By RoseRyan
2020 has been a craptastic year for most people in some way. Many companies were significantly adversely impacted by the economic fallout due to COVID-19, and yet others saw their business go through unprecedented growth. We all look forward to wrapping up this year and moving on, but you have a few areas to focus on before 2020 comes to a close.
Accounting and Reporting Considerations
Impairment tests. Impairment tests for long-lived assets, intangibles and goodwill are based on forward-looking cash flow projections. It’s always been a challenge to see what’s going to happen, but the view is even foggier: There is a lot of uncertainty around COVID-19’s impacts: How bad will this get? How long will it last? When will things recover? And nobody has the answers. In the meantime, impacts to your supply chain, customer demand, ability to collect receivables, and so much more, should all factor into your projections.
Our best advice:
- Develop a flexible framework. Make it so you can easily update modeling for changes in assumptions and perform sensitivity analyses. As always, document your assumptions and keep good records of how you came to your decisions.
- Start a dialogue with your auditors. It’s a good time to check in. Get ahead of any issues that may arise, so you can avoid 11th-hour surprises as the audit process gets underway, particularly with respect to your assumptions.
Don’t forget: The accounting guidance for impairment requires you to evaluate assets in a particular order. For more about this and the other issues that auditors will be closely reviewing, see “Time for a Checkup: How COVID-19 Can Affect Your Financial Statements?.”
Debt. Any forgiveness or restructuring requires scrutiny for appropriate accounting treatment.
Lease agreements. Have you recently had lease modifications? If so, you weren’t alone—many companies renegotiated lease terms and were granted concessions by their landlords. That raised a lot of accounting questions, and the FASB responded with a Q&A document to help clarify how to apply the lease accounting guidance for concessions related to the pandemic .
Companies finding themselves with excess space may need to update assumptions used in their impairment analysis, as demand for office space in many locations has plummeted and finding a subtenant may not be feasible.
Equity awards. Did you make any modifications to incent employees whose compensation was adversely impacted by market price declines or missed performance goals? Remember to update your accounting for this, too.
Reductions in force (RIF). If you’ve gone through a RIF or have excess manufacturing capacity, remember to reassess costs capitalized to inventory, including overhead allocations. Declining demand or prices for your company’s products may signal the need for potential write-downs for excess inventory and valuation at lower of cost or market.
Another potential accounting effect of a RIF is on assumptions you are using for the expected term on your equity awards—this may need another look as well.
Revenue recognition. You’ll need to update your estimates for variable consideration. Did you modify any customer contracts, such as granting extended payment terms or other concessions? Check to be sure you have applied the appropriate accounting guidance.
Watch our associated Impairment Tests video, in which finance and accounting consultant Mary Castellucci shares some examples of impairment considerations for right-of-use (ROU) assets and the importance of building a flexible model.
Going concern evaluation. This may have been a relatively easy task for your team in the past, but due to the economy falling off a cliff this year, you likely have a less straightforward task ahead of you. Remember the timeframe—you need to assess the ability to continue as a going concern for 12 months from the date of issuance of your financial statements. In thinking about your ability to generate sufficient cash to finance your company during this assessment period, consider the extent of operational disruption, such as:
- Diminished demand for product/services
- Ability to manage expenses
- Access to existing sources of capital, such as lines of credit
- Temporary closure of your facilities (whether due to government action, such as shelter-in-place mandates, or a management decision)
- Disruption to supply chains causing delays or an inability to obtain product
- Increased interest expense due to higher debt levels
- Incremental debt at higher interest rates
- Workforce disruptions
Also think about potential noncompliance with debt covenants and whether that will accelerate due dates or result in restrictions on future borrowings—and put a squeeze on your working capital.
As with impairment testing, we recommend building a flexible framework for your assessment that you can update for changes in assumptions and to perform sensitivity analyses (also be sure to gather supporting documentation for your assumptions). You will want your operations people involved so that your finance team is armed with the best understanding of your business and cash flow as they assess the assumptions and sensitivities used.
