Your Guide to 2019 Accounting Changes

For 2019, public and private companies alike are grappling with major accounting updates from the Financial Accounting Standards Board (FASB). Public companies tackled the changes to the leasing standard, which required so much time and energy that the FASB agreed to push back the effective date for private companies. Meanwhile, private companies worked through the updates to the long-awaited revenue recognition changes under ASC Topic 606.

2019 Accounting Changes for Public Companies

Lease Accounting

The lease accounting model has changed because of ASU 2016-02, Leases (Topic 842). Starting Jan. 1, 2019 for a calendar year-end public company, lessees were required to recognize lease assets and liabilities on their balance sheet. This change may have affected everything from internal controls to debt covenants. Lessors may have needed to modify existing leasing arrangements and financial reporting processes. Learn More>>

Derivatives and Hedging

If you use hedge accounting, you will note some significant changes for 2019 reporting. ASU 2017-12, Derivatives and Hedging Topic 815, Targeted Improvements to Accounting for Hedging Activities simplifies and expands the eligible hedging strategies. It also improves the financial reporting of hedging relationships to better reflect the economic results of an entity’s risk management activities in its financial statements. If you don’t use hedge accounting, this update may offer advantages that make it worth considering. Learn More>>

Other Accounting Changes

Several other minor-impact accounting changes in 2019 will also affect public companies:

• Replacement for LIBOR: ASU 2018-16, Derivatives and Hedging Topic 815, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes officially adds another benchmark interest rate because the LIBOR is going away.
• Stock Compensation: ASU 2019-07, Stock Compensation Topic 718: Improvements to Nonemployee Share-based Payment Accounting is part of the FASB’s Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees.
• Callable Debt Securities: ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs: Premium Amortization of Purchased Callable Debt Securities addressed concerns about losses recognized by a bond holder recording accounting losses when call options are exercised by issuers by modifying the amortization period for callable debt securities.
• Earnings per Share: For companies with financial instruments with down round features, there are some accounting updates in ASU 2017-11 to take note of here.
• Reporting Comprehensive Income: ASU 2018-02, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects also prescribes disclosure related to whether the permitted election to reclassify the tax effects of the law commonly known as the Tax Cuts and Jobs Act (TCJA) was made and other information related to accumulated other comprehensive income.

2019 Accounting Changes for Private Companies

Revenue Recognition

For private companies, revenue recognition changes are the biggest accounting story of 2019. ASU 2014-09, Revenue from Contracts with Customers Topic 606 ushers in a principles-based approach to revenue recognition, which means more judgment ahead for management than under previous guidance. At this point in the year, companies should be almost done with their implementation.

Certain types of companies will have some additional considerations under revenue recognition. Guidance for transactions includes:

• ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20), which provides some additional revenue recognition clarification for companies that issue gift cards and other prepaid store products.
• ASU 2018-08 Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which helps entities distinguish contracts with customer from contributions, and
• ASU 2017-10, Service Concession Arrangements (Topic 853) Determining the Customer of the Operation Services, which addresses a diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853. This update may be particularly relevant for the construction sector.

Financial Instruments

In ASU 2016-01, Financial Instruments – Overall (Topic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, the FASB issued changes that affect companies that hold certain types of financial instruments and liabilities. Of particular significance is the elimination of the available-for-sale and cost methods of accounting for investments in equity securities. Entities with calendar year-end Dec. 31, 2019 financial statements will account for investments in equity securities that do not result in consolidation or the equity method of accounting at fair value, unless the practical expedient applies for an equity security without a readily determinable fair value. Equity securities previously accounted for under the available- for-sale or cost methods will now have unrealized gains and losses recognized in net income.

Statement of Cash Flows

The FASB has addressed eight specific cash flow issues to reduce the current diversity in practice. ASU 2016-15, Statement of Cash Flows Topic 230, Classification of Certain Cash Receipts and Cash Payments addresses small scale changes to clarify the classification of certain transactions in the statement of cash flows. In addition ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires a change in presentation in the statement of cash flows and disclosure of restricted cash. The changes apply to all entities, both business entities and not-for-profit entities that are required to present a statement of cash flows under ASC Topic 230. Learn More >>

Definition of a Business

Updates to the definition of a business, effective for calendar year-end 2019 financial statements, make it more likely that acquisitions are accounted for as asset acquisitions rather than as a business combination. The revised guidance retains the concept that a business has inputs, processes applied to those inputs and, usually, outputs. ASU 2017-01, Business Combinations Topic 805: Clarifying the Definition of a Business clarifies the requirements that a set of assets and activities must meet to be a business. In practice, the change has reduced the number of transactions that are being accounted for as business combinations. Transactions that are no longer accounted for as business combinations are accounted for as asset acquisitions. Here are some points to consider about asset acquisitions.

Other Accounting Changes

Several other low-impact or minor-impact accounting changes will take effect in 2019 as well.

• Intra Entity Transfers: Under the provisions of ASU 2016-16, Income Taxes Topic 740, companies that exchange assets other than inventory between related parties will face changes in the timing of the recognition of the income tax effect of the transfer. Non-public entities will adopt for annual periods beginning after December 15, 2018 (i.e., 2019 calendar year) and interim periods beginning after December 15, 2019 (i.e., 2020 calendar year).
• Retirement Benefits: All employers that offer their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under ASC Topic 715 are affected by ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost. This update is particularly relevant for manufacturers. To improve the reporting of net benefit cost in financial statements, the standard provides additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets.
• Sales of Nonfinancial Assets: New guidance modifies the guidance for the partial sale of assets that aligns the accounting to be consistent with the sale of a business. ASU 2017-05 Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, is particularly impactful for entities operating in the real estate business because it eliminates the concept of “in substance real estate”.
• Reporting Comprehensive Income: If your company has accumulated other comprehensive income, you should consider the provisions of this accounting standard that permit reclassification of stranded amounts of income tax created by the accounting for the TCJA. ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects also prescribes disclosure related to whether the election to reclassify has been made and other information related to accumulated other comprehensive income.

For More Information

If you have any specific comments, questions or concerns about how these updates will affect your year-end financial reporting, please contact us.