This week’s GAAP Flash includes articles about the risks auditors face when auditing the implementation of the new leasing standard (ASC 842), auditors disclosing critical audit matters within their report, the amount of fair value audit deficiencies, and the reporting considerations when accounting for a natural disaster.

How should auditors get ready for the new lease accounting rules? (October 11, 2017) – Bloomberg BNA (@BloombergBNA)

In this article, Bloomberg BNA interviewed Paul Becht, a partner of Margolin, Winer & Evens, to discuss some of the challenges that auditors will face as a result of their clients adopting the new leasing standard (ASC 842). ASC 842 is effective for public companies in 2019, but it’s never too early to start talking about auditor considerations and risks!

How It’s Relevant: One of the biggest challenges that companies will face in adopting ASC 842 is compiling an inventory of leases along with an analysis on the various lease components. Auditors need to make sure that listing is complete, supportable data exists, and the assumptions used are reasonable. The more leases a company has means more room for errors! Additional training on the standard will be extremely helpful, so be sure to contact us for all of your training needs on interpreting ASC 842! Also, check out our list of accounting resources relating to implementing the new leasing standard.

SEC approves PCAOB's new auditor's reporting model(October 24, 2017) – Journal of Accountancy (@AICPA_JofA)

The SEC unanimously approved the PCAOB’s new auditor’s reporting standard, which includes a requirement for auditors to disclose critical audit matters in their report on a company’s financial statements. This represents the first major change to the standard form auditor’s report in 70 years! The standard will take effect for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers, and for fiscal years ending on or after December 15, 2020 for all other companies.

How It’s Relevant: Critical audit matters represent items that are material to the financial statements that have been communicated, or are required to be communicated, to a company’s audit committee. These matters usually involve challenging, subjective, and complex judgment, and the PCAOB and SEC believe that investors should also be aware of these matters to improve their experience and knowledge of a company. Some believe this will lead to additional litigation that will not benefit investors. Only time will tell! In the meantime, make sure you familiarize yourself with the new PCAOB standard.

Fair value audit deficiencies still too high, but improving(October 25, 2017) – Accounting Today (@AccountingToday)

In a recent analysis released by Acuitas Inc., it was noted that the number of audit deficiencies related to fair value measurements is still high, at nearly one-third (or 31.6%) of audits and engagements inspected by the PCAOB, but that number has declined for the second year in a row. It appears that the fair value measurement audit deficiencies are due to a surge in business combinations – the number of deficiencies related to business combinations rose to 68% in 2015!

How It’s Relevant: While the surge in business combinations appears to be a contributing factor to the high number of fair value audit deficiencies, remember that fair value is everywhere! There are many circumstances where fair value is required (or elected) so it’s important to properly assess the related audit risks, test internal controls, and validate the assumptions used. The PCAOB released a proposed auditing standard on auditing estimates (including fair value measurements) so they are focused on improving this area. Check out our free PCAOB eBook which discusses audit deficiencies and how to avoid recurring deficiencies!

Financial reporting after a natural disaster(October 18, 2017) – Accounting Today (@AccountingToday)

The recent string of devastating hurricanes and wildfires has prompted questions about financial reporting by companies aiming to recover while wrestling with their insurance companies over damage claims. This article summarizes various considerations including: the recording, classification, and disclosure of insurance recoveries; identifying any impairments; properly classifying the loss; environmental issues; tax reporting implications; and the importance of disclosures.

How It’s Relevant: Companies face a significant amount of financial reporting decisions after suffering from a natural disaster and I’m sure it can be overwhelming! I found the discussion on classifying the loss interesting: if a company is located in Florida where hurricanes can be frequent, can it really be classified as unusual in nature or infrequent in occurrence? This is just one of many questions companies must answer. Deloitte recently released an alert that discusses the financial reporting implications of disasters. Unfortunately, many companies are having to deal with these issues, so hopefully this alert is helpful.

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