This week’s GAAP Flash includes articles about loss contingencies under ASC 450, disclosure of material weakness, and news about the Dodd-Frank Act to help increase the business acumen of CPAs.

This Is Real. Spinal Tap Sues for $400 Million (February 8, 2017) – Bloomberg (@business)

The actors who starred as the rock group in the move “This is Spinal Tap” have joined forces again to sue the distributor of the film, Vivendi SA, for $400 million in damages. The plaintiffs allege that Vivendi failed to share income derived from the cult-classic movie due to “anti-competitive and unfair business practices, as well as fraudulent accounting”.

How It’s Relevant: With this litigation on the line, what’s the next step for Vivendi? More than likely, it should evaluate whether the filing of this lawsuit requires any additional disclosures or accruals according to ASC 450, Contingencies. With that, the film distributor will need to determine whether an unfavorable outcome from the lawsuit is probable, possible, or remote. If a loss is probable and it can be reasonably estimated, the company will need to accrue a loss contingency. Otherwise, it may need to disclose information about the lawsuit, if an unfavorable outcome is possible, or it can do nothing if an unfavorable outcome is remote.

EBay finds 'material weakness' in controls over accounting for tax (February 7, 2017) – Reuters (@ReutersBiz)

In a more unique turn of events, EBay reported a material weakness in its internal control of financial reporting, specifically related to its accounting for deferred tax assets and income tax benefits under ASC 740. However, the company states this weakness does not require it to restate prior period results, presumably because a material misstatement of those financial statements does not exist. EBay is putting new procedures in place to remedy this weakness by the end of its fiscal year.

How It’s Relevant: Generally, a material weakness accompanies a material misstatement when a company discloses one. However, that does not always have to be the case. A material weakness is defined as a significant deficiency that results in the possibility (i.e., more than a remote likelihood) that a material misstatement will not be prevented or detected. Therefore, a weakness of this magnitude does not mean a misstatement has actually happened! Kudos to EBay for acting before a misstatement occurs.

Trump Signs Actions to Begin Scaling Back Dodd-Frank (February 3, 2017) – Wall Street Journal (@WSJ)

The White House has started a chain of events necessary to attempt to undo the highly scrutinized Dodd-Frank Act, a voluminous series of regulations that came into effect after the economic crisis in 2008-2009. Critics of Dodd-Frank argue that reducing the regulatory costs of compliance with Dodd-Frank would essentially provide economic stimulus to banks and other financial institutions to increase lending. Proponents of the Act believe the regulations give consumers of financial services the protection they deserve.

How It’s Relevant: The Dodd-Frank Act limits certain trading activities of financial institutions, raises minimum capital requirements for banks, and more. The reduction or repeal of this Act will likely also have financial reporting consequences for these companies and change the way that certain disclosures, like those regarding regulatory capital, are made. It will likely take time for the effects of Dodd-Frank to be rolled back, but it is definitely something to watch in the coming months.

GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank (February 6, 2017) – Wall Street Journal (@WSJ)

The acting head of the Securities and Exchange Commission wants to take a new look at a specific rule of Dodd-Frank, which compares the compensation given to CEOs to the compensation given to the median employee. This rule is typically referred to as the “pay-gap” or “pay-ratio” disclosure rule. It represents another regulation that has been highly politicized and may change in the future.

How It’s Relevant: Again, reducing the impact of Dodd-Frank rules can have reporting implications for impacted companies. The larger message here is to stay up to date on the regulatory and political events, which are now changing under new leadership in the Executive branch. It will likely be a very different world from what management became accustomed to over the last 8 years.

Disclaimer
This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.