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FASB Standards.

throughout the last six years, the Financial Accounting Standards Board (FASH) and the Private Company Council (PCC) have spent considerable time listening to and engaging with private company stakeholders.

Private company preparers, auditors and financial statement users have told both groups of their concerns, and we have listened attentively. The FASB and the PCX: have continued to collaborate to address a wide variety of financial accounting and reporting issues that affect private companies.

Whether making a private company consideration within a broader standard. or establishing a simplification/targeted improvement project from scratch to address a specific concern, both groups have made substantial progress in improving accounting for private companies.

With all this activity, though, comes an even greater need for awareness of the standards that private companies will or may have to apply in the next few years. To help private companies and their CPAs, the following are some of the most important standards and FASH and PCC projects that they should be aware of for the remainder of 2019.

Accounting Standards Now Effective

Revenue Recognition

Revenue is one of the most important measures to users of financial statements. However, legacy accounting guidance is fragmented, with numerous requirements for recognizing revenue for particular industries or transactions. This can sometimes result in different accounting for economically similar transactions.

The new revenue recognition standard overhauls revenue recognition guidance with one cohesive model. In the model, revenue is recognized when or as a company satisfies the performance obligations (delivers the goods or services) upon which entitlement to a customer's payment depends.

The standard also provides guidance on accounting for the costs associated with obtaining or fulfilling a contract with a customer, for sales of nonfinancial assets outside the ordinary course of business (for example, the sale of a headquarters building; and for such challenging areas as licenses of intellectual property.

Finally, the standard includes disclosure requirements to help users of financial statements better understand the nature, timing, amount and uncertainty about the revenue that is recognized. Some of these disclosures are optional for private companies.

Business Combinations--Clarifying the Definition of a Business

The standard helps companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting--including acquisitions, disposals, goodwill and consolidation. The new guidance will likely result in a reduction of the number of transactions defined as acquisition for disposal) of a business.

Private Company Accounting Issues You Need to Know About

Accounting Standards Effective Next Year & Beyond


The leases standard becomes effective for private companies in fiscal years beginning after Dec. 15.

Changes to lease accounting will significantly affect the balance sheets of many private companies. For example, the minimum lease payments associated with most operating" leases will no longer only have to be disclosed in the notes. They will now be reflected on the balance sheet as a liability, discounted to present value and with a corresponding right-of-use asset.

The FASB provided several practical expedients for both lessors and lessees and continues to address issues identified by stakeholders as part of its implementation effort. Private companies should be on the lookout for any such changes as they prepare for future implementation.

Recently, the FASH received two requests for a one-year deferral for private companies for implementing the new leases standard, one of which was from the Technical Issues Committee (TIC) of the AICPA's Private Companies Practice Section. As of this writing, the FASH is considering those requests.

Nonemployee Share-based Payments

The standard aligns the accounting model for nonemployee share-based payments with the accounting model lor employee share-based payments. The accounting model for employee share-based payments was improved through a series of targeted simplifications (some specific to private companies) that were effective for private companies for fiscal years beginning after Dec. 15. 21) 1 7.

The new standard is of interest to private companies that make share-based payments to consultants, vendors and other nonemployees. For purposes of the scope of share-based payment guidance in GAAP, it's important to note that members of boards of directors are considered employees.

The new standard is effective for private companies for fiscal years beginning after Dec. 15. Early adoption is permitted, but no earlier than a company's adoption date of the revenue recognition standard.

Current FASB Projects

Practical Expedient to Measure Grant-date Fair Value of Equity-classified Share-based Awards A key element in valuing a stock option or similar award is the fair value of the underlying share. When compared to public companies, both the cost and complexity associated with determining that fair value are significantly greater for private companies.

Prior improvements to the share-based payment guidance included simplifications to other key elements in valuing stock options and similar awards (for example, award term and forfeitures). However, the PCC is seeking further simplification by exploring a practical expedient that would allow for the use of strike price as a proxy for grant-date fair value of the underlying share for equity-classified awards.

Distinguishing Liabilities from Equity (Including Convertible Debt) h's not uncommon for private companies to issue debt and/or equity with complex features- often with the goal of either obtaining more favorable financing terms or providing liquidity to the holder of the instrument.

Accounting for many of these features is extremely complex, but this project aims to improve understandability and reduce complexity of the accounting for instruments with characteristics of both liabilities and equity (including convertible debt).

Private Company Participation in the Standard-setting Process Although we've already made many improvements to accounting for private companies, we are always seeking more stakeholder input in the standard-setting process. Stakeholder participation helps the FASB and the PCX' better address private company concerns before standards are issued, not after.

We always welcome your thoughts on private company accounting issues and participation in our town halls and webcasts. We are also on a constant lookout for new PCC members who are interested in advising the FASB on private company accounting-related matters. Lastly, you can sign up for updates on our endeavors to improve financial accounting and reporting for private companies through the FASB website,


Jeff Mechanick is assistant director, nonpublic entities for the FASB. You can reach him at
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Title Annotation:professionalissues
Author:Mechannick, Jeff
Publication:California CPA
Date:Jul 1, 2019
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