Tag Archives: INTERNAL AUDITING

Projects, Pronouncements and Developments Affecting Your SEC Reporting

How do the latest SEC, EITF, PCAOB and FASB updates affect your reporting? Attend FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop being held August 23rd in Grapevine, Tx. Get up to date in-depth information on all the latest developments and practical tips on applying existing financial reporting requirements, including pushdown accounting, debt issuance costs and commitment fees, discontinued operations and dispositions, segment reporting and goodwill impairment.

http://www.pli.edu/Content/FASB_SEC_and_PCAOB_Update_for_SEC_Reporting/_/N-1z10odqZ4k?ID=290526

Rev Rec Trail Blazers? We Can Learn Together!

By: George M. Wilson & Carol A. Stacey

What do United Health Group, Alphabet, and Ford have in common? What if we also included Raytheon? That’s right, all these companies have early adopted the FASB’s new revenue recognition standard! Microsoft and Workday have also indicated that they plan to early adopt. Microsoft has indicated they will adopt as of July 1, 2017 and file their first 10-Q under the new method for the quarter-ended September 30, 2017. Workday has said that they will early adopt as of February 1, 2017 and hence their first 10-Q under the new method will be for the quarter-ended April 30, 2017, which should be filed soon. Here is a summary of some of the early adopters:

 

Early adopters who have filed with ASU 2014-09:

Alphabet                                        January 1, 2017           Modified Retrospective

Ford                                                 January 1, 2017           Modified Retrospective

United Health Group               January 1, 2017            Modified Retrospective

First Solar                                     January 1, 2017            Full Retrospective

General Dynamics                     January 1, 2017            Full Retrospective

Raytheon                                     January 1, 2017            Full Retrospective

 

Planned adoptions – no filing yet:

Workday                                  February 1, 2017         Full Retrospective

Microsoft                                July 1, 2017                 Full Retrospective

 

(If you know of any other companies that have early adopted it would be great if you could mention them in a comment on this post or email Carol or George – Thanks!)

 

As is always the case with a major new standard, it is helpful to learn from the experience of folks who have gone past the frontier to the leading, and hopefully not the bleeding, edge! Here are a few highlights and links to Form 10-Q’s with the new standard adopted.

 

From Alphabet’s Form 10-Q for the first quarter of 2017:

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2017 using the modified retrospective transition method. See Note 2 for further details.

 

Alphabet’s disclosures, including how they decided to disaggregate revenues, make for interesting reading!

 

From Fords Form 10-Q for the quarter ended March 31, 2017:

 

On January 1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

 

You can read about the impact of the change on revenues and review Fords Note 3 – Revenue to see how they decided to present the new disclosure for disaggregated revenues.

 

Raytheon, who had previously announced they would early adopt, did so in their Form 10-Q for the First Quarter of 2017, which you can find here.

 

Note 2: Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. In July 2015, the FASB approved the deferral of the new standard’s effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB permits companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016. Effective January 1, 2017, we elected to early adopt the requirements of Topic 606 using the full retrospective method.

 

Raytheon’s disclosures for the full retrospective adoption, and the volume of their disclosures overall because of their government contracting business, are great reading for anyone facing similar issues.

 

From United Health Groups Form 10-Q for the quarter ended March 31, 2017:

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively
ASU 2014-09). ASU 2014-09 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

The Company early adopted the new standard effective January 1, 2017, as allowed, using the modified retrospective approach. A significant majority of the Company’s revenues are not subject to the new guidance. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three months ended March 31, 2017. The Company has included the disclosures required by ASU 2014-09 above.

 

General Dynamics early adopted with the full retrospective method. From their Form 10-Q for quarter one 2017:

 

The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.

 

 

First Solar also early adopted and used the full retrospective transition method. Here is an excerpt from their Form 10-Q for quarter one of 2017:

 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.

 

Microsoft and Workday will also be filing with the new standard this year, so watch for their first 10-Q’s this year. Here is Microsoft’s SAB 74 disclosure (not included here is the section in which they say it is their intent to also early adopt the new lease standard as of July 1, 2017), followed by Workday’s SAB 74 disclosure for revenue recognition.

 

Microsoft:

Revenue from Contracts with Customers

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We plan to adopt the standard using the full retrospective method to restate each prior reporting period presented.

 

The standard will be effective for us beginning July 1, 2018, with early adoption permitted as of the original effective date of July 1, 2017. We plan to adopt the standard effective July 1, 2017. While our ability to early adopt using the full retrospective method depends on system readiness, including software procured from third-party providers, and completing our analysis of information necessary to restate prior period consolidated financial statements, we remain on schedule and have implemented key system functionality to enable the preparation of restated financial information.