Watch our associated Going Concern video, in which RoseRyan consultant Vicki Velez discusses how best to tackle your going concern assessment.
PPP Loan Forgiveness and Accounting Issues
No discussion about 2020 would be complete without a discussion about PPP loans. As of August, 5 million SBA loans totaling $525 billion were approved under the Paycheck Protection Program, but uncertainty lingers as companies seek 100% forgiveness.
Forgiveness timing. When should you file for forgiveness? While the intent was for the loan forgiveness to be a nontaxable event, the IRS published Notice 2020-32 stating that expenses related to loan forgiveness are not deductible, which in effect made the loan taxable for a number of companies. This was further reinforced in November when the IRS published Revenue Ruling 2020-27 indicating that it doesn’t matter if a taxpayer applies for forgiveness in 2020, or waits until 2021, since the amount is foreseeable in both situations. Therefore, taxpayers can’t deduct the expenses on their 2020 tax return. Revenue Procedure 2020-51 provides a safe harbor for deductibility of these expenses in 2020; however, the company will need to represent and disclose in the 2020 return that the forgiveness was denied or that the company decided not to request forgiveness of the loan.
Members of Congress, the AICPA, practitioners and taxpayers have requested that the IRS change its position regarding the deductibility of these expenses. At this point, it will take an act of Congress to make the change. Lawmakers have said that they are working to include legislation that taxpayers qualify for expense deductions even if their loans are forgiven. This could be included in government spending legislation that Congress must pass by December 11th.
There are now multiple forms available for taxpayers to request forgiveness. Companies should review the forms to determine which one is applicable to them.
Accounting. Another consideration is how to classify the PPP loan on your balance sheet. There is no specific authoritative guidance for this, so you’ll need to analogize—the most appropriate method for accounting for PPP forgivable loans is to follow the guidance under FASB ASC 405‐20 Liabilities: Extinguishment of Liabilities. You would record the loan as debt, and record the extinguishment of the debt when forgiveness of the loan is officially provided by the lender.
Watch our associated PPP Loan Forgiveness and Accounting video, in which RoseRyan’s founder and chair, Kathy Ryan, answers some frequently asked questions about several sometimes contradictory-seeming PPP loan forgiveness and accounting issues.
SOX Considerations
Changes in the economy and changes in how (and where) work gets done mean you have new considerations as you look at your internal controls and how you attest to them:
Materiality and risk assessments. Be sure to address risks related to external events and their impact on your business. Update your materiality assessment as you have more data—assumptions made earlier in the year may no longer be valid.
Review of control activities. What changed as a result of becoming a virtual workforce? Yes, ideally this would have been addressed back in March when these changes occurred, but if you haven’t, then now is the time.
- How are review controls being documented? For manual review processes—not everyone has access to a printer/scanner—if you’ve changed from documenting reviews through manual signature, tick marks and review notes, what evidence are you retaining to show how and when these reviews were performed?
- Have work duties been reallocated (either because of a RIF or to accommodate different physical location, or for other reasons) that may have segregation of duties implications? Is additional oversight or review controls needed to mitigate this issue?
- Is different system access needed to accommodate reallocation of work duties? Is the access properly approved? (And if the provisional access is no longer needed, did you remember to remove the access?)
- Did you update your documentation of controls? You may have made a number of changes in how your controls operate—did you update your process narratives, flow charts and control matrices to reflect the changes (e.g., to reflect what evidence you have to verify the control was performed)?
- Have you reviewed your design of controls where areas of judgment are involved? This will be especially scrutinized by the auditors. Methodologies and assumptions used in prior years may be insufficient this year. Be sure your control design includes robust and supportable back-up as part of the evidence of review and approval. Pay particular attention to estimates and reserves, impairment analysis, and renegotiations of debt and leases, to name a few.
Watch our associated SOX Considerations video, in which RoseRyan consultant John Shannon talks about the impact of the COVID pandemic, economic fallout and remote work on your SOX controls.
