This week’s GAAP Flash includes articles about recent accounting news relevant to public accounting, such as how the Brexit vote may be impacting companies’ short-term currency fluctuation risk, a $15 million payment made to settle FCPA charges, how the FASB’s new financial instrument standard will impact more than just banks, and what the Fed is looking for in their latest round of stress testing on banks.

How to Manage a Short-term Currency Fluctuation Risk such as Brexit (June 22, 2016) – CGMA Magazine (@CGMA)

As this article points out, the upcoming referendum on the UK’s membership in the European Union has been a powerful source of short-term currency fluctuation risk. Regardless of the outcome of the “Brexit” vote, as it’s called, it’s causing companies to evaluate their short-term foreign currency risks now.

This article talks about ways that companies can protect themselves from both translation risk (when companies convert their subsidiary’s financial statements from a foreign currency into the domestic currency) and transaction risk (the risk arising from selling goods or services in a foreign currency).

How It’s Relevant: This article is a great example of how companies can use derivatives to hedge risks. The article goes through several examples in detail and is a great resource for any accountant or auditor looking for a refresher on how derivative instruments work, particularly forward contracts.

From an audit perspective, this is a great example of how we, as auditors, must be constantly aware of the economic environments in which our clients operate. Has management identified any risks related to the Brexit vote? Should they have? How are they hedging or mitigating that risk? Do our audit procedures need to change in light of this information? Need a refresher on the accounting for foreign currency transactions and translations under ASC Topic 830? We’ve got you covered!

Medical Device Company Settles Foreign Bribery Charges (June 21, 2016) – The Wall Street Journal (@wsj)

Analogic, a medical device maker, just agreed to pay nearly $15 million to settle an investigation regarding potential illicit payments made in Russia and elsewhere. According to the charges, Analogic’s Danish subsidiary engaged in hundreds of “sham transactions,” providing approximately $20 million in distributions to third parties and individuals in Russia and various shell companies in the Caribbean. These payments are in violation of the Foreign Corrupt Practices Act (FCPA), which bars the use of bribes to foreign officials to gain new or retain existing business.

How It’s Relevant: The rules laid out in the Foreign Corrupt Practices Act (FCPA) are not new, but companies are continuing to be prosecuted for violating the FCPA’s provisions. As auditors, we need to make sure that our clients have the appropriate controls in place to prevent or detect questionable payments, such as these types of “sham” disbursements that Analogic made. Determining what is or is not a bribe is not as straightforward as you might think. Can you spot a bribe when you see one? Take our quiz here to find out!

FASB Credit Loss Standard Will Prompt Changes at More than Banks (June 20, 2016) – Accounting Today (@AccountingToday)

The new financial instruments standard issued by the Financial Accounting Standards Board (FASB) will affect much more than financial instruments. While banks and other financial institutions may bear the brunt of the impact, just because of what is contained on their balance sheet, other industries are not safe. It will also affect loans, receivables, net investments and leases…any financial asset with contractual cash flows.

As we discussed here, the new standard uses a current expected credit loss, or CECL, model to account for credit losses and loan impairment. This is a much more forward-looking model than the old requirements and, as a result, may require companies to recognize expected losses sooner than they would have previously.

How It’s Relevant: As the article stated, the new standard is coming. While many entities think this standard will not apply to them because they are not a financial institution, they may want to think again! As the article explores, this standard will have a much farther reach than just financial institutions, but really, will be applicable for any company with financial assets on their balance sheet with contractual cash flows. Not to mention, if you’re a multinational corporation, you may need to consider the new standard under U.S. GAAP and the new standard under IFRS, which are not the same.

What to Watch for in Fed’s Stress Tests of Big Banks (June 22, 2016) – The Wall Street Journal (@wsj)

Over the next two weeks, the Fed will begin to release the results of their annual “stress tests” of banks. These stress tests rely on hypothetical scenarios to determine whether or not the banks are safe enough to endure a severe economic downturn. These tests will also determine whether banks have been prudent enough to raise shareholder dividends. While these tests were also run last year, the criteria were different, so just because a bank passed last year, doesn’t guarantee their success this year. However, this article indicates the big U.S. banks passed the hurdle!

How It’s Relevant: This article underscores the continued importance that regulators, investors, and others are placing on banks’ capital requirements. It is the Fed’s hope that these requirements will not just act as a check-the-box exercise for banks, but will inspire banks to rethink how they think about capital planning strategies. Banks, on the other hand, are feeling like these requirements are placing an extra burden on them, not to mention all the extra costs of compliance. Auditors, especially of large financial institutions, need to stay aware of the changing regulatory environment and consider the potential impact on their audit procedures if the institution fails the Fed’s stress tests.