Big 4 firms are telling their clients that the Securities and Exchange Commission won’t object if certain “public business entities” that ought to adopt new rules on revenue recognition and leases with public companies ultimately do so under private company time lines.

Those public business entities would be limited to companies that would otherwise be regarded as private companies except that their financial statements are included in registrant filings for a few different reasons. First, a publicly listed registrant might have an equity method investment in the entity that passes the “significance test” under either Rule 3-09 or Rule 4-08(g) of Regulation S-X and so must be included in the public company’s financial statements. Second, an entity acquired by a public company might be required to include its financial statements with the public company under Rule 3-05 of Reg. S-X.

Normally, entities whose financial statements need to be included with a public company’s filing for those reasons would need to reflect significant new accounting pronouncements along with their public company parent financial statements. Yet audit firms are saying the SEC will not raise a fuss if those entities’ financial statements do not reflect the new revenue recognition and leases accounting standards on the adoption dates established for all public company.

The Financial Accounting Standards Board issued sweeping new rules on revenue recognition and leases that affect all companies, public and private. Public companies are preparing to adopt the revenue recognition standard in 2018, followed by new rules on leasing in 2019. FASB gave private companies an extra year, so the standards take effect for them in 2019 and 2020, respectively. By numerous accounts, companies have been sluggish in preparing for the new standards.

At least two of the Big 4 firms have issued alerts telling their clients a member of the SEC staff made an announcement at a July meeting of FASB’s Emerging Issues Task Force, where the EITF’s agenda allowed a few minutes at the opening for any SEC staff announcement. Neither the SEC nor FASB have published any confirmation of the Big 4 accounts of the SEC announcement.

PwC’s alert says the SEC announcement “allows entities that are PBEs solely due to the inclusion of their financial statements or financial information in another entity’s filing with the SEC to apply the new revenue and leases standards using the effective dates applicable to private companies.” Those entities can still elect to follow the original adoption dates, the alert says, and the deferral does not apply to entities “that meet any of the other criteria of a PBE.”

The alert says registrants need to understand whether their significant equity method investees will elect to delay their planned transition for the revenue and leases standards and assess the effect that will have on their own disclosures.

“This is a big deal,” says Timothy Brown, national director of audit at audit firm CohnReznick. “This is welcome relief both for issuers and public business entities that would have needed to comply by the dates for the revenue and leasing standard.”

It’s typically up to public companies to assure their equity method investees or acquisition targets  upgrade their financial statements to reflect new accounting requirements for inclusion in the public company filings. Given the overall state of readiness for these massive new accounting pronouncements, this may be an aspect of implementation that fell through the cracks.

“There could be cases where entities were caught by surprise,” says Brown. “For some smaller entities, there could be instances where they didn’t even realize this could impact them in the way it could have.”

Now auditors are on the beat, telling public companies to get their public business entities affected by the announcement up to speed, says Brown. “Our advice is entities need to take advantage of the relief,” he says. “A lot of entities haven’t taken advantage of the time they’ve had to prepare for both of these standards. Make sure you’re preparing and getting in touch with entities you’re associated with to make sure they’re preparing effectively for the new standard.”

That includes assuring companies use caution to understand the exact scope of the deferral. “This is limited relief,” Brown says. Both in terms of the entities that are affected and the accounting standards that are deferred, companies need to take care to assure they understand exactly where the exemption applies, he says.

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