As you draft your annual Form 10-K it is always a challenge to be sure that you deal effectively with new and emerging issues and the ever-evolving focus areas of the SEC. Register for our January 23rd One Hour Briefing, Form 10-K Tune-Up. Review the key issues to address in this year’s Form 10-K, including the latest in SEC Staff comments about non-GAAP measures; new accounting standards, revenue recognition, leases and financial instruments.
Tag Archives: Financial Accounting Standards Advisory Committee
Revenue Recognition –Some Example Implementation Judgements and an Update on the AICPA’s Industry Task Forces
By: George M. Wilson & Carol A. Stacey
Some of the New Revenue Recognition Judgments
If you have begun your implementation work for the new revenue recognition standard you know that this one-size-fits-all, principles based model will require many new judgments for most of us. Among the challenging questions are:
- When does an agreement with a customer become legally enforceable and include the five elements that bring it in scope for revenue recognition?
- How do we properly account on the balance sheet for transactions with customers before there is an in-scope, legally enforceable contract?
- When does a product or service we deliver to a customer meet the new criteria of “distinct” and become a performance obligation, the unit of account for revenue recognition?
- How do we make the now required estimate of variable consideration and apply the new constraint?
- What will be the best method to make the required estimate of stand-alone selling price when it is not directly observable?
- When does control transfer to a customer now that delivery, ownership and risk of loss are no longer the points in time when revenue is recognized?
This list is, of course, in no way complete. Individual companies may find their judgments more or less extensive and complex.
While the FASB has produced all of these new principles and the related judgments, it has also included a fair amount of implementation guidance in the new standard and clarified several issues in updates to the ASU. There are a few more soon to be final technical corrections in another ASU that you can read about here.
AICPA Help for Specialized Industries
Since this new standard is a “one-size-fits-all” approach to revenue recognition and it supersedes all industry specific guidance we have today, industries like oil and gas, airlines and others face unique challenges. In addition to the FASB’s efforts to assist us in this process you may have heard that the AICPA has also formed special task forces to deal with industry specific challenges in implementing the new standard.
You can learn about the AICPA’s efforts surrounding the new revenue recognition task force here.
The industry groups are:
- Aerospace and Defense
- Airlines
- Asset Management
- Broker-Dealers
- Construction Contractors
- Depository Institutions
- Gaming
- Health Care
- Hospitality
- Insurance
- Not-for-Profit
- Oil and Gas
- Power and Utility
- Software
- Telecommunications
- Timeshare
There are over 100 specific position papers that have been put in process for the working groups and task forces which will ultimately be reviewed by FINREC. If you work in one of these industries, the links above will help you find the related working papers and their status.
As always, your thoughts and comments are welcome!
A Control Environment and History Follow-Up
By: George M. Wilson & Carol A. Stacey
This famous quote has been in our thoughts over the last several months:
“Those who cannot remember the past are condemned to repeat it.”
George Santayana, the poet and essayist, wrote these famous words in his book The Life of Reason. Many other people including Winston Churchill have thoughtfully incorporated this fundamental principle of life in speeches and remarks.
Another favorite variation of the idea comes from Mark Twain:
“History doesn’t repeat itself, but it does rhyme.”
The lesson here is that if we learn history we can hopefully avoid making the same or similar mistakes in the future. As we discussed a couple of posts back, recent public company news shows that many organizations have not been learning from the past.
One person who can help us learn about history we do not want to repeat is Cynthia Cooper. She was the WorldCom head of internal audit who built and lead the team that worked almost “under cover” to find the largest fraud ever discovered. This was a tone at the top fraud, involving the CEO, CFO and CAO. Her book is a sometimes-chilling story of how bad tone at the top results in fraud.
Sharron Watkins is another person who can help us learn how to not repeat history. She was the Enron Vice President, a direct report to Andy Fastow, who blew the whistle about Enron’s accounting irregularities. And we all know perhaps too much about that fraud which was even the subject of a book and related movie “Enron: The Smartest Guys in the Room”.
Corporate ethics will never be easy, but as history and current events show, it does matter. If leadership of an organization sends the message that making money is the most important thing an organization does, if it sends the message that if you don’t make money you will be fired, if it sends the message that other values can be sacrificed if you make money, the ultimate result is inevitable. In countless frauds over centuries, from Ivar Kreuger, the match king in the early 1900s, to Equity Funding in the 1970s, to Madoff, to Enron, to the companies we are talking about today, this lesson has been proven time and time again.
