I get it—implementing the new revenue recognition rules has consumed a lot of your technical accounting team’s time, as it has at my company. The new standard likely has a steady spot at the forefront of your audit committee’s accounting concerns as well. It’s a big deal, but other new rules issued by the Financial Accounting Standards Board last year deserve attention, too. They must be implemented in fiscal 2018 if you’re a public company in addition to rev rec.
Planning ahead and maybe even early adopting these new accounting rules could make your life easier a year from now. Presumably (I hope!) you are well on your way in implementing the new rev rec rules, so now may be an ideal time to consider adoption strategies for the other new rules on your plate.
If that concept sounds daunting, take solace in this: You can pick up on the “lessons learned” from your rev rec implementation and apply it to these other implementations, including identifying what new data (and data sources) are required, as well as ensuring you have appropriate internal controls over adoption of new standards. For example, all adoptions require companies to determine if the effect at the adoption date will be material. This requires the computation of the effect to be accurate as well as a process to make sure you have identified the complete population of affected transactions.
Ready to dive in? Here is the next round of accounting changes you need to consider.
1. Changes ahead to cash-flow statements
Let’s start off with ASU 2016-18, which deals with how companies present restricted cash and restricted cash equivalents in the statement of cash flows. It’s not a difficult change to apply, it improves the user’s understanding of a company’s cash position, and it can be early adopted. So, if you have either restricted cash or restricted cash equivalents this year or in previous years, why not adopt now?
The standard can be adopted in any interim quarter. Keep in mind it must be applied retrospectively—whether you do it now or in Q1 2018, you are going to have to restate your statements of cash flows for prior years.
While you’re at it, ASU 2016-15, which also deals with reporting in the statement of cash flows, allows early adoption with the same retrospective transition rules. It makes sense to adopt both ASUs at the same time as users would likely prefer to see all changes reflected at once.
ASU 2016-15 is worth a review to see if any of the eight cash transactions it specifically calls out apply to you. The transaction types are not all infrequent among the companies I work with—two, for example: amounts paid to extinguish debt, including prepayments and payments for contingent consideration in a business combination. If you’ve got those, you may have some changes ahead of you.
And early adoption is not just an idea for public companies; it might also make sense for private companies as they will have to adopt no later than 2019. If you’ve got an IPO in the future, adopting now is one less change you’d have to make before taking on public-company GAAP.
2. Got a deal coming up? Is it a “business” or an “asset”?
ASU 2017-01 defines a business as opposed to an asset in transactions involving acquisitions, transfers, or disposals of a set of assets and activities. It’s another of the FASB’s projects for making transactional analysis more efficient by narrowing the definition when applying the rules for business combinations.
This one is also required to be adopted in 2018—prospectively—so it will apply to transactions on or after the adoption date. But if you expect to have a transaction sometime during the rest of 2017, definitely take a look at whether this new standard will affect your accounting in a way that makes more sense for your company’s situation.
Pundits are predicting that more acquisitions will be accounted for as acquisitions of assets, rather than business combinations. The differences in accounting are significant—for example, transactions accounted for as asset acquisitions will not have goodwill recorded but will require you to capitalize transaction costs.
While this is the first in the FASB’s project to define and clarify what a “business” is, keep in mind that the definition of a business also comes into play for identifying reporting units for goodwill impairment tests and consolidation.
3. Impairments and intangibles
Segueing into the subject of impairment, simplified rules for impairment analyses of intangibles, including goodwill, in ASU 2017-04 are also available for early adoption this year, prospectively, for any impairment measurements performed in 2017 for financial statements not yet issued.
The new rule removes the requirement to perform a hypothetical purchase price allocation, which involves determining the fair value of the individual assets and liabilities. Now, you can do a much simpler measurement by comparing the fair value of the reporting entity as a whole to its carrying value.
4. An accounting change for some equity investments
To fill out the rest of your technical accounting implementation work plan for Q1 2018, ASU 2016-01 affects accounting for equity investments classified as available for sale, which is not an uncommon investment.
It requires companies to record all changes in fair value, including impairments, in the income statement—not in other comprehensive income as we do today. This is going to mean more variability in earnings, so investors will need to be educated about why they’ll see changes.
Know that this is the one ASU on this list that cannot be early adopted. The standard has other provisions you should take a look at, too.
Do the work now, thank yourself later
With all these changes, keep in mind you may have more than just rev rec and the new accounting rules for leases affecting your ongoing SAB 74 disclosures, as well as planning for disclosures required under ASC 250 when adopting any new accounting standard.
My best advice? Plan ahead, and do what you can to be in front of the work. Keep your team and audit committee informed of what to expect. This way you’ll avoid surprises and an overwhelming workload for first quarter 2018.
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