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Effective Date Of ASC 842 Deferred By FASB Vote

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Summary

Earlier today, the FASB voted in favor of a one-year deferral of the effective date of:

  • ASC 842, Leases, for all private companies, and
  • ASC 606, Revenue from Contracts with Customers, for privately-held franchisors. 

Additionally, the FASB staff provided guidance regarding several technical inquiries it has received related to the impact of COVID-19.


Background

At its April 8, 2020, meeting, the FASB voted to defer the effective date for ASC 842, Leases (“ASC 842”), and ASC 606, Revenue from Contracts with Customers (“ASC 606”), for certain entities.  In addition, in response to concerns that the Coronavirus (COVID-19) pandemic may have on stakeholders in the United States and abroad, the FASB staff provided guidance related to several recent technical inquiries.

This summary is based on our observation of the Board’s meeting, and is subject to change once the FASB updates its website for the items discussed below.

Main Provisions

The FASB voted to defer the effective date for ASC 842 for private companies and certain not-for-profit entities (“NFPs”) for one year.  For private companies and private NFPs, the leasing standard will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. For public NFPs the leasing standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The FASB also voted to defer the effective date for ASC 606, Contracts with Customers, for franchisors that are not public business entities for one year.  As a result, for such franchisors only, the revenue standard will be effective for periods beginning after December 15, 2019 and interim reporting periods within annual reporting periods beginning after December 15, 2020. The Board also indicated it plans to conduct additional outreach with respect to reducing implementation costs for this industry, including the impact of how franchisors recognize initial franchise fees.

Early adoption would continue to be allowed for each of these standards. The FASB anticipates that it will provide a 15-day public comment period on these proposed deferrals once the proposed accounting standards updates are published.

Technical Inquiries

The FASB staff discussed several technical inquiries it has received related to issues arising from the COVID-19 outbreak, noting that it would soon publish a summary of its decisions for the following matters:

Leases

The FASB staff discussed a technical inquiry related to rent concessions; specifically, whether lease concessions related to the effect of COVID-19 are required to be accounted for in accordance with the lease modification guidance in ASC 842 or ASC 840. Because of the disruption caused by COVID-19, it is expected that many lessors will provide (or that many lessees will request) rent concessions, resulting in a large volume of contracts to be assessed under either ASC 842 or ASC 840. This could be particularly burdensome, complex and challenging for many entities to determine whether each lease contract provides enforceable rights and obligations related to those lease concessions.

During the public Board meeting, the FASB staff noted that the lease modification guidance in ASC 840 and ASC 842 contemplates routine changes in terms and conditions of lease contracts negotiated between lessees and lessors, but not changes rapidly executed on a global scale that arise as a result of COVID-19. Accordingly, the FASB staff stated that for concessions related to COVID-19, an entity could decide not to analyze each lease contract to determine whether enforceable rights and obligations for concessions exist. Instead, an entity can elect to not apply the lease modification guidance in ASC 842 or ASC 840 to those contracts and to account for lease concessions related to the effects of COVID-19 as though those concessions arise from the enforceable rights and obligations of the existing contract (regardless of whether those concessions explicitly exist in the contract). The election can be made for concessions if the total cash flows required by the modified contract remain substantially the same or are less than the total cash flows before the concession. The FASB staff expects that reasonable judgment will be applied in that determination.

Interest Income

The FASB staff discussed a technical inquiry for a situation in which a creditor provided a loan payment holiday to a borrower during which it also waived the accrual of interest.  In the fact pattern presented, the loan modification did not represent a troubled-debt restructuring under ASC 310-40 Troubled-Debt Restructuring by Creditors and was not accounted for as an extinguishment. Rather, it was considered a continuation of the existing loan. 

A question arises as to whether the creditor should establish a new effective interest rate in accordance with ASC 310-20 and continue to recognize interest income during the holiday period or if it should follow the contractual terms, i.e., not recognize interest income during the holiday period. The staff expressed its view that, in this situation, either method would be acceptable.

Hedge Accounting

Supply chain disruptions, work closures, and potential curtailing of business activity may result in reductions, delays, or even cancellations of business transactions. If these forecasted business transactions were previously designated in cash flow hedge relationships and are no longer probable of occurring within the originally specified time period, hedge accounting should be discontinued prospectively. However, amounts deferred in accumulated other comprehensive income (AOCI) related to the discontinued hedge should remain in AOCI unless it is probable that the forecasted transaction will not occur by the end of the period originally specified or within an additional two-month period of time thereafter.