These stories can help us learn and avoid the mistakes others have made. They can be the focus of training and learning. They can be the foundation for building awareness and support for these issues in organizations large and small.
As always, your thoughts and comments are welcome.
Disclosure Effectiveness – The Saga Continues
By: George M. Wilson & Carol A. Stacey
A not so long, long time ago (OK, sorry Arlo Guthrie), and over a very reasonable period, the SEC began its Disclosure Effectiveness initiative. As you have likely heard (and can read about here), the Staff has sought comment and feedback about a variety of issues, including a lengthy release dealing with Regulation S-K and another dealing with various “financial statements of others” requirements in Regulation S-X.
The latest disclosure simplification development is a 26-page Staff report required by the FAST Act titled “Report on Modernization and Simplification of Regulation S-K”. It addresses a variety of areas ranging from properties to risk factors. Included are several interesting ideas such as requiring year-to-year comparisons in MD&A for only the current year and prior year and including hyperlinks to prior filings for prior comparisons.
The report is a thoughtful and interesting step in this challenging process.
As always, your thoughts and comments are welcome!
More Transitions at the SEC
By: George M. Wilson & Carol A. Stacey
As you have most likely heard, Chair White recently announced that she will leave the Commission at the end of the Obama administration. As usual, whenever there is a change in administration the senior leadership at the commission leaves and their successors are appointed by the new President. Yesterday Chief Accountant Jim Schnurr announced that he will be retiring from the Commission. You can read the details here. Wes Bricker has been named the new Chief Accountant.
If you want to follow along and see SEC news as it happens, you can find all the SEC’s current press releases here.
As always, your thoughts and comments are welcome!
Happy Thanksgiving!
All of us here at the SEC Institute wish you a Happy Thanksgiving! We hope that you have a wonderful time with loved ones and enjoy this time of year.
And, to add a smile, we have been building a list of things we are thankful for!
- All of you and your support of our programs!
- Disclosure Effectiveness
OK, we tried to add some humorous SEC and accounting related items to this list, but when we started to think about all the change in our profession and we got to revenue recognition and leases, we weren’t sure if we were thankful for them or not!
So, even with all the change in the world around us, Happy Thanksgiving, and thanks for your participation and support!
The SEC Institute Team
A Very Picky Reminder – ICFR and Accounting Standard Implementation Reporting
By: George M. Wilson & Carol A. Stacey
SAB 74 (SAB Codification 11-M) disclosures surrounding the new revenue recognition, leasing and financial instrument impairment standards have been receiving a lot of attention lately, especially with the SEC Staff announcement about them at the September EITF meeting.
This is not the only reporting that a new accounting standard might involve. Since these new standards could have an impact on ICFR, this is a good time to remember the requirements to report material changes in ICFR. These requirements apply to both Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They begin with S-K Item 308(c):
(c) Changes in internal control over financial reporting. Disclose any change in the registrant’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of §240.13a-15 or 240.15d-15 of this chapter that occurred during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
With changes to ICFR for revenue recognition for information about contracts and estimates, like stand-alone selling price and when control transfers, and changes to ICFR for capitalization of all leases, these new standards could require material changes to ICFR. Is this the type of change included in the S-K 308(c) disclosure requirement?
This is an excerpt from the ICFR C&DI’s, number 7, about SOX reporting which you can find here:
After the registrant’s first management report on internal control over financial reporting, pursuant to Item 308 of Regulations S-K or S-B, the registrant is required to identify and disclose any material changes in the registrant’s internal control over financial reporting in each quarterly and annual report. This would encompass disclosing a change (including an improvement) to internal control over financial reporting that was not necessarily in response to an identified material weakness (i.e. the implementation of a new information system) if it materially affected the registrant’s internal control over financial reporting. Materiality, as with all materiality judgments in this area, would be determined upon the basis of the impact on internal control over financial reporting and the materiality standard articulated in TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976) and Basic Inc. v. Levinson, 485 U.S. 224 (1988). This would also include disclosing a change to internal control over financial reporting related to a business combination for which the acquired entity that has been or will be excluded from an annual management report on internal control over financial reporting as contemplated in Question 3 above. As an alternative to ongoing disclosure for such changes in internal control over financial reporting, a registrant may choose to disclose all such changes to internal control over financial reporting in the annual report in which its assessment that encompasses the acquired business is included.
