This week’s GAAP Flash includes articles about the new revenue recognition standard (ASC 606), loss (and gain) contingencies under ASC 450, business combinations under ASC 805, and non-GAAP measures.

The Clock is Ticking on Revenue Recognition Adoption (February 7, 2017) – AccountingWEB (@AccountingWEB)

The new revenue recognition standard (ASC 606) was issued in May 2014 and is effective for fiscal periods beginning after December 15, 2017 for public companies. The new standard requires companies to follow a five-step process to recognize revenue and requires more judgments and estimates.

“According to a recent PwC revenue recognition survey, 65 percent of respondents say they are still in the assessment phase, and 22 percent haven’t even started. Only 13 percent said they have begun implementation.”

How It’s Relevant: As we mentioned in a previous GAAP Flash, KPMG also recently did a revenue recognition survey. The surveys keep coming! Are you surprised by the results of PwC’s revenue recognition survey? I was! ASC 606 is not only going to impact a company’s accounting department, but it will also impact various other areas of a business. The new standard is required to be adopted in only 10 short months, but remember, if the full retrospective method is adopted, each period that is presented in the financial statements must also reflect the new standard. For public companies, that means 2016, 2017, and 2018 will need to be presented in accordance with ASC 606.

Cigna ends merger with Anthem, sues for more than $14B (February 14, 2017) – FierceHealthcare (@FierceHealth)

Cigna and Anthem’s merger was denied by a federal judge this month due to the merger violating antitrust laws. Although Anthem wanted to fight the ruling, Cigna did not. According to the article, “Cigna stated that given the court’s decision, it “believes that the transaction cannot and will not achieve regulatory approval and that terminating the agreement is in the best interest of Cigna’s shareholders””. Subsequently, Cigna filed a suit against Anthem, asking Anthem to pay a $1.85 billion termination fee and more than $13 billion for damages.

How It’s Relevant: Cigna and Anthem began their relationship in 2015, but according to this recent news, it appears that they have had a bad breakup! I think Cigna and Anthem’s legal departments will be busy, but what is the accounting impact?

Anthem will need to determine whether or not a liability should be recorded in accordance with ASC 450. Under ASC 450, if an unfavorable outcome is probable and the amount can be reasonably estimated, the amount must be accrued as a loss contingency in the financial statements. In Anthem’s case, more than likely the amount can be reasonably estimated; however, an assessment will need to be made to determine whether or not an unfavorable outcome is probable. If an unfavorable outcome is probable, the amount would need to be accrued.

Does this mean that Cigna should evaluate the suit to determine whether it should record a gain contingency in their financial statements? Under ASC 450, a gain contingency is not allowed to be recorded! Why? Because revenue would be recognized before realization.

Reckitt finalizes deal to buy Mead Johnson for $16.6 billion (February 10, 2017) – Reuters (@Reuters)

Reckitt Benckiser, “the maker of Lysol cleaners, Durex condoms and Mucinex cold medicine”, announced that it will buy Mead Johnson Nutrition, the maker of baby formula, for $90 per share or $16.6 billion. Reckitt is paying a 30 percent premium for the shares of Mead Johnson. To-date, the acquisition of Mead Johnson is Reckitt’s biggest acquisition.

How It’s Relevant: It’s only February and it seems like the mergers and acquisitions keep on coming! Accounting for business combinations under ASC 805 has been a hot topic in the accounting world, as well as a focus area for the PCAOB. Why? Because accounting for business combinations isn’t easy! There are numerous factors that need to be considered!

SEC Letter to Allergan hints at Additional non-GAAP Guidance (February 13, 2017) – The Wall Street Journal (@WSJ)

In January, Allergan received a comment letter from the Securities and Exchange Commission (SEC) regarding the way it calculated adjusted earnings per share. In the letter, the SEC also said that they “will evaluate the industry practices you described to us and consider whether additional comprehensive non-GAAP staff guidance is appropriate”. The article states that, “the comment is atypical in that it signaled the prospect of additional guidelines in a letter to a company, rather than a separate SEC statement”.

How It’s Relevant: Non-GAAP financial measures are numerical measures that exclude (or include) amounts that are otherwise included (or excluded) in the comparable measure calculated and presented under GAAP. As evidenced by the letter received by Allergan, the SEC has been paying attention! In fact, non-GAAP financial measures was a topic of conversation at the 2016 AICPA Conference. The SEC understands the importance of non-GAAP financial measures, but also acknowledges that some of the non-GAAP financial measures being reported are not being calculated and/or reported within the SEC rules. As such, in May 2016, the SEC issued new guidance on non-GAAP financial measures. The letter received by Allergen makes me wonder if the SEC may come out with additional guidance in 2017 related to non-GAAP measures. I guess we’ll have to wait to find out!

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