FASB Accounting Updates and Amendments for Retailers

The Financial Accounting Standard Board (FASB) has been busy over the past several years making technical corrections and improvements to existing standards and in some cases, creating new standards. The new standards are set to monumentally impact industries across the board, and the retail industry is not immune to their impacts. Of these recent pronouncements, two accounting updates and amendments are particularly notable for retailers: the new revenue recognition standard (FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and related) and the new leasing standard (FASB ASU No. 2016-02, Leases). If businesses are not presently engaged in discussions about the changes to revenue recognition and leases, those conversations should start in the near-term.  

What’s important for business owners to understand about revenue recognition?
The new revenue recognition standards will take effect in 2018 for public companies and 2019 for private companies. No particular industry is exempt from adopting the new standard, as FASB’s goals were to offer a greater level of comparability across all industries and minimize differences in the way revenue is recognized.

For many businesses, this will impact the timing and pattern of revenue recognition. For others that have followed industry-specific guidance to date, the changes could be significant and will require careful planning. In addition, the new revenue standard includes significant new disclosure requirements that will likely impact all companies, regardless of industry.

The basic premise of the new standard is to record revenue when customers obtain control over the goods and services that are provided to them, rather than when they are simply “earned.”

The new standard requires companies to identify their customer contracts, which can take many forms. After identifying the specific contracts they have, businesses must assess the distinct items they have to either deliver, produce or provide services for. This step also entails determining which of those distinct deliverables the customer benefits from—whether sold on its own or in combination with other goods or services. Businesses then establish the price of the overall contract and allocate that price to each of those distinct deliverables. Once these performance obligations are satisfied, they can recognize the revenue.

How are leases changing under FASB’s updates?
The new leasing standard mainly impacts lessees—companies that lease property or equipment—but has less sweeping implications for lessors, such as landlords. In particular, organizations with large lease portfolios for real estate and equipment–which encompasses many brick-and-mortar retailers—are subject to the heaviest burdens when it comes to implementing these changes.

For public companies, beginning in 2019, and private companies, beginning in 2020, lessees will be required to bring leases onto their balance sheet by recognizing the right to use the leased asset and establishing a liability to capture the present value of the future lease payments. The only exception is for leases with terms of 12 months or less that are not intended to be renewed. Lessees can make a policy election to continue to account for those leases by recognizing expense evenly over the life of the lease agreement without capitalization.

Each lease under the new standard will continue to be categorized as a finance or operating lease, depending on how much control is currently asserted over the asset or will be at the end of the lease. Under the new standard, this categorization impacts the pattern of expense recognition and where to report cash flows in financial statements. However, the distinction will no longer result in different balance sheet treatment, as previously noted. 

The new lease standards significantly expand qualitative and quantitative disclosures for lessees.  Lessee disclosures include the nature of the leases, judgments and assumptions used to account for the leases, lease expense amounts for finance and operating leases, and maturity tables of lease liabilities. The level of detail and how much emphasis to place on each of the requirements can vary. However, the reporting entity must aggregate or disaggregate disclosures to ensure that useful information is neither obscured by presenting a large amount of insignificant detail nor by aggregating items that have different characteristics. When leasing comprises a significant portion of business, more extensive disclosures are appropriate for those entities.

It’s important to be proactive, develop a plan and consider the impacts with lenders and other stakeholders, especially since new assets and liabilities will be presented, which have the potential to alter a company’s financial ratios. Also, businesses should consider whether their existing software can handle the complexities of the new lease accounting standard.

What’s next?
It’s important that business leaders familiarize themselves with the new standards and evaluate the impacts on their businesses. They should also be aware of trickle-down effects, including what this may mean for complying with EBITDA and other financial performance-based covenants, as well as any implications for income tax and their overall internal control environment.

The best advice in anticipation of these changes is to act now. To address the changes, businesses should consider the various transition methods that the FASB has prescribed, look into training for finance personnel and monitor any additional updates. Their financial experts can also help assist all lines of business through these transitions.

For more information on how these accounting changes may impact your business, contact Natalie Kotlyar at nkotlyar@bdo.com or Vince Stasiulewicz at vstasiulewicz@bdo.com. Be sure to keep up with the latest retail news by subscribing to our blog on the Consumer Business Compass homepage here, and follow us on Twitter at @BDOConsumer.