By: George M. Wilson & Carol A. Stacey<\/p>\n
<\/p>\n
In his recent, much publicized speech<\/u><\/a>,<\/u> Chief Accountant Wesley Bricker discussed the transition to the new revenue recognition standard. A bit later in the speech he addressed a not so frequently discussed issue, the requirement to disclose material changes in ICFR<\/strong> as it relates to implementation of the new revenue recognition, leases, credit losses and other standards. Here is an excerpt:<\/p>\n <\/p>\n Over the next several years, updating and maintaining internal controls will be particularly important as companies work through the implementation of the significant new accounting standards. Companies’ implementation activities will require careful planning and execution, as well as sound judgment from management, as I have mentioned earlier in illustrating areas of judgment in the new GAAP standards.<\/p>\n <\/p>\n In his remarks, well worth the read, he also comments on two crucial ICFR concerns<\/strong> in these new standards:<\/p>\n Having the requisite skills<\/strong> in the accounting and financial reporting area to make the many new, complex judgements required by these standards, and<\/p>\n Setting an appropriate tone at the top<\/strong> to assure these judgments are made in a reasonable, consistent and appropriate manner.<\/p>\n <\/p>\n We did a post<\/u><\/a> about reporting changes in ICFR in November 2016. To refresh your memory, or if you are not familiar with this area, here is a summary of the disclosures required for material changes in ICFR. This applies to material changes made to implement new accounting standards as well as any other material changes.<\/p>\n <\/p>\n These requirements begin with Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They both refer to S-K Item 308(c):<\/u><\/a><\/p>\n <\/p>\n (c) Changes in internal control over financial reporting. Disclose any change in the registrant\u2019s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of \u00a7240.13a-15 or 240.15d-15 of this chapter that occurred during the registrant\u2019s last fiscal quarter (the registrant\u2019s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant\u2019s internal control over financial reporting.<\/p>\n <\/p>\n 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. Are these the types of changes included in the S-K 308(c) disclosure requirement?<\/p>\n <\/p>\n This is an excerpt from the ICFR C&DI\u2019s, number 7, about SOX reporting which you can find\u00a0here<\/u><\/a>:<\/p>\n <\/p>\n After the registrant\u2019s 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\u2019s 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\u2019s internal control over financial reporting<\/strong>. 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.<\/p>\n <\/p>\n <\/p>\n 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\u00a0minutes<\/u><\/a>\u00a0discusses:<\/p>\n <\/p>\n Changes in ICFR in preparation for the adoption of a new accounting standard<\/strong><\/p>\n Item 308(c) of Regulation S-K requires disclosure of changes in internal control over financial reporting (\u201cICFR\u201d) during the most recent quarter that have materially affected or are reasonably likely to materially affect the registrant\u2019s 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.<\/p>\n <\/p>\n 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.<\/p>\n <\/p>\n So, as you begin implementing systems and processes for these new standards, don\u2019t forget this part of the reporting!<\/p>\n <\/p>\n As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":" By: George M. Wilson & Carol A. Stacey In his recent, much publicized speech, Chief Accountant Wesley Bricker discussed the transition to the new revenue recognition standard. A bit later in the speech he addressed a not so frequently discussed issue, the requirement to disclose material changes in ICFR as it relates to implementation … Continue reading ICFR Changes and the New Revenue Recognition, Leases, and Financial Instrument Impairment Transitions<\/span>