This week’s issue discusses ASC 740, infrastructure, coupons, incentives, and resources under ASC 605 and ASC 606, and considerations from the CAQ for 2016 audits.

S&P: Foreign Corporate Cash Could Solve U.S. Infrastructure Woes (October 5, 2016) – CFO Journal (@CFO)

You’ve likely heard about the hordes of cash that many U.S. companies have stashed in overseas subsidiaries which is now approaching, by some estimates, over $2 trillion. You’ve also probably heard that many believe this is due to a flawed U.S. corporate tax system that taxes profits, regardless of where they are earned, once they are brought back into the U.S. Since those profits aren’t taxed by the U.S. until they are repatriated, companies are motivated to keep the profits overseas, especially considering the U.S. has one of the highest corporate tax rates in the world. This topic has been increasingly newsworthy over the last few years; we blogged about it here and here (not to mention various other GAAP Flashes). Even Donald Trump mentioned this in his opening remarks at the first presidential debate! From the government’s perspective, they are concerned about the lost tax revenue. There have been many discussions about plans to alleviate this, from lowering the corporate tax rate altogether, to providing a “one-time” repatriation at a lower rate, to taxing those profits regardless of where they are located. This article, however, offers a different and unique idea. Why not also alleviate one of America’s other woes, crumbling infrastructure? Rather than taxing the profits directly, allow the earnings to be brought in tax free, but mandate that 15% be invested to repair deteriorating infrastructure. How? Either through direct investment or through the purchase of infrastructure bonds. Interesting idea; let’s see if it is a topic of the next presidential debate!

How It’s Relevant:

The U.S. tax system taxes earnings of a domestic company no matter where they are earned. Therefore, earnings of a foreign subsidiary that are transferred or paid as a dividend to a U.S. parent will be subject to U.S. income taxes. Most other economies have a territorial tax system that only taxes money earned within their borders. However, as long as the earnings are not repatriated to the U.S. parent (i.e. they remain in the foreign subsidiary “indefinitely”) they are not subjected to U.S. tax. As a result, from a financial statement perspective, there is an exception to deferred tax recognition if the earnings are “indefinitely reinvested” in the foreign subsidiary. Basically, this allows the accounting to mimic the tax treatment.

Bed, Bath and Beyond May be Ditching the Best Thing About Shopping There (October 4, 2016) – Yahoo! Finance (@YahooFinance)

Ever receive a 20% off coupon from Bed, Bath and Beyond in the mail? Most of you probably have and might be surprised to learn that Bed, Bath and Beyond is going to ditch that program. Why? It has actually become a problem for the company because customers have come to expect the coupon and won’t shop without it. Also, while the coupon was meant to lure customers in the door by giving 20% off any one item, with the hopes that they would buy more, recent experience suggests that customers will only buy one item to get the discount or will use multiple coupons on their purchases. Bed, Bath and Beyond is considering replacing the coupons with a new loyalty program that offers free shipping and 20% off every entire purchase, for a membership fee of $29 per year. Consider it a very scaled down “Amazon Prime” style program.

How It’s Relevant:

This is certainly relevant if you shop at Bed, Bath and Beyond, are a fan of coupons, and like to receive 20% off, but how is it relevant from an accounting perspective? While the article does not discuss the accounting aspect, it got this writer thinking about the implication. Currently, there is no accounting for the coupons distributed until they are used. Once used, they will result in a reduction of the price paid by the customer and recorded as a reduction of revenue. With the new loyalty program, the membership fee is likely going to be a non-refundable up-front fee. Under the SEC’s SAB Topic 13 interpretive guidance of ASC Topic 605, this fee would be required to be deferred upfront and recognized as revenue over the life of the membership. Any other aspects of the loyalty program would also need to be considered, but currently there is not much U.S. GAAP guidance on these types of programs. You can read more about the older standard here. Once ASC Topic 606 (aka the new revenue recognition standard) is effective, in addition to considering the accounting for the upfront membership fee, Bed, Bath and Beyond will also need to consider whether the loyalty program contains distinct performance obligations that need to be accounted for. The new standard will, in essence, provide clearer guidance on the accounting for loyalty programs. For a listing of recent blog posts about the new standard as well as several useful references to help you get up to speed, check out our blog post.

AICPA Issues More Revenue Recognition Working Drafts (October 4, 2016) – Journal of Accountancy (@AICPA_JofA)

As we get closer to the implementation of ASC Topic 606, Revenue from Contracts with Customers, interpretive and implementation guidance will become increasingly important. In addition to the FASB’s own Revenue Recognition Transition Resource Group (TRG), the AICPA’s Financial Reporting Executive Committee (FinREC) has issued several working drafts addressing accounting issues from the implementation of the new standard. All of the issues discussed will be included in a new revenue recognition guide that the AICPA is developing. Recently FinREC discussed four issues related to software.

How It’s Relevant:

The AICPA’s Financial Reporting Executive Committee (FinREC) discusses accounting issues arising from the implementation of the new revenue recognition standard. Four recent issues discussed are related to software and include:

• Determining whether software intellectual property is distinct in cloud computing arrangements
• Defining and identifying potential price concessions
• Estimating the standalone selling price of options that are determined to be performance obligation
• Estimating the standalone selling price

In addition, FinREC is currently discussing issues in the asset management, gaming, and telecom industries. Want to read more about the recent implementation issues? Check out this publication from the AICPA’s Revenue Recognition Task Force, Status of Implementation Issues.

Top Considerations for 2016 Audit Cycle (October 4, 2016) – Journal of Accountancy (@AICPA_JofA)

The Center for Audit Quality (CAQ) issued alerts identifying some of the more judgmental or complex audit areas to be considered for 2016, in addition to some new audit considerations such as the new required disclosure of the engagement partner and other participants in the audit. Issues highlighted were:

• Improving transparency though disclosure of the engagement partner and certain other participants in the audit
• Improper alteration of audit documentation
• Effective communication with audit committees
• Assessing and responding to risks of material misstatement
• Internal control over financial reporting
• Segment identification and disclosure
• Going concern

How It’s Relevant:

The CAQ warns that these are some of the key topics that auditors need to consider during the 2016 audit cycle. The CAQ is an autonomous, nonpartisan, and nonprofit public policy organization. It is supported by a membership of U.S., PCAOB registered accounting firms and is led by a governing board made up of CEOs from leading public company auditing firms and the AICPA, along with three members from outside the auditing profession. Making sure your engagement teams focus on these key areas will help your firm avoid audit deficiencies should the PCAOB come to call! For a more comprehensive look at recent PCAOB inspection findings and how to prevent them on your engagements, check out our eBook!