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Beyond rev rec—planning ahead for 2018 financial reporting

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.

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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.

Get the scoop on the accounting changes in store with the RoseRyan Technical Accounting Group’s fast-paced 90-minute webinar session, “Our Take from the Trenches on the Latest FASB Updates and What You Need to Know.” Go to bit.ly/FASBupdates to register for this webinar taking place Thursday, June 15, 10am-11:30am PT. 

Julie Gilson is a senior consultant with RoseRyan and a CPA (inactive) with over 15 years working in finance and accounting with fast-moving public and private technology companies. 

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Top 5 financial mistakes that startups make—and how to avoid them

The odds are tough for any startup. The business model is unproven, and the shift from prototype to product can take awhile. It’s all-hands-on-deck, which can be rough going when the team is so small. On top of that, everyone’s getting used to working together, and no one person is an expert in every aspect of running a business.

The good news: Even the smallest, youngest companies can better their odds when they recognize their skills gaps and seek out ways they can build a strong foundation for the future—yes, even as they struggle with the here and now.

We’ve worked with hundreds of tech and life sciences startups in the San Francisco Bay Area since 1993, and they usually have this burning question: How can we avoid the typical mistakes that startups make in finance?

This is where experience comes in handy. Learning from past mistakes and those of others is a huge advantage. We’re going to let you in on the common financial mistakes we see companies about to make when they’re starting out.

1. Forgetting about finance

Understandably in any startup, getting the finances is in order is not the number-one priority—it’s usually about getting a great product out the door. The finance function often doesn’t get as much love as it deserves in any startup, as the company tries to stay afloat while attracting new customers and investors. This can be a major mistake.

Paying the bills on time and employing one office manager who handles basic bookkeeping is necessary—but not enough. Startups still need savvy CFO skills, even if that’s on a very part-time basis at first, to think through a smart strategic plan, go after sound funding and plot milestones to get to the desired exit. These are strategic decisions, not bookkeeping basics. A company with just a bookkeeper is way behind and moving down a slippery slope.

CFOs and finance leaders model the burn rate and breakeven point, and they bless the sales forecast. Startups need someone who can go beyond the basic transactions and recordkeeping to actually design the financial strategy. Is it time to pivot? It’s better to have a well-formed plan than some reactive disappointments.

2. Overlooking the mantra that “cash is king”

Great cash management is critical in any startup. Everyone has heard this but not everyone quite believes it until they see firsthand what happens when more money is going out than coming in. Startups need to forecast all cash in and out, and manage spikes and dips. That information can change how your company manages business activity. And it means working with the person handling receivables so that collections don’t get out of control. Also make account reconciliations a regular part of doing business—especially bank recons—so you know how much cash you really have.

So we have another mantra worth memorizing: don’t think that P&L equals cash flow. No, no, no. Yes, you need to know your earnings and you need to know what you’re spending, but that’s only part of the story of how your business is doing. You need to track closely what’s going on with your cash balance and what’s moving it up or down.

3. Ignoring compliance

Ignorance is not an excuse that regulators will swallow. The risks are too high to be in denial. You need to get it done. Government intervention and auditor interference can make life downright unbearable if you don’t. And growth could stall as senior leaders get pulled off their day-to-day work to deal with pressing inquiries. In addition to the high stress involved, audits are disruptive to the business, and troublesome findings can result in penalties and interest charges. And there’s also the possibility of losing the ability to conduct business.

Private companies have a less weighty compliance load than public companies, but the list is still mighty long, between tax returns, labor laws, federal and state regulations, secretary of state filings, and so on. Lean on compliance experts who can help the company stay up-to-date so you can focus on your core job—growing the business.

4. Not planning for the future

It’s important to have a solid business plan. Projections are based on real, solid assumptions, not a finger in the wind. They will guide the company going forward while also ensuring that smart practices become a part of doing business. Smart moves include forming some good habits from day one. After all, make a mess in the early days and you’ll be mopping it up for years to come.

Do it right while you can—keep the books clean from the start, and you’ll see the benefits over time (lenders, for one, need to make sense of your finances or they’ll move on to the next business). Being GAAP compliant as much as possible will similarly help you in the long run. The same goes for compensation decisions you make today—If you’re doling out stock or options, invest in a 409A valuation once a year and anytime a major event occurs (such as a significant financing deal). This will help you stay out of trouble with the IRS and ensure that you properly account for stock comp.