The SEC Regulations Committee of the CAQ has also discussed a particularly intricate issue in this transition. What if you change your ICFR this year, but the change is for future reporting when you begin to report under the new standard next year? This issue is still in play, as this excerpt from the minutes discusses:
- Changes in ICFR in preparation for the adoption of a new accounting standard
Item 308(c) of Regulation S-K requires disclosure of changes in internal control over financial reporting (“ICFR”) during the most recent quarter that have materially affected or are reasonably likely to materially affect the registrant’s ICFR. The Committee and the staff discussed how this requirement applies to changes in ICFR that are made in preparation for the adoption of a new accounting standard when those changes are in periods that precede the date of adoption and do not impact the preparation of the financial statements until the new standard is adopted.
The staff indicated that they are evaluating whether additional guidance is necessary for applying the requirements of Item 308(c) in connection with the transition to the new revenue standard.
So, as you begin implementing systems and processes for these new standards, don’t forget this part of the reporting!
As always, your thoughts and comments are welcome!
Three Years of Fun – Planning the “Big Three” New FASB Statement Transitions
by: George M. Wilson & Carol A. Stacey, SEC Institute
We have all heard about the major projects the FASB has completed in recent years. Together with their implementation dates for public companies and allowed transition methods they are:
Revenue recognition: January 1, 2018. (F/Y’s beginning after December 15, 2017)
Early adoption is allowed to the original effective date, F/Y’s beginning after 12/15/16). Either a retrospective or modified retrospective with a cumulative effect adjustment transition may be used.
Leases: January 1, 2019. (F/Y’s beginning after December 15, 2018)
Early adoption is allowed. A retrospective transition must be used. The retrospective approach includes several practical accommodations.
Financial Instrument Impairment: January 1, 2020 (F/Y’s beginning after December 15, 2019)
Early adoption to years beginning after December 15, 2018 is allowed. The transition method is essentially a “modified retrospective approach with a cumulative effect adjustment” with adjustments for certain types of financial instruments.
The revenue recognition and lease changes have been widely discussed, but the financial instruments impairment change has not been as “hot” a topic. It could be problematic for some companies as it will apply to all financial instruments, including accounts receivable. Many companies could face significant challenges gathering the information to move from the current incurred loss model to the new expected loss model.
While the impact of each new standard will vary from company to company, every company needs to think about how to manage these three transitions. Will it be best for your company to adopt all three at once, or will it be best to adopt them sequentially? Or perhaps mix and match a bit?
There are several considerations in these implementation date decisions. How they will affect investor relations is a major issue. The time and other resources required, systems issues and ICFR impact are among the other inputs to this decision. Each company has to evaluate these considerations based on their own circumstances.
Given the potential magnitude of these changes and their widespread discussion in the reporting environment, disclosures about these changes have become more and more important to users. With the recent SEC Staff Announcement at the September EITF meeting about SAB 74 (SAB Codification Topic 11-M) disclosures, disclosing where you are in this process has become almost required. The more or less simple “standard” disclosures about “we have not selected a transition method” and “we do not yet know the impact” may not be enough. Qualitative information about where you are in the process may be a required disclosure.
There are strong incentives to move diligently on these transitions and to tell investors where you are in the process. And, anyway, who really wants to look unprepared?
Three years of sequential fun or big change? Spread it out or rip off the Band-Aid? Slow burn or big bang? We all get to decide what will be best for our company and our investors, the key issue is to make this decision on a timely basis!
As always, your thoughts and comments are welcome!
A Year End Planning Detail – No More Mailing the ARS to the SEC!
One frequently asked question in our Workshops concerns the “10-K Wrap” or the annual report that companies prepare: Is this a required report or is it an optional investor relations “marketing” document?
Turns out it actually is required for the proxy process. When a company solicits proxies for its annual meeting, and the annual meeting includes, the election of directors, the proxy statement must be accompanied or preceded by an Annual Report to Shareholders or “ARS”. You can find all the details about this requirement in Rule 14a-3. The Form 10-K and the ARS, however, are significantly different. The Form 10-K is a filed document while the ARS is furnished to shareholders pursuant to the proxy rules.
In this earlier post we reviewed the details of the proxy requirement for the ARS.
If you would like a refresher on the filed vs. furnished issues, check out this post.