However, in rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the reporting entity may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time. In those cases, amounts related to the discontinued cash flow hedge should continue to be reported in AOCI until the forecasted transaction affects earnings, when it is reclassified. That is, in those rare cases, an entity should disregard the additional two-month timing restriction otherwise applicable to the forecasted transaction and continue to defer amounts previously recorded in AOCI until the forecasted transaction affects earnings.

The FASB staff clarified that the exception related to rare cases caused by extenuating circumstances outside the control or influence of the entity may be applied to COVID-19 related delays of the forecasted transactions. Consequently, for discontinued cash flow hedges if the forecasted transaction is probable of occurring after the additional 2-month period, the entity would continue to retain amounts previously recorded in AOCI associated with that forecasted transaction until that forecasted transaction affects earnings. However, if the entity determines that it is not probable that the forecasted transaction will occur because of the effects of COVID-19, the exception would not apply and amounts previously recorded in AOCI related to the discontinued cash flow hedge should be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.

Fair Value Accounting

The FASB staff discussed a recent request it received to suspend mark-to-market accounting. In response to that request the FASB staff reminded stakeholders of the orderly transaction guidance that exists in ASC 820, Fair Value Measurement, and more specifically paragraphs 820-10-35-54(c) through 35-54(j) which provide guidance for measuring fair value when the volume or level of activity for an asset or liability has significantly decreased and provides guidance for identifying transactions that are not orderly. The staff noted that it stands ready to address any interpretive questions our stakeholders may have with respect to that guidance, but believes that such guidance should answer the questions posed in the recent inquiry.

SBA Loans

The FASB staff introduced a technical inquiry it has recently received, but has not yet evaluated, regarding Small Business Administration (“SBA”) loans.  The staff noted that the recent stimulus provided by the federal government provides for SBA loans that would be 100% guaranteed and forgivable by the SBA if the small business uses the loan proceeds for certain costs.  A question has arisen about how fees for originating these loans should be accounted for – that is, as a yield adjustment over the life of the loan or upfront when received. The staff is reviewing this technical inquiry and will determine the most appropriate way to inform stakeholders of the answer to the inquiry in the coming days.

Other Matters

The FASB indicated that it has also decided to temporarily delay many of its current standard-setting projects, that are not yet effective, to allow entities more time to focus on the pressing issues they are currently facing and to provide resources to assist entities with technical questions.  As such, the pace of standard setting may slow during the remainder of the year.

Five Key HITRUST Developments To Monitor In 2020

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Cybersecurity incidents continue to place immense pressure on healthcare organizations globally, jeopardizing not just patient data and the reputations of leading healthcare companies, but more importantly, patient safety. In each of the past two years, three-quarters of healthcare organizations experienced a significant security incident, according to the 2019 HIMSS Cybersecurity Survey. Organizations certified under HITRUST (Health Information Trust Alliance), the most widely adopted security framework in the U.S. healthcare industry, provide their patients and partners peace of mind, representing they have established a control environment to safeguard patient information.

Cybersecurity threats continue to evolve, so the HITRUST CSF must evolve as well. Here are five key HITRUST developments that healthcare organizations and other companies should monitor in 2020.
 

1.       COVID-19’s Impact on the HITRUST CSF

During times of rapid change, internal controls and information security requirements often must adapt to the new circumstances. The COVID-19 pandemic certainly qualifies as one of these times. On March 5, HITRUST released an advisory waiving the requirement that in-person / on-site validation procedures be performed at the assessed entity’s facilities. “In situations where assessors choose to leverage alternative approaches such as video conferencing to perform necessary walkthroughs and observations, assessment documentation must clearly reflect the nature, timing, and extent of the alternative approaches used,” the announcement said. On March 19, HITRUST issued a separate advisory stating that it isn’t currently issuing a blanket extension of timing-related requirements tied to assessments, although extensions are possible on a case-by-case basis. We will be closely monitoring the situation to see if HITRUST announces any additional COVID-19-related advisories that directly affect the certification process. HITRUST advisories on can be found on its CSF Assurance & Implementation Bulletin.
 