Whether your business experienced big ups or downs this year, 2020 has been a year like no other. And so will be some of the considerations you’ll make as you prepare for the moment we can officially close the door on this period in time. Overwhelmed? Feeling uncertain? Our ‘Checklist for a Smooth Year-End Close’ will get you through it. And finance and accounting experts can help guide you through the uncharted weeks ahead, to prepare your company for 2021.
What Are the Types of Corporate Governance?
Companies need order and structure. No one would dispute that—getting to an orderly place, however, often requires constant refinement as a company rapidly grows, hires more employees, builds out its organizations, and takes on bigger challenges, such as pursuing an initial public offering. This is where different types of corporate governance can help the company get a handle on its risks, tamp down inefficiencies that have evolved over time, and ensure that the financial information can be relied upon.
What Are the Different Types of Corporate Governance?
Interpretation of the term “corporate governance” varies. It can apply to the overall structure of a company, from the many organizations within it—Finance, HR, IT and so on—to the makeup of the executive management team and the board of the directors.
Another way to look at this term centers on the controls, procedures and policies that direct how the company’s employees and managers properly and ethically conduct their work. Clearly defined roles and responsibilities, segregation of duties, and documented policies (from code of conduct to expense reimbursement policies) create a uniform understanding of expectations, while also helping the team minimize the risk of making errors, operate as efficiently as possible, and meet compliance obligations.
As a finance and accounting consulting firm, we primarily focus on the corporate governance types that fall under these categories:
Which Type of Corporate Governance Applies to My Organization?
The types of corporate governance systems or types of corporate governance models vary among companies, depending on their growth stage in the business lifecycle and whether they are publicly traded or plan to be. The corporate governance mechanisms your company adopts should be customized for how the business operates.
One of the standout lessons learned from early implementation of SOX 404 was that one size does not fit all. Many companies ended up with bloated internal control systems in an attempt to get through their audits of internal controls—but those systems turned out to be incredibly difficult to manage and ineffective.
The right internal controls—personalized to your company size, the way you operate, and your people—are preferable. You want a workable solution, not compliance for compliance’s sake.
For companies not yet needing to comply with SOX, getting to the point of a practically developed corporate governance structure can be challenging, particularly if no one on staff previously dealt with SOX or has any public-company experience. Outside experts can help them take a look at their documentation methods, IT systems, risks, and policies and procedures to see where there any gaps or inefficiencies, and where streamlining and orderliness could occur.
Corporate governance practices related to the finance function are typically designed not only to bring “order to the chaos”, but to ensure that everyone can have faith in what the company is reporting about its financial situation. With the right internal controls in place, management can keep their attention on running the business and have confidence when it comes time to certify annual and quarterly reports.
When to Take a Look at Your Corporate Governance System
Many companies are prompted to take a hard look at their corporate governance system when they consider a major strategic transaction, such as going IPO or trying to attract the attention of a special purpose acquisition company (SPAC). Unfortunately, though, some companies try to do a lot all at once, with limited resources, to get ready for the changes and improve their valuation. Under a crunched time frame, they start tackling projects they have long put off, such as upgrading their finance and accounting systems, introducing financial integrity measures that will result in more reliable financial statements, and also help them have as smooth a first audit as possible. Expert help becomes indispensable to get this done properly.
Is Now the Time?
As companies mature and the complexity of the business expands, so does the outside scrutiny and the expectations of shareholders, regulators, and other interested parties. As you look out toward your company’s strategic goals, are your financial operations on the up and up, or have cracks started to show that could affect the reliability of your financial statements? Can others trust what you are putting out? Do you trust what you are putting out? With a monitored and properly-managed corporate governance system, you should be able to. When the time comes to review your corporate governance or put new financial policies in place, turn to experts who know corporate governance mechanisms and best practices, and can customize their solutions to work effectively for your company.
How to Complete Your Financial Health Assessment
A financial health assessment is an impactful way to understand where your company stands. Does your company have a solid financial and operational foundation for a positive growth trajectory? Are outdated or inadequate finance and accounting systems and processes preventing you from seeing the complete financial picture of the company? An objective assessment provides a starting point for rethinking the company’s finance foundation or properly developing it. A financial assessment of company health will highlight key weaknesses that require attention now, along with strengths that the company will want to continue to value.