One of the seeming anachronisms in this process is that the SEC has, even in these days of EDGAR, still required that paper copies of the ARS be sent to the SEC. This requirement is in the proxy rules. (Check out rules 14a-3(c) and Rule 14c-3(b)). Every time we talk about this requirement in our Workshops there are visions of the last scene from “Raiders of the Lost Ark” with a huge warehouse full of boxes no one will ever open again!
On November 2 the SEC modernized this requirement with the following Compliance and Disclosure Interpretation:
Proxy Rules and Schedule 14A (Regarding Submission of Annual Reports to SEC under Rules 14a-3(c) and 14c-3(b))
Question: Exchange Act Rule 14a-3(c) and Rule 14c-3(b) require registrants to mail seven copies of the annual report sent to security holders to the Commission “solely for its information.” A similar provision in Form 10-K requires certain Section 15(d) registrants to furnish to the Commission “for its information” four copies of any annual report to security holders. Can a registrant satisfy these requirements by means other than physical delivery or electronic delivery pursuant to Rule 101(b)(1) of Regulation S-T?
Answer: Yes. The Division will not object if a company posts an electronic version of its annual report to its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K respectively, in lieu of mailing paper copies or submitting it on EDGAR. If the report remains accessible for at least one year after posting, the staff will consider it available for its information. [November 2, 2016]
So, as we approach this year end we can change this process and even save some postage!
As always, your thoughts and comments are welcome!
George M. Wilson, Director, The SEC Institute & Carol A. Stacey, Director, The SEC Institute
Revenue Recognition – How Much Time Will You Really Need?
By: George M. Wilson & Carol A. Stacey, SECI Institute
Much has been written and said about the resources and time that will be required to implement the new revenue recognition standard. All public companies must implement the new standard for fiscal periods beginning after December 15, 2017, roughly 15 months from now. For calendar year-end companies, the first report on Form 10-Q using the new model will be filed in about 18 months. Time is, well, short.
Even the SEC has expressed their concerns about this transition. If you have not seen their comments, check out their expansion of SAB 74 disclosures announced at the September EITF meeting in this post.
Now, we are not writing this post to nag people. Our goal is to help you assess your particular situation with a deeper understanding of the areas you will need to address and the time and resources you will need. Armed with appropriate information you can build a plan and obtain the requisite resources.
Amidst all the commentary there isn’t much detail about the specific challenges in transitioning to the new revenue recognition model. Obviously a single blog post can’t do that either! But what we can do is help you with some starting points that your situation analysis will have to address to determine the resources your company will need. So, here are highlights of three of the more involved areas.
- As you likely know the new standard is contract based. Step one in the five step revenue recognition model is to identify contracts with customers. This means you need processes and controls to assure all contracts with customers are identified and tracked. And, perhaps more complex, modifications to contracts will need to be tracked and recorded. How much work and time will be required to build the systems to capture and control this information flow?
- The new standard requires many judgments, including, what are your performance obligations, how you will estimate variable consideration and how you will estimate stand-alone selling price to allocate consideration. How much time will you need to build these processes and the controls surrounding these processes?
- Even if the timing of your revenue recognition will not change, you will need to make substantially more disclosures including what are your performance obligations, how and when they are satisfied, how you estimate variable consideration and how you estimate stand-alone selling price. Perhaps the most subjective of all the new disclosures is the requirement to disaggregate revenue based on how different revenue streams are affected by “economic factors”. How much time will you need to assess “economic factors” and make these kinds of judgments about disclosures?
This process will be different for every company. For a retailer the process will likely need less time than for a custom manufacturer. But all companies will need some time. The time to analyze the new standard, build the policies for how the new standard will apply to your business, do the proper documentation, build processes and establish controls is what this is all about. And while it may not change how or when some companies recognize revenue, it will affect how and when you make disclosures.
This discussion does not even begin to address a raft of other issues companies face such as the decision about which transition method to use or how you will assess when customers “obtain control” of a product or service to determine the time revenue is recognized under the new standard.
So, again, not to nag, we do urge you to begin your planning process and if you have not yet done so, begin to learn how the new standard works and assess how it will apply to your business.
If you would like to let us know where are you in the process, we will share aggregate status reports in future posts.
Here are some example status updates.
Aware of the new standard.
Studying the new standards to learn how it works.
Reviewing how the new standard will apply to your business.
Drafting the policy white paper for the new standard.
Modifying accounting systems and processes for the new standard.
Updating IT systems or acquiring IT systems for the new standard.
Implementing new IT systems.
Currently running parallel between the old and new standard.
As always, your thoughts and comments are welcome!