This week’s GAAP Flash includes articles about recent accounting news relevant to public accounting, further fallout from “Brexit,” new disclosures impacting energy companies, more changes to the new revenue recognition standards, and more turmoil for the big banks.

SEC Requires Energy Companies to Disclose Payments to Governments (June 27, 2016) – The Wall Street Journal (@wsj)

As part of the Dodd-Frank regulation passed in 2010, energy companies will soon be required to report their payments to governments for extracting oil, gas, and minerals. This rule is meant to help combat the “resource curse” where oil and mineral wealth in certain countries flows to government officials and the upper class instead of lower income individuals. The American Petroleum Institute feels that the new regulations put American companies at a disadvantage compared to other overseas companies not subject to the rules.

How It’s Relevant: Companies are not required to comply with the new disclosure rules until 2018, but the SEC anticipates that approximately 755 companies will be impacted. Some countries forbid the disclosure of such payment information, which means that companies will need to report the payments on a disaggregated basis for the countries that do not expressly forbid disclosure. Companies will need to ensure that they have the processes and controls in place to track this information, and, as it is being disclosed, it will also need to be audited by the public auditors. For more information, see PwC’s In Brief here.

“Panic” Brexit Withdrawals Freeze $23 Billion Property Funds (July 7, 2016) – Bloomberg (@business)

In the aftermath of the Brexit vote, U.K. property funds are freezing withdrawals due to the fact that investors were dumping real estate holdings. Fund managers are worried that this is just a sign of things to come with other funds. Funds have also adjusted their values downward. Funds that allowed investors to redeem or withdraw their shares are doing so at a reduced value to reflect the current economic turmoil and lower valuation of the funds. There is also a worry about cash levels. Investors were pulling money from funds leading up to the vote, and many funds only had cash and liquid investments to handle normal level of outflows – not the increased level seen since Brexit.

How It’s Relevant: Many funds are measured using net asset value (NAV) as a practical expedient for fair value. As funds become less liquid or redemptions are stalled altogether on funds, auditors should consider whether using NAV is still appropriate as a practical expedient or if adjustments need to be made to the valuation to reflect the lack of liquidity in the fund.

Multinationals Scramble to Contain Risks Linked to Brexit (July 5, 2016) – The Wall Street Journal (@wsj)

Real Estate Funds aren’t the only ones feeling the impact of the recent Brexit vote. Multinationals are also moving to protect against repercussions such as foreign exchange risk. Companies are increasing their currency hedges, raising cash holdings, and scrutinizing the credit quality of trade partners. While companies may not be entirely hedging their foreign currency risks, they are increasing the amount of risk they are hedging against. And in terms of raising cash holdings, the goal is for companies to be less dependent on banks.

How It’s Relevant: The use of derivative instruments such as foreign exchange forwards and futures are great instruments to help companies hedge their risk. But companies and auditors would do well to remember there is a difference between hedging risks and hedge accounting! If hedge accounting is not applied, derivatives are measured at fair value on the balance sheet with changes in fair value reported through the income statement. While derivatives can effectively hedge a company’s risk, they can also introduce a degree of volatility to the income statement. Hedge accounting can help erase some of that volatility from the income statement, but there are strict criteria and documentation requirements to be able to apply hedge accounting. Need a refresher? Here’s PwC’s Accounting Guide on derivative instruments and hedging activities.

FASB Makes Additional Revenue Recognition Clarifications (July 1, 2016) – Journal of Accountancy (@JoA)

The FASB issued Accounting Standard Update (ASU) 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and also proposed new guidance on the standard. These amendments clarify the objective of the collectability criterion in step 1, permits companies to make an accounting policy election to exclude sales taxes from the transaction price, specifies the measurement date of noncash consideration received is the contract inception date, and amends the transition guidance for adopting ASC 606. You can find the full ASU here.

How It’s Relevant: As the Transition Resource Group (TRG) continues to work through practical application concerns that constituents are coming across, more guidance may come out through additional ASUs. In fact, the FASB has already proposed additional changes to the standard. However, this does not mean that companies should delay in analyzing their current revenue recognition models and preparing for the future standards. The FASB and the SEC have both indicated that the standard is substantially complete and both are worried about the lack of progress companies are making toward implementation. This standard is going to have far reaching impacts beyond just the accounting department. While companies should keep an eye out for amended guidance, they should continue to push forward with implementation now.

The Big-Bank Bloodbath: Losses Near Half a Trillion Dollars (July 6, 2016) – The Wall Street Journal (@wsj)

According to this article, the world’s 20 largest banks have lost nearly half a trillion (yes, trillion!) dollars since the start of 2016. While Brexit may be partially to blame, there have been plenty of other factors contributing to the plunge in stock prices: oil prices, low and lower interest rates, the Chinese economy, and increased regulatory scrutiny, just to name a few. Despite the sharp decline in value (Credit Suisse’s market value is down 50%!), banks are saying they do not need to raise capital, a claim that is at least partially supported by the recent round of Fed stress tests that we discussed here.

How It’s Relevant: While banks may not need to raise capital now, they’re not out of the woods quite yet. Values may continue to decline. Auditors of banks should continue to keep a very close eye on the economic situation and evaluate the changing conditions on their risk assessments and planned audit procedures – keeping in mind that last year’s risk assessments and procedures may not be sufficient.