So many factors go into determining the financial health of a company. An expert assessment can cover the essential bases, to indicate whether in fact a company is set up to consistently make good on its financial obligations in the near future and over time. The findings will also foretell if the company is on track to meet its growth goals (or could prompt an emerging growth company to get going on drawing up plans, such as where it sees its market share and valuation over the next three or five years). A properly prepared assessment goes a step further than simply determining whether the company can survive over the next few months, and explores whether it’s in a good financial position to scale up and grow.
What Is a Financial Health Assessment?
A financial health assessment covers a wide range of areas in the financial and operational areas of a company, to gain a sense of the strengths and weaknesses in current practices – among other things – that could be affecting its growth plans. At RoseRyan, our Rapid Assessment for Emerging Growth is an interactive tool that quickly assesses 16 essential areas of finance of startups. We ask a series of questions to get at how the company’s current operations and financial management are set up and performing, and how—if nothing changes—they are likely to perform over time.
Areas this assessment touches upon include:
A financial health assessment tool, such as RoseRyan’s, can reveal critical missing pieces to senior leaders. Focused on other areas of the business, they may have lost sight into how the business is really doing. Or the assessment could simply trigger a meaningful conversation about what needs to change to put the company on more solid footing. It can give company leaders an opportunity to reflect on how far the company has come, but also what’s required to get to the company to the next growth stage.
Why is a Financial Health Assessment Important?
As a company takes on new initiatives, hires additional people, introduces new products or services, or pursues new innovations: all of these activities can have an effect on the company’s ability to keep tabs on its performance and set a realistic, data-driven agenda. The financial health assessment can help you determine if the company is producing and looking at the right information and measuring the right metrics to inform decision-making. An assessment can clear up where financial operations could be strengthened so that the company can better position itself for scaling and growing in a sustainable way.
But don’t think of a financial health assessment service as a healthy vs. unhealthy determination. It’s a view of a certain period of time. By taking a financial assessment today, you can later see, perhaps a year from now, how the company has improved and where further improvements could be necessary.
How to Complete Your Financial Health Assessment
Once you see where the trouble spots are hiding, or where the weaknesses lie, that’s when a plan for improvements can be made. Running a company or managing an organization entails constantly improving—figuring out what can run more efficiently, or more smoothly, to steer the company in the right direction. View RoseRyan’s financial health assessment tool as a starting a point for that endeavor.
Sign up for your rapid assessment with RoseRyan today. After a dialogue with us, you’ll have an insightful report on areas of your finances and operations that could use some sprucing up—and a baseline for to see how you far you can take your company in the future.
What Is a Financial Consultant and What Do They Do?
You may be wondering what a financial consultant is and what a financial consultant can offer your business. We take a look at this service in more detail in this article.
Your finance team is missing out on a critical skill to get a project done. You’ve got a head-scratcher of a technical accounting issue. Or you could use some advice and foresight about a strategic change the business is contemplating. This article explains the role of financial consultants and how they can help your company.
What Is a Financial Consultant?
Because of the diverse nature of what financial consulting pros are capable of—and the many finance and accounting issues they can address—defining a financial consultant isn’t a clear-cut endeavor. Financial consultants work closely with companies to advise them on a problem or growth plan; provide critical, sometimes temporary, support when the finance team is missing a particular skill or role; and lead finance-related strategic projects, such as implementing a new accounting system, streamlining the SOX program, or helping the company become more attractive to potential buyers or investors.
Their backgrounds can be quite diverse, as well. At RoseRyan, many of our consultants love the independence and variety that the consulting life affords them, combined with a predictable paycheck and professional support that working with an established firm provides. Many have had careers in both corporate finance and public accounting firms.
What Does a Financial Consultant Do?
