This week’s GAAP Flash includes articles about recent accounting news relevant to public accounting, such as what companies can learn from “Brexit,” how Costco managed to repatriate $1.5 billion almost tax-free, how companies inflated their profits more that $164 billion through the use of non-GAAP measures, and what happened to the biggest bank to fail the recent rounds of stress tests by U.S. regulators.

Costco Used Weak Canadian Dollar to Repatriate Funds (June 28, 2016) – The Wall Street Journal (@wsj)

Over the next two years, Costco plans to repatriate approximately $1.5 billion dollars from Canada with virtually no tax consequences. This opportunity presented itself to Costco thanks to the weakening of the Canadian dollar. According to the U.S. tax code, companies must pay taxes on any monies it repatriates from a foreign jurisdiction. However, the company gets a credit for any taxes already paid in that foreign jurisdiction. Therefore, if the company paid taxes in the foreign jurisdiction when the Canadian dollar was at a higher level and then tries to bring that money home under a weaker Canadian dollar – the tax credit it received covers the majority of the U.S. taxes it owes. Costco reported that it still has $371 million left in Canada, which it intends to permanently reinvest abroad under the APB 23 exception (i.e., Costco does not have to pay U.S. taxes as long as it can assert that it will never bring the money back into the U.S.).

How It’s Relevant: According to ASC 740-30, a company is excluded from recording a deferred tax liability on foreign earnings if it can meet the indefinite reversal criteria. In other words, the company never plans to repatriate the earnings. As we just saw in this example, companies can change their minds! What then? This may call into question Costco’s ability to permanently reinvest that money in Canada. Companies should be sure to have evidence backing up their ability to meet the criteria, and auditors should make sure they have appropriately tested and corroborated that assertion! If you need a refresher on the implications of repatriation of earnings, check out this post of items you may need to consider.

Companies Inflated Profits $164 Billion with Non-GAAP Metrics (June 29, 2016) – Accounting Today (@AccountingToday)

According to a report from Calcbench, which analyzed the earnings releases of over 800 companies, U.S. corporations overstated their net income more than $164 billion…just last year. The report determined this amount by comparing the non-GAAP net income against the formal GAAP net income under U.S. GAAP. Generally, companies who presented non-GAAP net income claimed that the numbers provided a better sense of performance than their GAAP counterparts. A third of all adjustments were to adjust earnings for the effect of recent restructurings according to this article on the report.

How It’s Relevant: While the SEC does allow companies to report non-GAAP financial measures, given that the company meets certain criteria, it has become quite critical of the over-use of these metrics by companies. In fact, Non-GAAP measures was one of the hot topics at the 2015 AICPA National Conference and it seems like it has been in the news every week since! Companies need to ensure that they are not giving more prominence to these non-GAAP measurements or misleading investors. And auditors need to ensure that their clients really are providing value to their investors by providing the non-GAAP measure. Additionally, to help companies and auditors, the Center for Audit Quality has released a new publication on the use of non-GAAP measures.

Fed Stress Tests Clear 31 of 33 Big U.S. Banks to Boost Returns to Investors (June 29, 2016) – The Wall Street Journal (@wsj)

All but two of the big banks in the U.S. cleared the latest round of stress tests and were approved to boost dividends and buybacks. The two banks that failed were Deutsche Bank and Banco Santander. Morgan Stanley, while passing, did receive some feedback from the Fed that found some weaknesses in internal risk management processes.

So what was the fall-out from failing the latest round of stress tests? Well, according to this article, not much more than public humiliation and slightly tighter restrictions around its U.S. profits. But, after the results were released, Deutsche Bank’s stock hit a 30-year low. We’d hardly call that “not much.”

How It’s Relevant: The financial services industry has faced an onslaught of regulation in the past few years and companies are having a hard time complying. The new capital requirements force banks to fund themselves with less borrowed money, thus protecting the patrons of the banks. Not only that, but banks have had to spend billions of dollars putting the correct processes and procedures in place to ensure they comply with the new regulation. Other companies have had to spin-off certain divisions to avoid reaching the threshold most stringently examined by regulators. Auditors should keep a close eye on the changing regulatory landscape and consider the impact of results from stress tests closely when assessing risk and designing their audit programs.

Brexit Lesson: Focus on Consequences, not Causes in Scenario Planning (June 28, 2016) – Journal of Accountancy (@JoA)

This article uses “Brexit,” the outcome of the recent vote in the U.K. to leave the European Union, as a lesson for corporate risk strategy. Although companies certainly cannot predict the future, they should consider multiple scenario outcomes in their risk planning strategies and not employ a wait-and-react mentality. If companies do a robust job at planning for multiple outcomes, regardless of the cause, the entity will be much better prepared to weather the storm. Said another way, companies should focus on preparing for outcomes, such as a major currency drop, and plan appropriately instead of planning on a very specific event, such as “Brexit.” This article also introduces a six-step process for companies to consider that was introduced by the Chartered Global Management Accountant organization (CGMA).

How It’s Relevant: Corporations often fall into a trap of thinking that enterprise risk management is just a project that is done once a year and then revisited the next year. Auditors can also fall into that same trap. Companies and auditors should both remember that risk assessment is a continual process. As facts and circumstances change about the company, the economic environment, etc., companies and auditors should revisit their risk assessments and risk strategies and adjust their plans as necessary.