GAAP Flash – Accounting News about IFRS 16 and ASC 605 – 02.05.16
gaap-flash-accounting-news-about-ifrs-16-and-asc-605-02-05-16

GAAP Flash – Accounting News about IFRS 16 and ASC 605 – 02.05.16

This week’s GAAP Flash includes articles about the new leasing standard under IFRS (IFRS 16), accounting for cloud computing arrangements under current U.S. GAAP (ASC 605), and other accounting news provided to help increase business acumen of CPAs.

A New Lease of Life (January 29, 2015) – IFRS Foundation (@IFRSFoundation)

Former IASB chairman, Sir David Tweetie, once said he would love to fly on an airplane that actually appears on the airlines balance sheet. That day is here, well almost. The IASB recently published IFRS 16 Leases, eliminating the classification of leases as either operating or finance. The new standard, effective from January 1, 2019, introduces a single lessee accounting model. Under this model, the company obtains the right to use an asset at the start of the lease and, because most lease payments are made over time, also obtains financing. As a result, IFRS 16 requires lessees to account for all of their leases, on the balance sheet, similar to how finance leases were treated applying IAS 17. In the coming few weeks, the FASB is set to issue a similar, yet slightly, different standard (ASC Topic 842).

How It’s Relevant: As legendary newscaster Ron Burgundy once quipped, “I don’t know how to say this, but I’m kind of a big deal.” As reported by the IASB in their press release when IFRS 16 was released, listed companies using either IFRS or U.S. GAAP are estimated to have around US$3.3 trillion of lease commitments outstanding. Of this amount, over 85% do not currently appear on their balance sheets. Therefore, balance sheets will get bigger once these standards are implemented. Certain industries, such as airlines and retailers, will be more affected than others, but all companies must assess the impact of the new standards. We recommend companies get up-to-speed on the new standards and this publication from the IASB is a good start. Also, we’ve included it within our Essential IFRS Update course that we can facilitate to your professionals at your location.

SABMiller Pressured by Volatile Currencies (January 21, 2016) – The Wall Street Journal (@wsj)

SABMiller, the world’s second-largest brewer, said net producer revenue fell 8% for the quarter. Why? The company attributed the decrease to key operating currencies sliding considerably against the dollar. In the last few months of 2015, the South African rand, the Columbian peso, the Tanzanian shilling, and the Angolan kwanza all depreciated by more than 20%, while the Polish zloty and the Kenyan shilling depreciated by more than 10%.

How It’s Relevant: The strengthening dollar has wreaked havoc on the results of U.S.-based companies. Forget the relatively esoteric currencies noted in the article. During 2015, the U.S. dollar strengthened against more “mainstream” currencies as well, including the euro, Brazilian real, and the Canadian dollar. We’ve seen a considerable increase in the number of inquiries from companies about the accounting for foreign currency transactions in accordance with U.S. GAAP. As a service to our readers, we’ve provided our training slides on ASC Topic 830 here.

When It Comes to Tech Services, ‘Cloud’ Can Be a Nebulous Term (February 1, 2016) – CFO Journal (@CFOJournal)

As businesses continue to shift to cloud computing, technology companies are receiving pressure from regulators, customers, and investors to be more forthcoming about they classify the “cloud” services they offer. Under current accounting rules, technology companies have wide latitude to define their cloud revenue. This might include, not only software subscriptions, but also server parts, and maintenance and consulting fees. “Comparisons are difficult,” said Kevin Barnes, chief information officer of Ferguson Enterprises Inc., about sizing up competing cloud services.

How It’s Relevant: This is an important reminder that disclosures, just like the financial statements, are part of U.S. GAAP and should be audited with the same amount of vigor. Under GAAP and SEC reporting rules, a company must break out a revenue source in its financial statement disclosures once that source reaches 10% of overall revenue. Aftab Jamil, leader for the technology and life sciences group at accounting firm BDO USA LLP, said investors prefer transparency as compared to so-called “lumpy revenue.” That’s the first time I’ve heard that term. I like it!

Will New Accounting Rule Slow Adoption of Cloud Computing (January 25, 2016) – Network World (@networkworld)

The FASB changed a rule in December that will make it harder to capitalize the cost of cloud set-up and implementation expenses, a change that may encourage some enterprises to opt instead for traditional on-premise software. The rule in question – Accounting Standards Update No. 2015-05 (ASU 2015-05) Intangibles – Goodwill and Other – Internal-use Software (Subtopic 350-40). The author argues that although the amendments didn’t set out to address how to account for cloud migration costs, the new rules, combined with the FASB’s decision “not to provide additional guidance on the accounting for upfront costs,” will mean enterprise shops can no longer depreciate some fees involved in a cloud migration. The article cites several examples of how the new rule will change the costs companies can capitalize.

How It’s Relevant: If you are moving to the “cloud” (and many of you are), we suggest you familiarize with these new rules. ASU 2015-05 addresses the concerns of stakeholders that the lack of guidance about a customer’s accounting for fee in a cloud computing arrangement leads to unnecessary cost and complexity when evaluating the accounting for those fees. The amendments will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software.

Stock Buybacks Enrich the Bosses Even When Business Sags (December 10, 2015) – Reuters Special Reports (@SpecialReports)

Most major U.S. companies tie part of executive pay to earnings per share (EPS) and other metrics to align the interests of management and shareholders. The trouble is, these numbers can be – and often are – influenced by stock buybacks and other maneuvers that have little to do with operating performance. The article begins with an example of how health insurer Humana Inc. reported worse-than-expected quarterly earnings in late 2014, including a 21% drop in net income. It softened the blow by telling investors that it would make a $500 million share repurchase. What wasn’t as highly publicized was that this buyback added 2 cents to EPS and, surprise, allowed the company to meet executive earnings targets and unlocking higher pay for its executives.

How It’s Relevant: Stock buyback are on the rise and, after reading this article and watching the Democratic National Debate, I am considering voting for Bernie Sanders. Just kidding! Seriously, this is a very thorough and well-written article arguing, as the title says, that stock buyback enrich executives even when the business case isn’t there. It chock full of “real-life” examples. I would encourage that anyone interested in stock buybacks give it a read.

IFRS Update

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