The point here is to think about long-term efficiencies rather than just focusing on the short term. An exit strategy might sound like some far-off dream, but it should always be present when decisions get made. When the time comes to go IPO or to make the company look attractive for an acquirer, the work involved is huge—it can be even more enormous and make any deal shaky if lots of mistakes were made along the way. Set your financial processes in place to scale. Think of the long term.

5. Pretending but not really carrying out policies and procedures

Sometimes startups get sloppy about this. Accountants by nature, we’re sticklers for processes and procedures, but we also know these don’t come naturally to everyone. When your business is streamlined and humming along, extra work can be avoided and expenses kept in check. This happens when people know what is expected of them (policies, please!), the company keeps good records as a matter of course, and everyone knows that certain behaviors will not be tolerated.

Policies and procedures do not slow a business down—they actually keep it moving. Keep strong records now—make it a habit—and you’re setting up the company for efficiency.

Companies tend to be fairly simple at the start stage. As the complexities grow, the mistakes that are made in the early days will start to appear. The cracks can soon be crevasses. Trusted advisors who have the financial wisdom and high-level perspective can steer the ship well and head off mistakes before they happen.

RoseRyan guru Michelle Hall loves to help startups with getting their finances in order, meeting their compliance requirements, budgeting and forecasting, and more. Earlier in her career, she held roles at Netflix, Mercury Interactive, American Express and other firms.

Tracey Hashiguchi heads up RoseRyan’s small business team, a dedicated group of consultants helping companies launch and grow. She develops RoseRyan’s strategy, programs and consulting team for helping startups get to the next level. Before joining RoseRyan, Tracey worked at Deloitte.

Chris Kondo is a small business consultant helping companies make strategic decisions to manage their growth and run their accounting and finance functions. His consulting work at RoseRyan has put him in the finance teams at Roku, GenturaDx, Versatis and Lytro. He previously was vice president of finance at Azanda Networks, corporate controller at Chips & Technologies and director of business development at Intel.

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The CFO juggling act of managing resources

A crazy sprint in the middle of a marathon would leave anyone gasping for oxygen. It’s not sustainable. Go too fast and there’s a risk of real burnout. Then again, go too slowly and there’s the risk of a competitor catching up and taking away your lead.

Sound familiar? Companies are always in the turbulence of growth, whether they’re chasing after it or striving to complete a mega transaction, like an IPO. And CFOs are at the helm of it all. On top of all the roles that they already take on at their company, finance chiefs are also guiding the velocity. Are they deploying the right amount of resources, or are they expending them much too quickly? Thoughtful growth is the secret.

RoseRyan director Stephen Ambler, who has served as CFO in several companies, shares his wisdom about the essential areas in finance that need the close attention of senior finance executives. These include:

Cash flow: Finance organizations can’t afford to look away for a minute. Literally. In RoseRyan’s latest intelligence report, A CFO guide for managing resources, Stephen relays the tough squeeze one company fell into when it lost a grip on its cash position. Sounds unbelievable, but it does happen, and it can sink the ship.

Growth strategy: The pace of growth is not always something the company can control, but a realistic forecast and deliberate path should be developed—wild guesses have no place here.

Talent: It’s about timing and understanding that you get what you pay for—even with people. That includes knowing when hiring junior-level employees does or does not make sense. Having the wrong mix of people may actually cost the company more over time. And today’s world is all about outsourcing. Know when to bring in the ninja team to get things done in a tough, overflow situation.

Upgrading systems: Get a sense of when the company has outgrown processes and systems (QuickBooks can be awesome as a small-business accounting program but an upgrade will be needed when the company has the public markets in its sights). Are the systems in place scalable and appropriate for the company’s size and complexity? If not, it might be time for an upgrade.

Managing resources well is an ongoing effort. No matter what size company or how fast you are growing, the same essential best practices will help you to stay in control of your financial situation. Be the steady hand at the helm. Along the way, don’t hesitate to lean on trusted advisors who can help you over the finish line.

Is your company galloping ahead without a well-centered plan? Or are you too conservative in your spending approach? To understand growth path considerations, check out A CFO guide for managing resources.

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