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Conquer complexity: Get briefed on the latest accounting updates

In the accounting world, the rules are ever changing. Large in scope and long awaited, the new rule for recognizing revenue continues to get clarifications in the months leading up to its effective date. The new leasing standard is finally here as well and sharing the attention. Those are just the biggies—the Financial Accounting Standards Board has been coming out with a flurry of changes in recent months, and regulators are paying attention to what you are doing with them. There’s a ton of information to follow to stay compliant.

How equipped finance teams are to keep up with all the moving parts varies quite a bit. They oftentimes find it beneficial to lean on technical accounting experts who can decipher the never-ending landscape and help with interpretations. Such experts can help them stay on track in understanding the latest accounting refinements, transition-method choices and effective dates. Diana Gilbert, senior consultant at RoseRyan and head of our Technical Accounting Group, helped many companies get up to speed during the June 2 webinar, “Demystifying the Latest Major Accounting Changes.”

This fast moving, 90-minute, all-out binge covered the latest twists and turns that have come out from FASB and regulators over the past year. Some changes have simplified things. Others will have a narrow effect. And many will force finance teams to do some soul searching as the deadlines near. Contracts and compensation plans may need to be revisited.

Diana filled in listeners (most of whom were from life sciences and technology companies) on the five topics below, along with other changes, and gave timely advice along the way.

Revenue recognition: Companies that don’t have a game plan for the new revenue recognition standard are running out of excuses. The SEC has been “aggressively” referencing the new rule in recent speeches to let companies know they will be watching what gets said in disclosures, Diana said. Boilerplate, vague language won’t cut it much longer.

“This has been out there since 2014, so they are going to question why you’re still evaluating it now,” she said. “If you’re honestly, sincerely evaluating it, then just be prepared for the questions. But if you’ve done your evaluation and pretty much do understand the impact, then think about including more detailed disclosures, particularly about decisions you’ve already made,” such as the transition method the company will be taking and the planned adoption date.

Leases: The new standard finalized in February will bring what we refer to as operating leases today onto the balance sheet. The rule applies to leases of property and equipment with terms of at least one year and centers around the lessee’s “right of use” of an item (the obligation to pay for that right is what will appear on the liability side of the balance sheet).

The new rule could change behavior, Diana predicted. “Think about it. If you’re going to have it on the balance sheet anyway, are you still going to lease it or would you buy it outright?” she said. “You might create new forms of leases that are clearly less than a year, without the option to renew, and you’ll have to deal with the issue every year. That may make sense for inconsequential arrangements. It will be interesting to see what happens going forward.”

Financial instruments: Public companies will begin following new rules on classifying and measuring financial instruments for filings submitted in 2018, and private companies will do so a year later. Equity investments that are not consolidated are generally going to be measured at fair value through earnings. In some ways, disclosure requirements have been simplified with the rule changes—companies won’t have to disclose their methods and significant assumptions for estimating fair value—and in other ways they have expanded.

Stock-based compensation: Companies have “a grocery bag of different changes” to deal with when it comes to improvements to employee share-based payment accounting, Diana warned. The most significant relates to deferred tax assets. When the changes take effect, companies will no longer record excess tax benefits and certain tax deficiencies resulting from share-based awards in additional paid-in capital (APIC). APIC pools are eliminated under the changes.

Diana said this is a “huge simplification” in terms of tracking share-based compensation, but the downside is the potential for more volatility in the income statement. This particular change is applied prospectively from the date of adoption (which begins after December 15, 2016, for public companies).

SEC comments: The SEC staff has always tended to question areas that involve judgment and subjectivity, Diana noted. In recent years, in particular, they have been scrutinizing the statement of cash flows and whether companies’ internal controls are effective. Diana recommended that companies be as clear as possible and use tables and charts to help tell their story.

“Comment letters come about because they don’t understand what’s happening,” Diana said. “Or it’s a complex area and they’re going to ask you questions whether you like it or not.”

Keeping tabs on regulators’ areas of emphasis and accounting standard-setters’ changes takes time and effort. Things are in constant motion, and companies need to stay on top of it all. That’s how they can help minimize the questions that come from regulators and any uncertainty that may arise during implementation. To save time and effort in understanding the latest accounting standards (changes through June 1, 2016), feel free to check out the 90-minute replay of “Demystifying the Latest Major Accounting Changes” here.

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What CFOs need to know about the new leasing standard

One loud giant thud is the sound you’d hear if you printed out all 485 pages of the new lease accounting standard and threw it on your desk.