Financial consultants are problem-solvers, advice givers, and doers. Working alongside the CFO, or the controller, or the accounting team—or being the CFO or controller, on an interim basis—they hit the ground running and become a part of the organization, for however long their finance and accounting expertise is needed. They could help a company implement a new accounting standard, for example; liaise with the external auditor before the company’s first-ever audit; provide financial and planning analysis to guide decision making; and support a company as it’s about to become public (and then deal with all the transitional adjustments that follow).
Moreover, a corporate finance consulting firm can offer optimal solutions for a company facing a crisis, such as the need to address a material misstatement in the financial statements or the need to suddenly revisit its internal controls over financial reporting now that it’s subject to Section 404(b) of the Sarbanes-Oxley Act. When you seek out a consulting firm that employs financial consultants who have steep experience in their fields of expertise, at companies similar to yours, there’s miniscule, if any, ramp-up time. The financial consultants know the right questions to ask to get up to speed on your business—and get the job done.
The Main Mission of Financial Consulting Firms
Top financial consulting firms vary in their size, business model, expertise, corporate culture, and areas of focus. As a financial consulting company based in the San Francisco Bay Area, RoseRyan serves companies of all types, from emerging growth and fast-moving pre-IPO companies to Fortune 100 enterprises. Our corporate finance consulting solutions—made possible by a diverse team of corporate finance veterans, accounting firm alums, and finance whizzes—include helping clients solve problems, providing financial advisory expertise, strengthening the finance function of the company, and preparing the organization for a major transaction.
Consulting: Finance Teams Benefit from Experience
Consulting on finance matters requires financial consultants to wear many hats—a different one for each client. They’re fully adaptable to each and every client. In fact, that’s what’s why we love what we do. As financial consultants, we find career fulfillment in being able to take on different types of projects at different companies. It’s rewarding.
For that very reason, companies greatly benefit when they seek out financial consulting firms with a longtime foothold and consultants who have seen and done pretty much everything. Companies gain best practices and powerful insights from the consultants and learn what comparable businesses are doing or have done to successfully get through a tricky spot, overcome a challenge, or achieve a growth milestone. When working with experts who have varied experience, the transition of bringing in a new consultant or a team of consultants is seamless. And incredibly helpful.
Finding the Right Financial Consultant Firm
As your company considers the options for support, advice, or practical solutions from financial consulting firms, you could narrow down your choices by asking thoughtful questions such as:
Founded in 1993, RoseRyan’s finance and accounting consulting solutions cover the wide range of issues facing companies as they grow, expand, explore exit strategies, and take on new accounting projects, processes, and systems. Find out how our tailored solutions can address finance and accounting management challenges and accelerate your company’s success.
SOX Compliance: Top Considerations for This Year’s Risk Assessment
This past year, perhaps like no other, has likely brought tremendous changes to your company -and those changes will bring up new considerations in your Sarbanes-Oxley risk assessment. Shifts in strategic plans, impacts from the COVID-19 pandemic, and new ways of working by your finance team (completely paper-less, fully remotely) could require some updates in your SOX compliance program.
The process of assessing risk for SOX compliance turns up new considerations every year, such as an increased area of focus by your external auditors because of common themes in Public Company Accounting Oversight Board inspections, or big swings in your company’s market capitalization. Here, we provide a starting point for the considerations that may be on the table this year. This list of areas to consider and questions to ask is based on years of SOX experience and our SOX experts’ 2020 work with clients.
Prepping for SOX Risk Assessments
SPAC plans: Is your company one of the many currently looking into a special purpose acquisition company (SPAC)? What is the timing of the SPAC-IPO trajectory? Unlike newly public companies that take the traditional IPO route, SPACs do not get the one-year grace period for SOX compliance. Have you started your risk assessment to begin the design of your control environment?
Impact from market cap changes: Are you prepared if your market capitalization unexpectedly increases and requires you to change your assessment of your control environment under 404(b)? In 2020 we saw a number of companies whose market cap unexpectedly increased on their measurement date of June 30. If the company had previously been exempt from the SOX requirement for external audit attestation on internal controls over financial reporting, you may find that’s gone this year. It’s time to review the improvements you’ve made in your control environment and optimize your designed controls.
