may choose to implement Leases before the deferred effective dates. For example, an entity may choose to implement Leases as of the beginning of the first quarter of its fiscal year, in an interim period, rather than waiting to apply the guidance to the annual reporting period. Comment letter respondents supported the deferral.

Public NFP Entities

BC29. During the Board’s deliberations preceding the issuance of Update 201910, a deferral for public NFP entities was requested by certain stakeholders, including a member of the FASB’s Not-for-Profit Advisory Committee (NAC). At that time, the Board decided against deferring the effective date for public NFP entities. Specifically, the Board rejected deferring Leases for those entities primarily because Leases already was effective for those entities. Additionally, the Board reasoned that deferring the effective date for those entities could cause confusion and add complexity to the effective date requirements. Considering the current state of the economy and business priorities, the Board considered whether public NFP entities should be afforded a similar one-year effective date deferral for Leases.

BC30. The Board observed that public NFP entities mostly comprise higher education (colleges and universities) and healthcare organizations. Public NFP entities are required to post GAAP-compliant financial statements in the Electronic Municipal Market Access (EMMA) system on an annual basis. EMMA is governed by the SEC and the Municipal Securities Rulemaking Board (MSRB). The content and timing of the required filings are negotiated between the issuer (the public NFP) and the underwriter (typically a broker-dealer) and are included in the initial offering circular as a continuous disclosure agreement. The requirements of continuous disclosure agreements vary and are market driven; some require only annual information, while others require certain interim financial information or interim financial statements. Continuous disclosure agreements in healthcare often require some form of interim information, but the timing of the posting (for example, 90 days after fiscal year-end) also is negotiated between the issuer and the underwriter. However, public NFP entities also may have earlier reporting requirements to satisfy, for example, bank covenants or grantor requirements.

BC31. Almost all higher education institutions have fiscal year-ends ending on or after May 31. Assuming a fiscal year-end of May 31, 2020, those entities are required to reflect the adoption of Leases as of June 1, 2019, in their annual financial statements as of and for the year ended May 31, 2020. However, those entities may not have commenced or finalized their implementation of Leases because, per the Board’s research, public NFP higher education institutions generally do not issue GAAP-compliant interim financial statements. Additionally, the Board learned that those organizations (not considering any other reporting requirements) may have negotiated up to nine months after fiscal year-end to post their financial statements in EMMA.

BC32. Most public NFP healthcare organizations use fiscal year-ends of either December 31 or on or after June 30. Therefore, the population of NFP healthcare organizations that may not have commenced or finalized their implementation of Leases is generally those issuing financial statements for fiscal years ending on or after June 30, 2020. The Board’s research indicates that many public NFP healthcare organizations may be required to post interim financial information or interim financial statements to EMMA. Therefore, organizations may have already adopted Leases as of the first day of their fiscal year ending in 2020 (for example, July 1, 2019, for a public NFP with a fiscal year-end of June 30, 2020). In accordance with paragraphs 842-10-65-1 and 842-10-65-4, the deferred effective date is not applicable if an entity has already issued financial statements (or made financial statements available for issuance) prior to the issuance of this Update. Therefore, a public NFP entity is eligible for the deferral if it has posted only interim financial information in EMMA. Conversely, a public NFP entity is ineligible for the deferral if it has posted interim or annual GAAP-compliant financial statements in EMMA because that would be an issuance of financial statements. While financial information is a broad term that can vary widely in content from an earnings release to a balance sheet and income statement, GAAP-compliant financial statements is a widely understood term and includes a full set of disclosures. The Board acknowledges that a public NFP entity that has posted financial information on EMMA may still have significant remaining costs to complete its adoption of Leases to produce a full set of financial statements with disclosures.

BC33. Feedback from NAC members at the April 2020 NAC meeting indicated that public NFP entities, especially those in the higher education and healthcare sectors, could benefit from a deferral because operational and regulatory COVID19 issues have been consuming almost all preparer resources over the past few weeks. While the NAC members explained that those organizations’ readiness to adopt Leases varies, many use the last quarter before the effective date to finalize their implementation, which is not feasible in the current environment. NAC members mentioned that it would be beneficial to provide a one-year deferral of Leases so that those organizations can give implementation the time and attention it deserves once normal conditions return. They said that while some organizations may decide to implement Leases as of the original effective date, others— particularly smaller organizations—would take advantage of a deferral. Users of public NFP financial statements were not concerned about a lack of comparability among those organizations that adopt as of the original effective date (or early adopt) or who decide to implement upon the deferred effective date because they are used to adjusting their analyses for varying dates of adoption.

BC34. The amendments in this Update defer the effective date of Leases by one year for NFP 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 that have not yet issued financial statements (or made financial statements available for issuance) reflecting the adoption of Leases. Therefore, Leases is effective for those entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application continues to be permitted, which means that an entity may choose to implement Leases before the deferred effective date. The Board believes that this deferral for public NFP entities is needed at this time because Leases is currently effective for those entities and because the year-end dates or financial statement issuance dates of higher education and healthcare organizations are rapidly approaching. Almost all comment letter respondents supported the deferral.

The amendments to the FASB Accounting Standards Codification® in this Accounting Standards Update (ASU) do not require improvements to the current U.S. GAAP Financial Reporting Taxonomy (Taxonomy). However, the provisions of this ASU may affect the timing of changes to references and deprecations in future Taxonomies.