Study ASU 2016-02 Leases and ASU 2014-09 Revenue Recognition and conduct additional research, where needed, to address the following:
1) Briefly describe the concepts discussed in both ASUs. Include effective dates for nonpublic business entities. Focus especially on changes relevant to small and medium-sized nonpublic businesses.
2) Considering ASU 2014-09 Revenue Recognition, are there steps that nonpublic reporting entities need to take now, if they have not already done so? Explain.
3) How should entities prepare for implementation of ASU 2016-02 Leases? Explain.
4) Are there any other ASUs with open effective dates that have a likelihood of impacting the financial statements of small and medium-sized nonpublic businesses?
5) Research pending FASB activity related to small and medium-sized private businesses.
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1) ASU 2016-02 Leases:
ASU 2016-02 introduces a new approach to lease accounting, requiring lessees to recognize lease assets and lease liabilities on their balance sheets. The standard eliminates the concept of operating leases and introduces the distinction between finance leases (similar to capital leases under previous guidance) and operating leases. It includes new disclosure requirements and changes the recognition, measurement, and presentation of lease-related expenses and cash flows.
For nonpublic business entities, the effective date for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, is the effective date.
2) ASU 2014-09 Revenue Recognition:
ASU 2014-09 establishes principles for recognizing revenue from contracts with customers. It outlines a five-step process: identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price to performance obligations, and recognizing revenue when each performance obligation is satisfied. The standard also requires enhanced disclosures about revenue recognition.
Nonpublic reporting entities may need to take steps to implement ASU 2014-09 if they have not already done so. This could involve reviewing their revenue recognition policies and contract flows, updating their accounting systems, and communicating with stakeholders about the changes in revenue recognition practices. Failure to comply with the standard may impact financial statement comparability and could lead to misinterpretation of financial results.
3) Entities should prepare for the implementation of ASU 2016-02 Leases by reviewing and analyzing their lease agreements and contracts. They will need to identify lease components, evaluate lease terms and options, assess lease classification, determine lease payments, and establish accounting policies and processes to recognize and measure lease assets and liabilities. Entities should also consider the impact on key financial ratios, systems, internal controls, and financial statement disclosures.
4) There may be other ASUs with open effective dates that could impact the financial statements of small and medium-sized nonpublic businesses. The specific ASUs will depend on the reporting entity's industry, contractual arrangements, and unique circumstances. Conducting a comprehensive review of the latest authoritative literature and consulting with accounting professionals can help identify any other relevant ASUs.
5) To research pending FASB activity related to small and medium-sized private businesses, you can visit the Financial Accounting Standards Board (FASB) website and explore their current projects and exposure drafts. FASB regularly communicates and updates the accounting standards, and you should find information specific to small and medium-sized private businesses there.
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