 

We have reached conclusions on key accounting assessments related to the standard. However, we are finalizing our assessment and quantifying the impacts related to accounting for costs incurred to obtain a contract based on guidance issued by the FASB Transition Resource Group as part of their November 2016 meeting. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.

 

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, under the standard we expect to recognize Windows 10 revenue predominantly at the time of billing rather than ratably over the life of the related device. We expect to recognize license revenue at the time of contract execution rather than over the subscription period from certain multi-year commercial software subscriptions that include both software licenses and Software Assurance. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances may vary from recognition at the time of billing.

 

We expect revenue recognition related to our hardware, cloud offerings including Office 365, LinkedIn, and professional services to remain substantially unchanged.

We are nearing completion of retrospectively adjusting financial information for fiscal year 2016 and are progressing as planned for fiscal year 2017. We estimate our revenue would have been approximately $6 billion higher in fiscal year 2016 under the standard primarily due to the net change in Windows 10 revenue recognition.

 

 

Workday:

 

We have closely assessed the new standard and monitored FASB activity, including the interpretations by the FASB Transition Resource Group for Revenue Recognition, throughout fiscal 2017. In the fourth quarter of fiscal 2017, we finalized our assessment of the new standard, including completing our contract reviews and our evaluation of the incremental costs of obtaining a contract. Based on our assessment, we decided to early adopt the requirements of the new standard in the first quarter of fiscal 2018, utilizing the full retrospective method of transition.

 

The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the term of the related subscription contract, which was generally three years. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs over a period of benefit that we have determined to be five years.

 

As always, your thoughts and comments are welcome! And if you hear of or know of any other early adopters please put that in a comment to this post, or email George or Carol

Whither the Auditor’s Report?

By: George M. Wilson & Carol A. Stacey

 

Would you expect to find this language in an auditor’s report?

“We performed a full scope audit on seven components representing 99% of the Group’s revenue, 90% of the Group’s profit before tax and 90% of the Group’s net assets.

 

During our first year as auditor of the Group, we visited all significant locations. For our second year, we have implemented a rotational approach to these visits.”

Or how about a discussion of materiality such as this?

“We determined materiality for the Group to be £30 million.

We reported all audit differences in excess of £1 million.

 

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced.”

This language may sound like it is from the auditor’s internal conclusion memoranda, but in fact it is from the Deloitte report on the 2016 financial statements of an English company, Marks and Spencer.

Their annual report contains the expanded auditor’s report now required by UK Auditing Standards. The report is on pages 78 to 85 (Yes, it is that long!). It also enumerates several “Key Audit Matters”, describing how each such issue was dealt with in the audit.

While this might seem like an extreme example, there has been movement in international audit standard setting towards more tailored, descriptive audit reports. Here in the US the PCAOB began consideration of changes to the auditor’s report over 7 years ago.

In a May 24, 2017 news release the PCAOB announced that on June 1, 2017 they will consider adopting a new Standard on the auditor’s report. The proposal would eliminate the existing standardized form auditor’s report and replace it with a more tailored report which would include discussion of audit specific issues such as “Critical Audit Matters”. Also to be considered at the meeting are new standards about auditing estimates and using the work of specialists.

You can read about the auditor’s report project and review the most recent proposed version of the standard here.

 

As always, your thoughts and comments are welcome!

Demystifying Alternative Financing Solutions for Emerging and Growing Companies

Auditors and Financial Officers of companies who raise capital with complex financial instruments often find themselves drowning in convoluted accounting issues and restatements. Avoid the confusion by attending the live workshop, Debt vs. Equity Accounting for Complex Financial Instruments being held May 25th in New York City and June 23rd in San Francisco. Through a detailed review of the accounting literature and numerous examples and case studies this Workshop will help you build the knowledge and experience to appropriately recognize, initially record and subsequently account for these complex financing tools

http://www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z10odmZ4k?ID=290521&t=WLH7_PDAD

Significant New Changes in SEC Accounting & Auditing Demand Clarity

The world of financial reporting is complicated and ever-changing. 2017 brings a host of new issues. Implementation deadline of the FASB’s revenue recognition standard is fast approaching and the new lease accounting challenges filers. Attend SECI’s 32nd Midyear SEC Reporting & FASB Forum. This live program is being held May 18-19 in Dallas, June 8-9 in New York City along with a live webcast and June 19-20 in San Francisco. Get practical advice on how to successfully tackle these challenges and more.

http://www.pli.edu/Content/32nd_Midyear_SEC_Reporting_FASB_Forum/_/N-1z10oddZ4k?ID=290510&t=LLM7_9DPAD

Overcome the Challenges Resulting from the FASB’s New Lease Accounting Standard!

