GAAP Flash – ASC 605, SAB 104, ASC 830, ASC 944 and Taxes - 05.05.2017
GAAP Flash – ASC 605, SAB 104, ASC 830, ASC 944 and Taxes - 05.05.2017

GAAP Flash – ASC 605, SAB 104, ASC 830, ASC 944 and Taxes - 05.05.2017

This week’s GAAP Flash includes articles about revenue recognition misconduct (inconsistent with the accounting prescribed in ASC 605 and SAB 104), the struggles insurance companies face due to the severe weather trend which could have impacts on insurance reserves, the euro in relation to foreign currency transactions (ASC 830), and corporate tax planning based on President Trump’s proposals.

Executives Charged in Connection With Accounting Failures at Government Contractor (April 28, 2017) U.S. Securities and Exchange Commission (@SECNews)

Two ex-executives of a government contractor are being charged by the Securities and Exchange Commission for corporate misconduct and accounting failures. Revenue was prematurely recorded by using fabricated invoices. This extra income satisfied internal sales goals, which in turn resulted in management bonuses. The individual responsible for these actions was charged, along with the former president of the corporation who chose to ignore the warning signs of fraud.

How It’s Relevant: SAB 104 requires that “persuasive evidence” exist for revenue recognition, which needs to be applied consistently. The timing of this income was fudged to meet internal goals, which is definitely not in line with the requirements of SAB 104 and ASC 605. Soon, all companies will need to apply ASC 606, which evaluates if a contract is “legally enforceable.” We have many resources available outlining the new revenue recognition standards!

Property Insurers Hit By Worst First Quarter in 20 Years (April 30, 2017) – The Wall Street Journal (@WSJ)

Property insurance companies are holding their breath, hoping that the severe weather during the first three months of 2017 is not a trend. The first quarter payouts this year were the most expensive on record. In comparison to 2016, the number of tornados documented from January through March more than doubled! Hurricane season has not even started, which is typically the most expensive time in their business year.

How It’s Relevant: Insurance companies need to keep a close eye on their insurance reserves. Not only is severe weather increasing, but higher crash rates due to distracted driving is costing insurance companies more than ever. The number of claims is increasing, along with the cost of premiums the consumer must pay. ASC 944 outlines accounting for insurance companies and how activity should be recorded. GAAP Dynamics has practical experience in many industries, including insurance. In addition, our training and education materials can be tailored to meet your needs!

Grudging Public Support for Euro Could Hold It Together (April 30, 2017) – The Wall Street Journal (@WSJ)

From the beginning, the euro has been blamed for slow economic growth, unemployment, and industrial decline. Polls have shown that although the euro is criticized, most Europeans do not want to change to another currency. This weekend will be telling as the French elections are Sunday, May 7th. Le Pen, a far-right candidate, would like to see the country leave the euro in the past.

How It’s Relevant: The euro was meant to unite European countries economically. It certainly has made trade activities and movement of capital easier, but has also revealed economic weaknesses throughout the EU. Having a single currency also decreases necessary exchange rate and transaction cost calculations. Accounting for foreign currency transactions in accordance with ASC 830 is a complex topic. Looking for a refresher? Check out our slides on foreign currency transactions!

Trump plan seen turning ‘everyone and their dog’ into an LLC Bloomberg Politics (April 28, 2017) – Bloomberg Politics (@Bloomberg)

President Trump’s tax plan proposal includes many tax breaks, including lowering the tax rate to 15% for corporations. This rate would apply to pass-through entities (S-Corps, Partnerships, and LLCs for example) who pay tax at the individual level rather than on a business tax return. Currently, pass-through income is taxed at the same rate as other individual income. Critics are concerned that this tax cut will apply to the financial service industry and will be a loophole for the rich.

How It’s Relevant: If a reduced tax rate for pass-through entities is approved, it could help small businesses, especially if it is tailored correctly. As the article suggests, there could be limitations on the size of pass-throughs that would receive a lower tax rate. With any new tax law, there will be income shifting and new plans implemented to save money. For instance, salary income would still be taxed at the individual rate. A small business owner might want to lower their salary from the company, and increase their pass-through business income... and this is all dependent on whether the tax brackets change! As a self-proclaimed tax nerd, I will be keeping a close eye on this proposal!

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.

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