This week’s GAAP Flash includes articles about non-GAAP financial measures, IFRS 15, Revenue from Contracts with Customers, and recent activity from the Financial Accounting Standards Board.

SEC Moves to Identify 'High-Quality' Non-GAAP Measures (December 12, 2016) – Accounting Today (@AccountingToday)

The AICPA Conference on Current SEC and PCAOB Developments was held on December 5-7, 2016 in Washington DC. At the conference, non-GAAP measures were a hot topic once again. In a panel discussion, Mark Kronforst, chief accountant of the SEC’s Division of Corporate Finance, provided insight into progress made with regards to non-GAAP measures as well as issues with non-GAAP reporting that still needs work. Christine Davine, deputy managing partner of Deloitte & Touche LLP’s National Office who facilitated the panel discussion, summed it up well with her remarks:

“…non-GAAP measures are not prohibited…You’re allowed to use them, and investors and analysts find quite a bit of value in non-GAAP measures, but they need to be high quality.”

How It’s Relevant:

Non-GAAP measures continue to be an area of focus for the SEC. The SEC acknowledges that some non-GAAP measures are useful to financial statement users, but want to ensure that they are not given undue prominence and are not misleading to investors. The SEC released guidance on the use of non-GAAP financial measures in May 2016. For more information on that guidance click here. Stay tuned for further guidance expected from the SEC.

FASB Zeros in on Liability and Equity Accounting (December 8, 2016) – AccountingWeb (@AccountingWeb)

On December 7, 2016, the FASB issued a proposed ASU on distinguishing liabilities from equity. The proposed ASU is comprised of two parts. Part I addresses complexity of accounting for certain financial instruments with down round features. Per the FASB:

“Stakeholders have asserted that accounting for freestanding and embedded instruments with down round features as liabilities subject to fair value measurement on an ongoing basis creates a significant reporting burden and unnecessary income statement volatility associated with changes in value of an entity’s own share price. Stakeholders also suggest[ed] that this accounting does not reflect the economics of the down round feature, which exists to protect certain investors from declines in the issuer’s share price.”

Part II addresses the difficulty of navigating Subtopic 480-10, Distinguishing Liabilities from Equity—Overall due to extensive amounts of pending content. The proposed amendments in Part II will not have an accounting effect.

How It’s Relevant:

This proposed ASU stems from the Boards project to make targeted improvements that simplify the accounting guidance for financial instruments with characteristics of liabilities and equity. The due date for comment letters on this proposed ASU is February 6, 2017. Refer to the FASB Project Plan Update and the Proposed ASU for further information.

FASB Considers Slowdown in Standard Setting (December 6, 2016) – Journal of Accountancy (@JoA)

With the big 3 standards now issued (Revenue Recognition, Leases and Credit Losses), FASB Chairman, Russ Golden, reached out to the public for input regarding what the FASB should prioritize next. In his speech at the recent AICPA conference, Mr. Golden indicated that comments received reflected concern over the work and resources that are needed to successfully implement the new standards. The FASB is aware and will be taking the comments into consideration as they discuss and plan future FASB projects.

How It’s Relevant:

Anyone overwhelmed yet? The new revenue recognition standard (ASC Topic 606) is effective for public companies in January 2018, the new lease standard (ASC Topic 842) is effective for public companies in 2019, and the new credit losses standard (ASC Topic 326) is effective for public companies that are SEC filers in 2020. There is definitely an abundance of work to be done to implement these in addition to the other guidance issued or expected to be coming (hedging and long-duration contracts for insurance companies to name a couple). I think all of us would welcome a slowdown in pace and activity to catch our breath and focus on the tasks at hand.

New Accounting Standard Will Hurt Rolls-Royce Result, CFO Says (November 16, 2016) – Wall Street Journal (@WSJ)

Rolls-Royce’s CFO indicated that implementation of the new IFRS 15 revenue recognition guidance will have a negative impact to the company’s reporting. Rolls-Royce sells aircraft engines often at a loss but makes profit on the backend by servicing the engines. Under previous guidance, Rolls-Royce recorded some of the service revenue early. In accordance with the new revenue recognition standard, a company recognizes revenue once a customer obtains control over a good or service. As such, under IFRS 15, Rolls-Royce will not be able to recognize the revenue for these service activities until the actual service takes place, resulting in losses being recognized upfront.

How It’s Relevant:

The effective date for both IFRS 15 and ASC Topic 606 is effective for public entities beginning January 2018. With that date quickly approaching, it is expected that there will be increased disclosures from entities regarding the impacts and other implementation efforts.

At the recent AICPA conference, a poll was taken from the audience regarding where in the process participants were in implementing the new ASC Topic 606 standard. Based on the participant replies, about 49% were still in the “not ye started” or “getting familiar/performing initial assessment” phases. The clock is ticking so management needs to be sure efforts are underway and progress is being made. For additional information, take a look at our blog post on Accounting Resources for the New Revenue Recognition Standards.