2.       HITRUST CSF Version 10

HITRUST CSF version 10 is expected to be released in December 2020. Although the timing of this release could still change, a few things are fairly certain. HITRUST CSF Version 10 is expected to continue HITRUST’s efforts to be more industry-agnostic and accommodate the needs of industries such as travel, tourism and financial services, as HITRUST expands its focus beyond healthcare. This is expected to be accomplished through a combination of changes. These include the establishment of a “core” or baseline set of implementation requirements and controls for all organizations and a new focus on choosing additional relevant regulatory factors to determine the scope of assessments. These changes will be supported by providing clearer and more consistent language and syntax for implementation requirements and further use and leverage of the new shared responsibility matrix (more on this below).
 

3. PRISMA Weighting Updates

HITRUST CSF’s PRISMA weighting scale previously gave equal importance to policies (25%), procedures (25%), and implementation (25%), with measurement and management making up the remaining 25%. In 2020, those weightings have shifted to emphasize the importance of effective implementation of the controls necessary to obtain HITRUST CSF certification. The new weightings will be 15% for policies, 20% for procedures, 40% for implementation, 10% for measurement, and 15% for management. See HITRUST’s recent webinar for more information.

The message from these PRISMA weighting updates is clear: having well-documented policies and procedures is not enough; strong implementation of internal controls is essential to HITRUST CSF certification.
 

4. New Shared Responsibility Program and Matrix

Continued growth in cloud computing has spurred other changes to the HITRUST CSF assessment and certification processes. In addition to meeting its own requirements, HITRUST CSF-certified cloud providers working with healthcare organizations are encouraged to operate within HITRUST’s new shared responsibility matrix. This shared responsibility matrix is designed to avoid misunderstandings about who owns and is responsible for various sharable and inheritable controls when a healthcare organization is working with cloud computing vendors. This is particularly important when healthcare organizations use applications that reside in different cloud environments that must communicate and share data. The shared responsibility matrix was developed with input from the top 20 cloud providers in the market to ensure its effectiveness and relevance. Over the next 12 to 18 months, HITRUST will continuously release guidance on how the Shared Responsibility Program can be best utilized.
 

5. Additional HITRUST Tools and Resources

Several HITRUST resources are being updated or have seen more robust usage:

  • The HITRUST Threat Catalogue, which was initially published in late 2018, is designed to provide organizations with greater visibility into the threats they face and how those threats tie to appropriate HITRUST CSF control requirements. The catalogue is continually updated to ensure that healthcare organizations have the latest information about relevant threats and can continue to meet their control responsibilities and HIPAA compliance requirements.
  • A growing number of healthcare IT startups have begun using the HITRUST RightStart Program to establish their compliance and risk management programs. This is part of an increasing trend throughout the healthcare ecosystem to find innovative solutions through startups, which now join providers, hospital systems, and insurance companies in seeking HITRUST CSF certification.
  • More healthcare organizations are now using the HITRUST Assessment Exchange to obtain and manage information on vendors’ risk management practices and information security and privacy programs in a cost-effective way.

Insight: Assesor Quality Matters

In addition to these more recent developments, HITRUST has significantly increased its emphasis on the importance of assessor organization quality. As the HITRUST CSF has grown in acceptance, the organization has seen a widening range in the quality of the companies delivering those assessments.

This divergence highlights the importance of working with assessors that bring the professionalism and standards of a CPA and auditing firm to the HITRUST CSF assessment and certification process.

Providing Economic Aid: Federal Reserve Announces Main Street Business Lending Program

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On April 9, the Federal Reserve announced additional actions it will take to provide up to $2.3 trillion in loans to support the U.S. economy. The Federal Reserve believes this funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic. Also on April 9, Federal Reserve Chair Jerome Powell stated: 

“We have acted to safeguard financial markets in order to provide stability to the financial system and support the flow of credit in the economy. … Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances. … We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”
 

Main Street Business Lending Program

Among the actions taken to offer companies liquidity, the Secretary of the Treasury will make a $75 billion equity investment using appropriated funds from the CARES Act in a special purpose vehicle (SPV) established to implement a Main Street Business Lending Program.

According to Treasury Secretary Steven Mnuchin:

“The Main Street Business Lending Program will make a significant difference for the 40,000 medium-sized businesses that employ 35 million Americans. This important Main Street initiative complements the robust relief efforts already underway, such as the Paycheck Protection Program, Employee Retention Credits, and Economic Impact Payments, while protecting taxpayer funds.”

