GAAP Flash – ASC 606, ASC 842 and ASC 326 (CECL) – 07.22.16

GAAP Flash – ASC 606, ASC 842 and ASC 326 (CECL) – 07.22.16

I’ve been a practicing CPA for over 20 years and I do not recall a time when so many significant new standards have been issued all at once. This week’s GAAP Flash includes articles and discussion about the new revenue recognition standard (ASC 606), the new leasing standard (ASC 842), and the new standard on impairment of financial instruments, or CECL (ASC 326).

AICPA Issues Revenue Recognition Working Drafts for 9 Industries (July 5, 2016) – AccountingWEB (@AccountingWEB)

The AICPA Financial Reporting Executive Committee (FinREC) released for informal comment working drafts of revenue recognition issues for the following nine industries:

  1. Aerospace and defense
  2. Airlines
  3. Brokers and dealers
  4. Engineering and construction contractors
  5. Gaming
  6. Health care
  7. Investment asset management
  8. Not-for-profits
  9. Software

These working drafts provide industry-specific helpful hints and illustrative examples for entities implementing ASC Topic 606 Revenue from Contracts with Customers (ASC 606). Sixteen industry tax forces are in the process of finalizing implementation issues that will be included in a new guide the AICPA is developing on the new standard.

How It’s Relevant: ASC 606 will have a significant impact on most companies in a variety of industries. According to a recent survey by KPMG, the vast majority of public companies have indicated that they have not yet completed their assessments of the impacts of ASC 606. What are companies waiting for? “Go time” is NOW. Looking for a place to start? Check out our series of posts, eLearning module, and videos on the topic!

Companies Slow to Comply with New Lease Accounting Standard (June 22, 2016) – AccountingWEB (@AccountingWEB)

Less than 10% of businesses are “very prepared” or “extremely prepared” to implement the new lease accounting standards under U.S. GAAP (ASC 842) or IFRS (IFRS 16), according to a recent poll by Deloitte. Sean Torr, Deloitte’s lease accounting services leader, said, “I’d encourage any leader of an organization with real estate or equipment leases to take the time now to learn about the potentially broad-reaching impacts of these new accounting requirements.”

How It’s Relevant: Different standard. Same story. So where should companies begin? The first step would be to gather the data on all the leases within the organization in a centralized inventory and begin to assess the impact of the new standards on the organization. We’ve compiled a list of accounting resources to help companies implement the new leasing standards.

FASB Rule to Require Banks to Record Projected Loan Losses Up Front (June 16, 2016) – The Wall Street Journal (@wsj)

The FASB recently issued guidance requiring U.S. banks to book losses on bad loans much faster, a change that could cut into some banks’ profits by forcing them to set aside more in reserves. ASU 2016-13 (ASC 326) requires banks to record all losses they project over the lifetime of their loans, as soon as the loans are made. That is a change from current practice, under which banks wait to record loan losses until there is evidence a loss is likely to occur.

How It’s Relevant: This standard was part of the FASB/IASB convergence initiative, but in the end, convergence was not achieved. The FASB’s credit expected credit losses (CECL) model will result in more credit losses being booked sooner than under the IASB standard. Not everyone is happy about the new standard, particularly smaller banks. According to the article, the American Bankers Association continues to have “strong concerns” over the costs of implementation.

5 Tips for Implementing FASB’s Credit Loss Standard (July 12, 2016) – Journal of Accountancy (@AICPA_JofA)

Although the new revenue recognition and leasing standards will have a big impact on financial institutions, the new standard relating to impairment of financial instruments (ASC 326) will have a more significant impact! According to Reza Van Roosmalen, KPMG Managing Director, “It’s the biggest accounting change I think that banks have been subject to in a long time.” In a shout-out to training organizations like ours, Deloitte managing director, Jonathan Prejean noted, “There’s going to be a need for education from accounting to the rest of the business partners.”

How It’s Relevant: One of the “tips” noted in the article is that the new standard is not just applicable to banks. Lease receivables, trade receivables, and held-to-maturity debt securities are among other financial assets within the scope of ASC 326. So how do organizations estimate expected credit losses under the CECL model? Entities will have to implement very sophisticated models that consider past events, current conditions, and reasonable and supportable forecasts. Quite frankly, smaller banks and non-banking entities will have a very hard time implementing this standard without considerable help from professionals.

How to Tackle Implementation of Multiple High-Profile Accounting Standards (July 13, 2016) – Journal of Accountancy (@AICPA_JofA)

Many companies’ finance departments are struggling to implement all of these standards at once. Only 37% of companies surveyed by KPMG said they are on the “right track” in implementing the new revenue standards. Two-thirds of companies surveyed by PwC and CRBE have used spreadsheets as their primary system for tracking leases. Estimating expected credit losses using the CECL model would require the use of sophisticated models requiring significant judgment. “It’s a lot of work for what oftentimes are lean financial reporting groups to adopt three potentially heavily impactful standards,” said Sheri Wyatt, PwC partner.

How It’s Relevant: Companies are required to implement three major standards in the next three years. Good luck! This article gives six tips that can help ease the burden and is definitely worth a read. It suggests starting with the revenue standard and finishing that assessment first. It also recommends bringing the tax department to the table. We would recommend bringing in other areas of the business too, such as investor relations, treasury, and internal audit. Last but not least, we recommend training to ensure that everyone understands the requirements of the new standards and their impact to your organization. We’re here to help - not only with training your people, but also with advisory services. Contact us today for a free consultation and we’ll get you headed down the right path!

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