Tag Archives: REVENUE

Challenging Accounting Judgments, Principles Based Standards and ICFR

By: George M. Wilson & Carol A. Stacey

As you have undoubtedly heard from a variety of sources (including this post we made last December), the new revenue recognition, financial instruments impairment and lease standards all involve many new and sometimes complex accounting judgments and estimates.

 

Issues ranging from how to estimate current expected credit losses to what is stand-alone selling price confront us with new, difficult, and subjective judgment calls.

 

Even the Chief Accountant has discussed this issue in a recent speech, which we discussed in our blog. In his remarks, the Chief Accountant focused on ICFR, specifically mentioning:

 

“Having the requisite skills in the accounting and financial reporting area to make the many new, complex judgements required by these standards, and

 

Setting an appropriate tone at the top to assure these judgments are made in a reasonable, consistent and appropriate manner.”

 

To help us all deal with these challenges the Anti-Fraud Collaboration, a group made up of the Center For Audit Quality, FEI, NACD and IIA, has issued a report titled “Addressing Challenges for Highly Subjective and Complex Accounting Areas”.

 

This report is built on a foundation of detailed analysis of several SEC and PCAOB enforcement cases, a webcast and two workshops. The report has a robust discussion of several of the issues underlying these enforcement cases. One important conclusion drawn from this work is that a lack of controls surrounding subjective and complex accounting judgments is frequently a root cause underlying reporting problems. Based on this conclusion, the report includes a discussion of ways to help establish appropriate controls for such estimates and judgments. In fact, one of the enumerated objectives of the report is to:

 

“Facilitate a robust discussion about accounting policy, centering on highly subjective and complex accounting areas, and the design and operating effectiveness of ICFR”

In the report, there are several insights into ICFR issues surrounding complex judgments. For example:

 

Difficult Accounting Issues

 

Three accounting issues were problematic for companies under investigation: revenue recognition, loan impairment, and valuation. Both highly subjective and complex, these three areas were under stress during the financial crisis and therefore more prone to manipulation or error. The analysis of the AAERs also highlighted issues with the accounting policies pertaining to these areas. In the enforcement actions studied, the SEC cited that the companies either did not have an adequate accounting policy or procedure for the issue being investigated; the company was non-compliant with their existing policy or procedure; or that management acted to override the company’s accounting policy.

 

 

The report goes on to state:

 

For all members of the financial reporting supply chain, the importance of tone at the top cannot be overstated. In most cases of alleged financial fraud, the SEC names the CEO and/or the CFO in the complaint. Commission staff noted that the driver of earnings management—the catalyst for most fraud cases—is often top management, such that the focus on the CEO and CFO is not surprising. In cases the PCAOB has brought against individual auditors, it is usually the lead audit engagement partner or other senior members of an audit engagement team who are disciplined.

 

 

Hopefully, as you think about the design of ICFR over the new estimates and judgments required to implement the revenue recognition, lease and financial instrument impairment standards, you will find some helpful ideas in this report.

 

As always, your thoughts and comments are welcome!

 

 

The Move to The New Revenue Recognition Standard – Is the Pressure On?

By: George M. Wilson & Carol A. Stacey

 

Now that year-end is over for most calendar-year companies the transition to the new revenue recognition standard is a major focus area. In recent weeks there have been two interesting sources of comment and information about this transition.

 

First, on March 21, 2017 Chief Accountant Wesley Bricker spoke before the Annual Life Sciences Accounting & Reporting Congress in Philadelphia. (If you are thinking “that sounds familiar”, it was at this same conference a year ago that former Chief Accountant Jim Schnurr made some serious comments about the use of non-GAAP measures that previewed the May C&DI’s!).

 

In his remarks, Mr. Bricker focused on the transition to the new revenue recognition standard, saying:

 

“Let me now turn to implementation of the new revenue standard.  This area deserves close attention, both to make sure that the standard is implemented appropriately and timely and to ask whether the appropriate transition disclosures are being made so that investors and other market participants have sufficient time to absorb the anticipated effects of the new standard.

 

…………………………..

 

In the worrisome column, however, some companies need to make significant progress this year in their implementations.  In a survey of public companies released in October 2016, eight percent of respondents at that time had not started an initial assessment of the new revenue recognition standard, while an overwhelming majority of the others were still assessing the impact.

Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information. Successful implementation requires companies to allocate sufficient resources and develop or engage appropriate financial reporting competencies.”

 

The second recent development is the release by Deloitte in a “Heads Up” newsletter in April 2017 of their most recent updated survey “Adopting the New Revenue Standard — Where Do Companies Stand?”

 

In the survey, Deloitte found that many companies that had originally contemplated using a full retrospective have moved more towards the modified retrospective method. And, along with the worries of the Chief Accountant above, they also found:

 

“Slightly more than half of respondents had started to implement the new standard, but most were in the very early phases of adoption.”

 

As always, your thoughts and comments are welcome!

 

Another SEC Accounting Enforcement

 

The most recent fruit of the SEC Enforcement Division’s on-going efforts to find and bring financial reporting cases is against Monsanto Company and several individuals. It was announced on February 9, 2016. You can read the release here:

www.sec.gov/news/pressrelease/2016-25.html

 

The case involves some of the classic financial reporting problem areas including revenue recognition, manipulation of expenses and ICFR.

 

The settlement includes fines for both the company and individuals as well as two officers being barred from SEC practice. Interestingly, the settlement also requires the company to hire a compliance consultant to deal with the enforcement related issues.

 

The CEO and CFO, while not named in the case, voluntarily repaid bonuses and share based payment awards that would not have been paid if financial results had not been manipulated. This was essentially a voluntary clawback. As a result, the SEC did not have to bring a case based on the clawback provisions of SOX.

 

As always, your thoughts and comments are welcome!