This program aims to increase the flow of credit to small and medium-sized businesses that were in good financial standing prior to the COVID-19 crisis. The program will either expand existing credit facilities (MSELF) or originate a new loan facility (MSNLF). To do so, the program will offer four-year loans (via eligible lenders) to companies that meet at least one of the following criteria:

  • Employ up to 10,000 employees, or
  • Had 2019 annual revenues of $2.5 billion or less.

Eligible lenders will retain a 5% share of the Main Street loans and sell the remaining 95% share to the SPV, which will purchase up to $600 billion in total loans.
 

Eligible Loan Details

Loans made pursuant to this program will have the following features:

  • Unsecured four-year term loan
  • Originated on or after April 8, 2020
  • Principal and interest payments are deferred for one year
  • Adjustable rate of the secured overnight financing rate plus 250-400 basis points
  • Minimum loan size of $1 million
  • Maximum loan size the smaller of either:
    • $25 million, or
    • Loan amount, when added to the eligible borrower’s existing undrawn debt, does not exceed 4x the borrower’s 2019 EBITDA
  • Prepayment allowed without penalty
  • May only participate in one program (MSELF or MSNLF)
  • May not participate in Primary Market Corporate Credit Facility (PMCCF)


Attestation Requirements

Lenders and borrowers will have to attest to at least the following:

Eligible Lenders​

Use of Loan ProceedsWill not be used to repay or refinance pre-existing loans made by the eligible lender
Existing Lines of Credit to BorrowWill not cancel or reduce existing lines of credit to the eligible borrower
Certification of EligibilityMust certify that it is eligible to participate in the Facility


Eligible Borrowers

Use of Loan ProceedsWill not be used to repay other loan balances or other debt of equal or lower priority unless the eligible borrower has repaid the eligible loan in full
 
Cancellation/Reduction of Existing DebtWill not cancel or reduce any existing lines of credit with the eligible lender or any other lender
Financing Is RequiredAttest that it requires financing due to the COVID-19 pandemic and that it will use loan proceeds to make reasonable efforts to maintain payroll and retain employees during the term of the loan
EBITDA ConditionsLoan proceeds do not exceed 4x 2019 EBITDA
Other RestrictionsMust follow compensation, stock repurchase, and capital distribution restrictions under section 4003(c)(3)(A)(ii) of Title IV in the CARES Act
Certification of EligibilityMust certify that it is eligible to participate in the Facility


Fees

Eligible borrows and lenders will be subject the following fees:

  • Eligible lenders will pay a fee of 100 basis points of the principal amount of the loan purchased by the SPV but may request that the eligible borrower pay this fee.
  • Eligible borrowers will pay eligible lenders an origination fee of 100 basis points of the principal amount of the loan.
  • Eligible lenders will receive 25 basis points of the principal amount of the loan purchased by the SPV for loan servicing.

Both the Treasury and the Federal Reserve noted that businesses vary widely in their financing needs. As the program is being finalized, they will continue to seek input through April 16 from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds.

Insight

  • The Main Street Business Lending Program will provide eligible businesses access to loans in addition to other aid provided under the CARES Act, such as the Payroll Protection Plan or the Coronavirus Economic Stabilization Plan. Businesses should consider consulting with an external professional service provider to help determine if they qualify under this plan, how these loans affect other federal aid already applied for or received, and how to work with eligible lenders for the application process.
  • Eligible borrowers should develop a compliance program that should be continuously monitored for the life of the loan to ensure that none of the loan covenants are breached, which could result in penalties or other adverse consequences.
  • Borrowers should be mindful of loan disclosure implications and follow appropriate standards for disclosure in notes to the financial statements.  
  • To the extent that eligible businesses have thoughts, concerns, or other suggestions related to the Main Street Business Loan Program, they must communicate those to the Federal Reserve on or before April 16 for consideration before the program is finalized.

Disclaimer
The above has been prepared solely for informational purposes.  Any opinion expressed herein shall not amount to any form of guarantee that we have determined or predicted future events or circumstances, and no such reliance may be inferred or implied.  We accept no duty of care or liability of any kind whatsoever to any party, and no responsibility for damages, if any, suffered by any party as a result of decisions made, or not made, or actions taken, or not taken, based on this information.