The FASB’s new lease accounting standard presents complex accounting, internal control, systems and implementation challenges. Attend SECI’s live interactive workshop, Implementing the FASB’s New Leases Accounting Standard Workshop being held May 17th in Dallas with additional dates and locations this fall. Attendees will learn the conceptual underpinnings, overall structure and details of this new standard as it applies to both lessees and lessors. Implementation considerations, system issues and related topics will be discussed in detail and concepts will be reinforced by use of examples and case studies.

http://www.pli.edu/Content/Seminar/Implementing_the_FASB_s_New_Lease_Accounting/_/N-4kZ1z10dmc?fromsearch=false&ID=309311&t=WLH7_DPAD

Audit Committees and Financial Reporting 2017: Recent Developments and Current Issues

The role of the audit committee is constantly changing. Recent regulations from the SEC and guidance from the PCAOB impact how audit committees, their advisors and those who prepare public company disclosures function. If you are a member of an audit committee, advise audit committees, or are responsible for corporate reporting on financial reporting and controls, you need to have the latest information and stay on top of current updates that occurred over the past year including SEC and PCAOB developments. Register today for PLI’s June 12th live program and webcast, Audit Committees and Financial Reporting being held in New York City.

http://www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z10o1a?fromsearch=false&ID=306520

The New Going Concern Disclosures – An Example

By: George M. Wilson & Carol A. Stacey

Sears, a storied retailer with a rich history, provides a perhaps not unexpected example of the new going concern disclosures in their recently filed 10-K. In their financial statements on page 66 of the 10-K you will find these disclosures:

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.

If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency.

This, as the bolded sentence above illustrates, is an example of the situation where there is substantial doubt about the ability of Sears to continue as a going concern, but the substantial doubt is mitigated by the company’s plans. The new reporting requirement for going concern disclosures has a two path approach. The first is:

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is alleviated as a result of consideration of management’s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):

  • Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

The second disclosure path is:

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:

  • Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

Sears provides us an interesting example and the delicate dance of the wording in their disclosure sheds light on how challenging this new requirement can be for companies.

And, to close the loop, here is the opinion paragraph from the auditor of Sear’s financial statements:

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sears Holdings Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2017, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As always, your thoughts and comments are welcome!

The Enforcement Division Found Evidence How?????

By: George M. Wilson & Carol A. Stacey

Earlier in March the Enforcement Division announced a settled case against homebuilder Desarrolladora Homex S.A.B. de C.V. This company fraudulently inflated revenues by reporting the sale of over 100,000 homes that had never been built or sold! This was a huge fraud, over $3 billion!

All of that is interesting, but what is really fascinating is how the SEC found that the homes had never been built. They used satellite imagery! You can see one of the pictures here.

We are tempted to say “watch the skies”, but that sounds too much like a 50’s sci-fi movie trailer…..

As always, your thoughts and comments are welcome!

Jeepers – More Whistleblower Enforcement Cases? – Do We Have the Message Yet?

By: George M. Wilson & Carol A. Stacey

Just a few weeks ago we did the latest in a series of posts about the SEC’s Whistleblower program. That post focused on two significant enforcement cases where companies attempted to impede whistleblowers. For other posts in our whistleblower series, see:

Our post discussing the background of the SOX and Dodd/Frank whistleblower programs

Our post about the total amount being paid-out to whistleblowers exceeding $100,000,000 (It is even more today!)

Our post discussing a company having to pay a $500,000 fine for firing a whistleblower

SEEMS LIKE THE MESSAGE SHOULD BE CLEAR BY NOW! Don’t try to limit how employees can blow the whistle.

But, the Enforcement Division is not done!

In a case announced on January 17 a company paid a $650,000 fine for including language trying to restrict whistleblower rights in over 1,000 severance arrangements. After removing the language the company also voluntarily agreed to conduct annual training for employees about their whistleblowing rights.

In a case announced on January 21 the SEC found a company that actively searched for a whistleblower, to the point of essentially threatening employees. The reason for the hunt was clear, the treasurer and the company had manipulated information related to hedge accounting and was actively trying to hide the fact that certain hedging relationships were not effective. When the SEC began to ask questions about the issue, the company suspected someone had blown the whistle. The company tried to ferret out the whistleblower, compounding their offenses. The company and the treasurer both paid fines.

There is a very important reason for these cases. In many situations a fraud would go undetected if it were not for the conscience and courage of whistleblowers.

It would seem that the SEC is actively searching for more enforcement cases to make the point that it is illegal for a company to try and prevent or impede employees from blowing the whistle.

Not to be too preachy, and hopefully to be a bit practical, here are two thoughts:

For all of us who may see a need to blow the whistle, know that this is never easy, and know that you have rights and protections.

For companies, don’t try to hide problems and make sure any agreements surrounding employee departures don’t have these kinds of restrictions!

 

As always, your thoughts and comments are welcome!