Coronavirus: FASB staff provides guidance on various issues
FINANCIAL REPORTING INSIGHTS |
During the Financial Accounting Standards Board’s (FASB) meeting on April 8, 2020, the FASB staff discussed certain questions it has answered through its technical inquiry service on the following topics related to the coronavirus pandemic:
- Lease concessions
- Interest income recognition when a lender grants a payment holiday
- Ramifications when a hedged forecasted transaction is delayed
- Fair value measurements
- Fee recognition for Small Business Administration loans
Each of these topics is discussed in this article. In addition, the FASB provided some commentary about its other standard-setting activities, which is discussed in the last section of this article.
The FASB decided at this meeting to defer the effective dates of the following two topics in the FASB’s Accounting Standards Codification (ASC): (a) ASC 606, Revenue from Contracts with Customers, for only private franchisors and (b) ASC 842, Leases, for certain entities. For additional information, see our article, FASB to provide limited deferrals for ASC 606 and ASC 842.
At the meeting, the FASB staff discussed whether lease concessions granted by lessors as a result of the coronavirus pandemic are required to be accounted for in accordance with the lease modification guidance in ASC 840 or 842. The FASB staff followed up this discussion with a FASB staff Q&A, Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.
The FASB staff guidance indicates that both lessees and lessors may elect to not apply the modification accounting guidance in ASC 840 and 842 to lease concessions granted as a result of the coronavirus pandemic, thereby eliminating the need to determine whether the terms of the lease explicitly provide for the possibility of such concessions. This election would only be permitted if the lease concessions result in the lease’s total cash flows being substantially the same as or less than the lease’s total cash flows prior to the concessions.
When a lessee or lessor elects to not apply the modification accounting guidance in ASC 840 and 842 to lease concessions resulting from the coronavirus pandemic, the accounting applied to the concessions depends on whether they only affect the timing of the payments (i.e., the concessions only defer payments without making any substantive changes to the total lease payments). When only the timing of payments is affected by the lease concessions, the FASB staff acknowledges that multiple accounting methods may be applied in practice, none of which it believes would be preferable to the others. The two specific accounting methods discussed by the FASB staff would result in the deferred payments resulting from the lease concessions being accounted for as either:
- Increases to lessors’ lease receivables and lessees’ payables as the receivables and payables accrue, respectively. (Under this method, both lessors and lessees continue to recognize income and expense, respectively, as they otherwise would. This method accounts for the concessions as if no changes were made to the lease.)
- Variable lease payments by both lessees and lessors.
When a lessee or lessor elects to not apply the modification accounting guidance in ASC 840 and 842 to lease concessions resulting from the coronavirus pandemic, and more than just the timing of the payments is affected by the concessions, the accounting for the concessions depends on the facts and circumstances. For example, if a lease concession results in a lease payment being forgiven or waived, it should be accounted for as a variable lease payment.
When a lessee or lessor decides to apply (rather than elect out of) the modification accounting guidance in ASC 840 and 842 to lease concessions resulting from the coronavirus pandemic, if the terms of the lease explicitly provide for the possibility of lease concessions resulting from the coronavirus pandemic, the concessions are accounted for as variable lease payments. If the terms of the lease do not provide for the possibility of such concessions, the concessions are accounted for using the modification guidance.
Based on the FASB staff guidance, the election to not apply the modification accounting guidance in ASC 840 and 842 to lease concessions granted as a result of the coronavirus pandemic should be made consistently for leases with similar characteristics and in similar circumstances. In other words, the election may be made on a portfolio-by-portfolio basis.
The FASB staff also indicated in their guidance that disclosures about material concessions and their accounting effects should be provided by both lessors and lessees.
