In 2020, FASB issued Accounting Standards Update (ASU) 2020-05, which deferred the effective dates of Topic 606 and Topic 842 by one year. This update gave private companies a much-needed relief, which was overwhelmed by numerous challenges associated with fighting off the consequences of the COVID-19 pandemic. Even though many companies had adopted the new revenue recognition policy, both preparers and auditors experienced significant difficulties applying the new accounting standards in practice. The central problem was that the new standard, unlike GAAP, does not provide sufficient detail on the implementation rules. Instead, it gives a theoretical basis similar to all industries, which leaves the details open for interpretation.
There are several issues associated with revenue recognition that private companies face in all industries. First, Topic 606 requires revenues to be recorded when or as the company satisfied a performance obligation, which does not allow the companies to recognize costs right away. Second, there was a significant problem with variable consideration, as contractors needed to identify the most likely outcome and adjust the value of a contract. Before Topic 606 was implemented, it was impossible to recognize revenues based on a claim. Finally, the number of required disclosures increased significantly.
Even though the majority of firms are ready to embrace the new regulations concerning leases, there are some problems associated with Topic 842. These problems include identifying embedded leases, ensuring the accuracy of all the data associated with leases, and standardizing procedures about new leases, renewals, and modifications to let all the departments receive the required information timely. Moreover, similar to changes in revenue recognition, changes of policy concerning leases now require more disclosures, which may affect the decision-making of investors.