GAAP Flash – Revenues, Cash flows, and Performance Reporting – 07.7.17
GAAP Flash – Revenues, Cash flows, and Performance Reporting – 07.7.17

GAAP Flash – Revenues, Cash flows, and Performance Reporting – 07.7.17

This week’s GAAP Flash includes articles about an ASC 606 accounting change that could boost retailer profits, the emphasis on revenue forecasts, SEC warnings on free cash flow talk, and the IFRS chief wanting more transparency on performance reporting.

An obscure accounting change could boost Amazon, Starbucks, Wal-Mart profits by hundreds of millions of dollars (June 28, 2017) – MarketWatch (@Marketwatch)

For retailers, one significant positive impact from the new revenue recognition standard (ASC 606), which is effective for public companies in 2018, could be how revenue from the unredeemed portion of company-issued gift cards, called breakage revenue, is recognized. The accounting change will affect every company who issues gift cards, from classic brick-and-mortar grocery and fashion retailers to restaurants to Amazon and other online stores.

How It’s Relevant: Everybody uses gift cards! And this accounting change will have a significant impact on the retail industry, although the final overall impact is still being evaluated. ASC 606 will require companies to spread breakage income over the expected gift-card redemption period, which is generally 5 years (thanks to the CARD Act), rather than waiting until the likelihood of cashing in the balance becomes remote or until the card expires. Need to get up to speed on all of the revenue changes due to ASC 606? Check out the resources available, including our GAAP Chats on Revenue Recognition in our YouTube channel. And remember the positive impact you will have on retailers’ earnings the next time you purchase a gift card!

Do companies adjust revenue to meet investor expectations? (July 5, 2017) – AccountingWeb (@AccountingWEB)

A company’s success of meeting analyst earnings forecasts brings major attention to a company, and it’s not unheard of to see stocks drop at these companies when facing disappointing revenues because of the importance that investors place on a company’s revenue. A recent study showed that a larger number of companies barely met or only slightly exceed analyst revenue forecasts after reporting disappointing revenue vs. reporting disappointing earnings because of the importance that revenue has on investors.

How It’s Relevant: Every public company has investors that want to make sure the company is meeting forecasts and targets but companies need to realize that manipulating these results can have significant consequences. Growing revenue is back to being a priority for companies after having to focus on cost reduction efforts due to the recent financial crisis, but companies need to make sure they are accurately reporting revenue. They also need to challenge their own internal forecasting processes, internal process-level and entity-level controls, and their overall growth strategy.

SEC tells companies to be careful how they talk about free cash flow (July 5, 2017) – MarketWatch (@Marketwatch)

The SEC has warned more than 20 companies in the last six months about their potential misuse of the non-GAAP metric “free cash flow.” Analysts like to talk about free cash flow but companies should be careful to avoid any misleading or inappropriate references or disclosures about the usefulness of free cash flows, especially about it representing residual cash flow available for discretionary expenditures.

How It’s Relevant: Non-GAAP metrics have continuously been a hot topic for the SEC and with all of the recent warnings, it will continue to be for the foreseeable future. The description of the use of free cash flow is just one of many considerations when it comes to non-GAAP measures: other descriptions, presentation of the metrics, and the reconciliation are all others (to name a few). Just recently, the SEC told American Airlines to rein in praise of its non-GAAP metrics. Sign-up for our U.S. GAAP Update course, where we cover SEC Hot topics, including non-GAAP measures, so the SEC doesn’t come knocking on your company’s door!

IFRS chief calls for more transparency on cashflow and income reporting (June 30, 2017) – CCH Daily (@accountancylive)

Hans Hoogervorst, the head of the international IFRS standard setter is calling for the development of tougher guidance on financial statement reporting relating to the income statement and the statement of cash flows, or what he calls performance reporting. Specifically, he believes focusing on a better structure to these statements gives investors and key stakeholders more transparency and insight. Investors tend to look at operating income and finance activities, which is why EBIT (a non-GAAP measure) is very common. Additionally, investors measure the degree of earnings persistence, which is important for estimating future cash flows and why non-GAAP measures that adjust for infrequent income are widely used.

How It’s Relevant: Non-GAAP metrics are everywhere! Not only is this a focus for the SEC, but also for the chair of the IASB who recently spoke at the annual IFRS Foundation Conference about the importance of developing standards for better transparency and accountability. Having improved formatting of financial statements increases comparability and will make it easier for regulators to enforce proper presentation and disclosures, especially with four major new IFRS accounting standards that will be effective over the next few years. Are you up-to-date on your IFRS knowledge? Take peak at our IFRS Update Course and let us know if you’d be interested!

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.

IFRS Update
 
New Revenue Recognition

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