Interest income recognition when a lender grants a payment holiday
The FASB staff addressed a specific fact pattern in which a lender provides a loan payment holiday to borrowers affected by the coronavirus pandemic, which allows the borrowers to temporarily cease making payments without interest accruing during the holiday. In the fact pattern, the lender had concluded based on its specific facts and circumstances that the loan payment holiday did not result in a troubled debt restructuring or a new lending arrangement. Instead, the lender had concluded that the modification caused by the loan payment holiday in its specific facts and circumstances resulted in application of the modification accounting model in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The question that arises in applying the modification accounting model in this situation is whether interest income should be recognized during the holiday. The FASB staff considered the following two views and determined that either are acceptable:
- View 1: Interest income is recognized during the loan payment holiday using a revised effective interest rate that equates the modified debt’s remaining cash flows to the current carrying amount of the debt. The revised effective interest rate is used prospectively over the remaining term of the debt.
- View 2: Interest income is not recognized during the loan payment holiday. Instead, interest income should be recognized based on the modified contractual terms of the loan. Recognition of interest income resumes at the end of the loan payment holiday.
We believe the view elected by a lender should be consistently applied and disclosed as its accounting policy.
Ramifications when a hedged forecasted transaction is delayed
The FASB staff considered a question related to the guidance in ASC 815-30, Derivatives and Hedging – Cash Flow Hedges, about the circumstances under which amounts deferred in accumulated other comprehensive income (AOCI) should remain in AOCI when a cash flow hedge of a forecasted transaction is discontinued. In general, ASC 815-30 provides for such amounts to remain in AOCI until the hedged transaction impacts earnings, unless it is probable the forecasted transaction will not occur within the originally specified time period or within two months after the originally specified time period. However, there is an exception that lifts these timing restrictions for the rare cases in which there are extenuating circumstances that are related to the nature of the forecasted transaction and are beyond the entity’s control or influence that push the probable occurrence of the forecasted transaction to a date that goes beyond two months after the original specified time period (the timing exception). When those rare cases arise, the amounts deferred in AOCI related to the discontinued cash flow hedge should not be removed from AOCI until the forecasted transaction is reflected in earnings.
The specific question answered by the FASB was focused on whether the coronavirus pandemic qualifies as one of those rare cases in which the timing exception applies to a discontinued cash flow hedge. The answer provided by the FASB was “yes.” However, it must be emphasized that the timing exception only applies if the forecasted transaction remains probable of occurring. If at any time it is no longer probable that the forecasted transaction will occur, the amounts deferred in AOCI related to the discontinued cash flow hedge should be immediately reclassified into earnings and disclosed in the financial statements.
Fair value measurements
The FASB staff indicated that mark-to-market accounting will not be suspended due to the coronavirus pandemic. Instead, the FASB staff suggested referring to the fair value measurement guidance in ASC 820-10-35-54C to 35-54J, which addresses: (a) how to measure fair value when there has been a significant decrease in the volume or level of activity for an asset or liability and (b) how to determine whether transactions are orderly and the effects of that determination on whether the transaction price should be used when estimating the fair value of an asset or liability.
Fee recognition for Small Business Administration loans
The FASB staff indicated that they have received a question about how to account for the origination fees related to Small Business Administration (SBA) loans guaranteed and forgivable by the SBA if the proceeds are used by the borrower for certain costs. While the FASB staff indicated that the question focused on whether the origination fees should be accounted for as a yield adjustment over the life of the loan or upfront when received, they did not provide an answer during the meeting. Instead, they indicated that the FASB staff will be determining the answer to this question and the best way to communicate it in the coming days.
Questions also have been raised related to the accounting for SBA loans from the borrower’s perspective given the forgivable nature of the loans. We expect clarification from the FASB or FASB staff on these questions will be forthcoming.
Other standard-setting activities
During its meeting, the FASB also made additional comments related to its standard-setting activities, all with the intention of refocusing their efforts to support stakeholders during the coronavirus pandemic. One such comment was that the FASB is suspending efforts to publish exposure documents and perform outreach on in-process projects not related to addressing issues related to the coronavirus pandemic. Another such comment is that the FASB is committed to understanding how the coronavirus pandemic will affect implementation activities related to guidance with effective dates of 2022 and later, and based on that understanding, considering whether any deferrals of the guidance may be necessary.