Multiple giant thuds. That’s what we’ll all be hearing when trillions of dollars worth of leases land on many companies’ balance sheets in 2019. That’s when public companies will need to bring right-of-use assets and associated obligations onto the balance sheet and out of the footnotes. (Privately held companies get an extra year to comply.) The full effects are yet to be known, but two things are known for sure: balance sheets will get heavier and many questions for CFOs will follow.

In the works for over a decade, the new standard issued by the Financial Accounting Standards Board in February will affect almost every company. Lessees will feel it the most. As I mentioned in a recent article in ComplianceWeek (sub. required), the new standard will be “pretty pervasive.” The rule addresses leases of property and equipment that are 12 months or longer.

Many companies will be bringing their operating leases onto their balance sheets, which will make them appear more leveraged than under historical GAAP. The new guidance will lead to “a more faithful representation of an organization’s leasing activities,” according to FASB Chair Russell G. Golden.

One of the most common examples given while standard-setters ironed out the details of the new rule was the leasing of airplanes. For aircraft leased for several years but not for their entire “life,” airlines did not have to show their ongoing obligation on their balance sheet. Some viewed this allowance of off-balance-sheet reporting as misleading (this is not just an issue for airlines: Amazon will have to factor in the new rule as it moves forward with its reported plans to lease 20 Boeing 767 planes).

Although it will be awhile before we see the full extent of the standard’s changes in publicly filed financial statements, CFOs are going to have to be ready to answer some questions about how it will affect their company and how they’re going to deal with it. For now, companies will need to add it to their new accounting pronouncement disclosures. And then there’s the detailed work ahead in figuring out what leases the company has and evaluating them.

In the months ahead, companies will need to thoughtfully review their current lease agreements and consider whether any will need to be reclassified under the new rule. It may need to be a cross-functional effort. Companies may want to revisit the wording in some contracts. They may notice that some debt covenants could be affected. There’s some time to get ahead of the changes—but only if the work is put into it now.

Feel like 2019 is a ways off? Some long-term leasing agreements you have in play now could be affected as the standard requires modified retrospective adoption. Comparative financial statements will accompany the reports when it comes time to comply with the rule. And by then the time to transition to this new way will seem to have flown by.

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. Frequently tapped for her insights by Compliance Week, Diana excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

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Get ready: FASB is dumping some big items on your to-do list

The Financial Accounting Standards Board has a bunch of resolutions that affect many companies. The board is offloading some of their weightier projects that have taken up a lot of time (several years!) on their docket.

Fortunately, they are giving financial statement preparers a lot of time to come to terms with the changes ahead, providing a couple of years to implement new standards for lease accounting and the classification and measurement of financial instruments.

The most highly anticipated one—the new leasing standard—will result in some companies looking more leveraged on their balance sheets, starting with their 2019 financial reports (privately held companies get an extra year). Companies that lease any property and equipment for one year or more will be impacted. This will be a really big deal.

In the works for a decade (the SEC called for a revamped standard in 2005), the new leasing rule created a rift during the ongoing convergence effort between FASB and the International Accounting Standards Board, leading the two boards to come out with two different standards. Call it a divergence if you will.

The IASB recently released their final standards and the FASB’s is expected this quarter. Companies will appear to be burdened by more debt than they do now, as disclosing leases only in footnotes will no longer be acceptable under GAAP. Studies estimate that the changes will raise the reported liabilities of U.S. public companies by $1.5 trillion to $2 trillion.

It is expected that the new rule will take more effort to put in place than the new revenue recognition standard (and that’s saying something). Consider that every lease must be reviewed with assumptions updated each reporting period. Under the new guidance, lessees will be required to present right-of-use assets and lease liabilities on the balance sheet.

FASB has passed down a couple of other big agenda items when it released its rules concerning financial instruments last month. Although not in the works as long as the pending changes to lease accounting, this project was also divisive for FASB and IASB. For FASB’s part, the board will require companies to follow new rules on classifying and measuring financial instruments in 2018 and financial instrument impairment in 2019.

FASB’s standard for how to classify and measure financial instruments will be relevant to most companies, in particular those that have equity method investments that are not currently measured at fair value. Current fair value measurements and disclosures can be confusing to investors, and the new rules are intended to simplify things. Companies can adopt parts of the standard early if they wish.

As for the new revenue recognition standard, the Joint Transition Resource Group had its last scheduled meeting in Q4 2015 and will reconvene if new issues arise around implementation of the new rule. The FASB is expected to finalize proposed amendments to the standard this quarter. So the rules are settling, and there is no more reason to delay your implementation efforts. You are already in the first fiscal year that will be effected by the new standard when you implement in 2018.

FASB’s agenda will appear a bit thinner by the second quarter of 2016, while yours has grown. Let the fun of implementation begin!

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. Frequently tapped for her insights by Compliance Week, Diana excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.