Board Matters Quarterly, April 2014

Financial reporting update

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New revenue standards, private company reporting and regulatory developments

It’s time to start preparing for the new revenue standard

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are expected to soon issue a new revenue recognition standard.

"While some companies will be able to implement the new revenue recognition standard with limited effort, others may find implementation to be a significant undertaking".

Calendar year-end public companies will be required to apply the new standard in the first quarter of 2017. Companies should begin preparing now because the standard will likely affect their financial statements, business processes, and internal control over financial reporting (ICFR). While some companies will be able to implement the new standard with limited effort, others may find implementation to be a significant undertaking.

Companies can take the steps below to begin preparing for adoption.

  • Become familiar with the new model. Key personnel need to become familiar with the model’s key principles, including those involving variable consideration and other areas that will require more judgment and estimation than under current revenue recognition models
  • Evaluate the potential effect. Companies may want to begin applying the new guidance to common and/or material revenue streams to assess its potential effects. When performing this analysis, a company may determine that it will need to gather more financial data and customer contract details than it currently collects

Because all companies will be required to disclose more quantitative and qualitative information than they do today, the new disclosure requirements should be considered as well. During the transition period, companies may want to consider whether their systems can properly capture the data needed to comply with these requirements.

From the SEC and PCAOB

As part of an effort to help companies reduce disclosures, the staff of the Division of Corporation Finance of the US Securities and Exchange Commission (SEC) recently updated its Financial Reporting Manual. The update is that companies may be able to scale back their disclosures relating to events and developments that affected the estimates used to value stock-based compensation awards granted before an initial public offering.

The change followed a recommendation by the staff that the SEC launch a comprehensive review of its disclosure requirements for all companies. The SEC staff also discussed steps companies could take to streamline their disclosures at the AICPA National Conference on Current SEC and the Public Company Accounting Oversight Board (PCAOB) Developments in December.

In fact, addressing disclosure overload was a key theme at the conference, along with simplifying accounting standards and improving ICFR.

Additionally, the FASB is developing an internal policy to evaluate whether new standards will reduce or increase complexity.

SEC officials also emphasized management’s responsibility to maintain and assess ICFR. As they have in the past, SEC officials suggested that some inspection findings of the PCAOB involving ICFR likely indicate deficiencies in internal controls and management’s assessment of ICFR. (For example, management might not be identifying deficiencies or might not be appropriately evaluating the severity of deficiencies.)

Members of the Division of Corporation Finance staff said that registrants whose filings indicate the existence of control deficiencies may be asked to explain whether management identified the deficiencies. If so, what management determined to be their severity, including whether the deficiencies should be considered material weaknesses. Filings that correct errors or disclose changes in ICFR might indicate control deficiencies in previous periods, the staff said.

A new era of private company accounting

In January, the FASB issued new guidance that allows certain private companies to simplify their accounting under US GAAP. They can now elect to amortize goodwill acquired in a business combination and qualify more easily for hedge accounting for certain interest rate swaps, beginning with year-end 2013 financial statements.

The alternatives grew out of an effort by the FASB to focus on private company issues after several years of adding new requirements aimed primarily at large public companies.

Questions for the board to consider

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Questions for the board to consider

  • Has management performed a thorough analysis of any control deficiencies identified, including whether the deficiencies should be considered material weaknesses?
  • Have private companies evaluated the FASB’s new accounting guidance, including how they would need to transition to public accounting guidance if they were to go public or be acquired by a public company?
  • Has the company performed a preliminary assessment of the new revenue standard on its financial statements, processes and internal controls and presented the assessment to the audit committee?
  • Have management and the audit committee discussed which transition alternative the company will select with respect to the new revenue recognition standard and why?
  • Has management determined what planned or ongoing IT system initiatives could be affected by the new revenue standard and, if so, informed the audit committee of these changes?