This week’s GAAP Flash includes articles about investments with negative interest rates, non-GAAP measures, the quality of audits, and the latest findings in PCAOB inspection reports.

Now Companies Are Getting Paid to Borrow (September 6, 2016) – Wall Street Journal (@WSJ)

Negative interest rates have been in the news a lot with central banks using this “strategy” to encourage banks to lend their money and thus stimulate economic growth versus “stashing” money in the central bank. Now it looks as if companies are issuing bonds where the investor is paying them to lend their money to the company. In other words, the investor will get less money back when the bond matures than what they initially paid for the bond. Earlier this week, two companies, Henkel AG and Sanofi SA issued no interest bonds at a premium.

How It’s Relevant: It looks as if negative interest rates are “in vogue,” spreading from central banks to companies. U.S. GAAP is mostly silent regarding the accounting for investments with negative yields. On the international front, the question of whether a negative return can be properly presented as revenue and if not whether a negative return on a financial asset can be presented as interest expense was raised to the IFRS Interpretations Committee (IFRIC); however, the IFRIC chose not to issue guidance as part of an agenda decision. It seems that it is only a matter of time before the accounting issues associated with negative interest rates will come to bear. You read more about the accounting issues surrounding investments with negative yields here.

Why Tesla's Cash Crunch May Be Worse Than You Think (September 2, 2016) – Fortune (@Fortune)

Tesla has been reporting a non-GAAP measure that they call “cash flow from core operations” that includes cash flows from loans. According to this article, “the new measure makes Tesla’s position look vastly improved. For the first six months of this year, Tesla reported a negative $99 million in cash from operations. But by adding $385 million in cash received from lessor banks, it boasted “core” cash flow of a positive $285 million." Previously, Tesla offered a loan-financing program, the Resale Value Guarantee Program, where they guaranteed the resale value of certain car models after three years. Under this program, after the defined period (typically three years) the lending bank had the option of selling the car back to Tesla at a fixed-price. Additionally, if the lending bank decided to sell the car on its own, but received less than the guaranteed amount, Tesla would be responsible for difference.

How It’s Relevant: Non-GAAP measures have been a hot topic with the SEC in recent years. The SEC has raised concerns as to whether these non-GAAP measures are confusing or misleading investors. In May of this year, the SEC updated their Compliance & Disclosure Interpretations ("C&DIs") of Non-GAAP Financial Measures which provide SEC guidance on rules and regulations on the use of non-GAAP financial measures. In this instance, the cash Tesla received upon transfer/delivery of the vehicle is not immediately recognized as revenue because the transaction does not qualify for sale accounting as a result of the resale value guarantee. Instead, the transaction is accounted for as secured borrowing. But, this non-GAAP measure of revenue that Tesla has been reporting includes the full sales price of the vehicles under the Resale Value Guarantee program as revenue. What do you think? Does drawing attention to this non-GAAP measure help investors or does it confuse them?

The Decline in Global Audit Quality (August 31, 2016) – Accounting Today (@AccountingToday)

What are your thoughts on audit quality? Do you believe the quality of audits has decreased over the years? Are additional rules and regulations needed or are there already too many? According to the consultant who penned this article, “deficiencies [in the quality of audits] lie on several fronts, and a multi-level approach including changes to the way a firm manages its assurance practice, the culture, and the “tone at the top” are necessary.

How It’s Relevant:

While I don’t completely agree with the author, I think we can all agree that auditing practices and the quality of audits can be continually improved. And while rules, regulations, and firm methodology play an important role, it is also crucial that auditing professionals have a solid knowledge base that is continually expanded through experience and training. While the Big 4 accounting firms have implemented extensive, formal training programs, many of the smaller firms have not. Also, all accounting firms need to stress the importance of training and continuous learning, both formally and through the “tone at the top” of their leaders.

Audit Flaws Up for Deloitte, Down for PwC (August 31, 2016) – CFO (@CFO)

It’s that time of year again! PCAOB inspection reports are beginning to be released for the 2015 inspection cycle. These inspections identify deficiencies in how accounting firms perform their audits and detect weaknesses in quality controls over their audits of public companies. The PCAOB inspected 55 audits and partial audits of Deloitte & Touche LLP and PricewaterhouseCoopers LLP. The PCAOB found deficiencies in 13 of the Deloitte audits that were inspected, a 24% deficiency rate and 12 of the PwC audits, a 22% deficiency rate. Not too shabby!

How It’s Relevant: “Mistakes…show us what needs improving. Without mistakes, how would we know what we had to work on?” I love this quote and believe that analyzing trends in deficiency rates and recurring audit deficiencies can help improve the quality of audits. It’s good practice to understand the deficiencies noted by the PCAOB, learning from the findings to make necessary adjustments to your audit process.