This GAAP Flash includes articles about PCAOB inspection report improvements, applying the new revenue recognition standards under ASC 606 to subscription model businesses, possible changes to SOX Section 404(b) coupled with PCAOB AS 5 deficiencies, and LVMH’s full acquisition of Christian Dior.

PCAOB sees some improvement in audit quality (May 4, 2017) Accounting Today (@AccountingToday)

The Public Company Accounting Oversight Board has seen signs of improvement in its inspections of audit quality. It appears that firms are dedicating more resources and time towards improving their internal quality control systems. In 2015, the PCAOB proposed audit quality indicators and encouraged firms to use them. Since then, the indicators are being monitored to evaluate their effectiveness…and they seem to be working!

How It’s Relevant: The audit quality indicators provided by the PCAOB are still not required. However, it seems that with this guidance, firms of all sizes are taking it upon themselves to improve their quality control systems. It is impossible to come up with all-inclusive indicators that cover all firms, but it has proven to be a big step in the right direction! In a previous blog post, we noted the improvement in the deficiency rate of annually inspected firms, along with other interesting observations related to the latest round of PCAOB inspection reports.

Annual Harvest: Adopting the Subscription Model (May 2, 2017) – CFO Newsletters (@CFO)

Subscription based businesses have gained a strong foothold recently – it is not just for newspapers and magazines anymore! Subscription sales are currently growing 500% faster than the U.S. economy. With the new Revenue Recognition standard taking effect this year, accounting for the revenue earned by these types of companies will become more complicated. For instance, if an entity provides software on a subscription basis, the entity may now need to recognize separate performance obligations for items like the actual software, offered upgrades, support services, etc. The transaction price would then need to be allocated to those different performance obligations.

How It’s Relevant: The new revenue recognition standards under ASC 606 will require management to make more judgment calls when identifying performance obligations and determining transaction price allocations. Companies who may have thought their subscription product was cut-and-dried need to put thought into how to evaluate the different components of their services. The new revenue recognition standards will affect a vast majority of companies. Is your company ready to tackle the changes? Start by reading our resources here!

CAQ, investor groups seek to preserve SOX provision (May 2, 2017) – The Journal of Accountancy (@AICPA_JofA)

There is a movement to oppose any legislation that seeks to decrease the Sarbanes-Oxley (SOX) Section 404(b) obligations. One part of the bill proposes a substantially higher exemption level for companies required to assess internal controls. Currently, companies with a market capitalization of less than $75 million are exempt from applying the requirements in Section 404(b). Under the proposal, that threshold would rise to $500 million. Critics say that if these thresholds are raised, internal controls would suffer and investor confidence would erode.

How It’s Relevant: Surveys have shown that CFOs and financial advisors overwhelmingly support SOX, and believe that financial reporting is now more reliable after its implementation. If the thresholds increase significantly, fewer companies will be subject to the requirements to document and test internal controls over financial reporting (ICFR). As a result, financial executives, advisors, and investors would all have less confidence in the annual reports being produced by those companies. It could be a slippery slope!

Interestingly, auditors continue to find auditing ICFR under PCAOB Auditing Standard No. 5 (PCAOB AS 5) challenging as well. As we discuss in our PCAOB eBook, PCAOB AS 5 continues to be the number one area of audit deficiencies noted by PCAOB inspections.

LVMH Extends Control of Christian Dior (April 25, 2017) – CFO (@cfo)

LVMH is a luxury goods conglomerate company that now fully owns Christian Dior. This transaction was not a surprise since investors were interested in simplifying the corporate structure of LVMH. The value of the Christian Dior and LVMH shares rose right after the deal was made, so the market certainly approved of the transaction!

How It’s Relevant: Accounting for companies that have investments in other businesses can be complex. The accounting method used when reporting your income from the company will vary depending on the ownership percentage and level of influence. LVMH will include all of the activity of Christian Dior on their financial statements using the consolidation method of accounting. Any time there is a change in ownership or influence, it is a good idea make sure that the correct method of accounting is being utilized.

Converting to a new accounting method can be tricky, and some of the rules changed recently related to a change to the equity method. Check out our most recent blog post on the topic!

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.