This week’s GAAP Flash includes articles about recent accounting news relevant to public accounting, such as implementation issues of the new revenue recognition and leasing standards, issues when accounting for business combinations, the importance of risk assessment when innovating, and the use of non-GAAP measures in financial reporting.
Revenue Standard Causes Concern about Compensation Arrangements (June 3, 2016) – Journal of Accountancy (@AICPA_JofA)
Companies who currently offer compensation plans tied to revenue metrics are experiencing difficulties when analyzing how best to implement the new revenue recognition standard once it becomes effective. These compensation plans may be in place for the benefit of sales personnel, company executives, or others within the organization. The new standard has the potential for certain companies to recognize revenue earlier, which will affect commissions, revenue-dependent bonuses, etc.
The article goes on to discuss how to build an implementation team, including which departments likely need to be involved, at a minimum. The article recommends inventorying the company’s revenue streams as a starting point. Once those are identified, the company can work through technical issues and evaluate the impact on other aspects of the business.
And finally, the article concludes with a discussion of different transition methods – namely the full retrospective and modified retrospective approaches.
This article notes
How It’s Relevant: As we discussed in a previous post, the new revenue recognition standard is going to have a pervasive impact on organizations – not just the accounting department. This is why it is imperative that companies begin to think of the potential impacts now, before the standard becomes effective(and not just within the accounting department). Other departments may need to be brought in on discussions. For instance, in this example, the new guidance may result in recognizing revenue earlier, which would result in higher bonuses or commissions. Thus, it may make sense to consult HR to determine if a change in the commission structure is necessary.
As this article points out, many companies do not recognize how challenging implementation may be until the company actually begins its analysis. According to this analysis by Deloitte, many companies have not yet started to implement the new standard. Help your company avoid the impending firestorm…start the conversation now!
Verizon to Bid $3 Billion for Yahoo’s Web Assets (June 7, 2016) – The Wall Street Journal (@wsj)
This article details Verizon Communications’ and private-equity firm TPG’s expected second-round bids to purchase Yahoo’s core internet business. Verizon has indicated that it does not intend to purchase certain of Yahoo’s patents or real-estate, which Yahoo would likely sell separately. Other bidders, like TPG, have not indicated if they are interested in purchasing all of, or just pieces of, the core assets.
How It’s Relevant: Sure, the headlines say that Verizon is attempting to acquire Yahoo’s assets. But are they really acquiring assets or are they acquiring a business? The distinction may seem like semantics to the untrained eye, but we accountants know it makes a big difference! For instance, in a business combination, which is covered by ASC Topic 805, assets and liabilities are measured at fair value and goodwill is recognized for the excess purchase price over the assets and liabilities assumed. However, in an asset acquisition, the purchase consideration is allocated to assets and liabilities based on the relative fair values and no goodwill is recognized.
If you need a quick refresher on distinguishing between asset acquisitions and business combinations, check out this brief resource from PwC.
Lease Accounting Implementation a Challenge for Preparers (June 6, 2016) – CGMA Magazine (@CGMA)
According to this article, only 9.8% of financial and accounting professionals believe their company is prepared for the new lease accounting standards. The top two implementation concerns cited by the survey were:
- Collecting necessary data in a centralized, electronic repository
- Instituting reporting processes to evaluate quarterly adjustments for financial statements
Most companies are spending the balance of 2016 consolidating their lease data so that they can begin the lease calculations in 2017 as implementation of the new standard will require lookback reporting for 2017 and 2018.
How It’s Relevant: Just like with the new revenue recognition standards, the time to think about the new leasing standard is now! Yet, according to this study by KPMG, most companies do not have a clear plan for implementing the new standard. Companies need to begin to assess the impact, not only to their balance sheets, but also to their systems and processes. As this article suggests, companies are going to need a system to capture their full inventory of leases and they will need to institute processes to evaluate quarterly adjustments. These changes will impact more than just the accounting department as IT will need to be brought into the fold to implement the new system and the company will need to establish controls over this new system and the procedures for evaluating the leases each quarter for financial reporting purposes.
The Importance of Risk Assessments in Business Innovation (June 3, 2016) – The Wall Street Journal(@wsj)
In today’s disruptive economic environment, innovation is key. And according to this article, so is risk assessment. In order for innovation to be successful, companies need to be able to anticipate problems that may arise and put controls and procedures in place to prevent those problems.
The article lists three companies (Chipotle, Volkswagen, and BP) that all raced ahead with innovating without fully understanding the risk and all faced reputation damaging crises as a result. Companies should instead assess risk at each stage of a project. In fact, asking what could go wrong can open up even more opportunities to innovate.
How It’s Relevant: As this article highlights, fully understanding the risks an entity faces can (and should) be an evolving process. It is just as important for the auditors to understand what could go wrong at each stage in the financial reporting process for material financial statement line items to ensure that the company has proper controls in place to prevent or detect potential material misstatement. Auditors would do well to remember that as a company innovates and changes the way they do business, so should their controls change to reflect those innovations. Don’t just rely on what was done last year. Continue to be alert to the changing environment and adjust your audit procedures appropriately.
Valeant Prodded to Highlight GAAP by SEC (June 9, 2016) Accounting Today (@AccountingToday)
Since this past December, the Securities and Exchange Commission (SEC) has been sending Valeant Pharmaceuticals Inc. letters for playing down their U.S. GAAP numbers and placing more prominence on pro-forma, or non-GAAP, financial measures. This past quarter, Valeant focuses on the U.S. GAAP numbers, and the results weren’t pretty. It appears as though the non-GAAP numbers were making Valeant seem like its results were stronger than they actually are. In fact, over 4 years, Valeant presented approximately $9.8 billion of non-GAAP net income, but reported a GAAP loss of $330 million!
How It’s Relevant: The use of non-GAAP measures in the financial statements is permitted by the SEC as long as the GAAP equivalents are presented and given more prominence than their non-GAAP counterparts. In some cases, non-GAAP measures can provide useful information to investors by excluding one-off costs. However, the SEC warns preparers not to get too creative and not to make non-GAAP measures appear more important than GAAP numbers. The SEC believes non-GAAP numbers should only be presented to the extent that they provide useful, and not misleading, information to investors.