What if you see a decrease in market cap? Is this decrease expected to last, or is this just a temporary market fluctuation? If you believe this exemption from 404(b) will extend for a few years, maybe modifications can be made to your SOX compliance program: Can you reduce your sampling in testing? Can you perform self-assessments in place of testing? There are many options available to continue to be compliant. But be cautious here: if this is a short-term change, your best option may be to not make any changes to your 404 program.
SOC 1 reports: Increased reliance on SaaS software has increased companies’ reliance on their service providers’ SOC 1 reports. SOC 1 report reviews need to account for the fact that many of these service providers have changed their auditors for their SOC 1 reports, and those auditors have discovered deficiencies. To mitigate these risks for 2020, you may have put temporary controls in place, performed alternate procedures, or you may have unremediated control deficiencies. Companies should identify their own controls that can address the risks identified within a SOC 1 report.
Proper documentation: Auditors continue to focus on documentation of management review controls. Increased details regarding the evidence being reviewed and any judgments made by the reviewer need to be included in the documentation and testing of the control.
Emails saying “approved” can no longer stand in, on their own, as sufficient evidence. If an email approval is the only option of obtaining approval, the approver needs to include the details of what they are actually reviewing and approving.
Accounting estimates: We’ve also seen a focus on accounting estimates and increased documentation required in the performance of the control. What is being used in the determination of the estimate? What were the input assumptions? Was there a sensitivity analysis performed? Any reports used for the estimate must be retained and provided for testing.
All-remote workforce: How companies secure and protect their information became more of a challenge when so many people started working remotely last year. Think about the effect a sprawling workforce – working on their own devices and with increased potential for exposing information to outside parties—has had on the company’s cybersecurity risk.
Also, if recent changes include relying less on paper and transitioning from processing checks to ACH payments, increased controls may be needed in your payment systems. New ways of communicating and getting work done could require a deeper look into segregation of duties and user access reviews in the finance function.
Compliance: Meeting Sarbanes-Oxley Act Requirements
A fresh perspective from experts with steep SOX audit knowledge could be what your company needs after a year of tremendous change. Our SOX experts will make sure your internal controls are addressing your company’s current risks, apprise you of auditors’ areas of focus, and keep the entire SOX program running smoothly.
RoseRyan consultant Tracy Thames excels at SOX, corporate compliance, enterprise risk management, internal audit and project management. She was previously director of internal audit at Informatica and Guidewire, and she’s a Big 4 alum (EY).
What Is Corporate Governance in Finance?
Is it time to bring order to your fast-moving, fast-growing company’s corporate governance? Could a strategic change in the near future open up the business to more scrutiny and questions about how you operate? With the right practices in place, corporate governance reins in confusion about roles and responsibilities. It introduces structure to startups, and instills organizations of all sizes with financial integrity. For more mature companies, new or enhanced corporate governance measures can prepare the business for meeting compliance obligations, such as Sarbanes-Oxley (SOX), and lead to greater efficiencies in finance, among other benefits.
Corporate governance is continually adjusted as the company grows—to meet the company’s wide-ranging obligations to its many stakeholders while also assuring management that they can stand by its financial information. Stakeholders, including investors, customers, suppliers and lenders, will also want to know they can trust what the company is reporting to them. If there’s uncertainty about a company’s integrity, they’re going to walk away.
Here are some questions that may come up as a company looks to set up, improve or enhance their corporate governance programs.
What Is the Importance of Corporate Governance?
In its most literal sense, governance is “the act or process of governing or overseeing the control or direction of something.” In the business world, the term “corporate governance” covers the rules, procedures, and processes a company follows. Corporate governance is often a work in progress, as the company expands its operations, assesses ongoing risks, brings in new employees, figures out what works and what doesn’t for its culture and people, and as the rules and regulations that they have to follow evolve.
Without clear or defined corporate governance practices, as a company brings in new and more employees, what’s viewed as acceptable behavior and how the company should be properly managed can get lost. In the finance organization, the results can lead to weak internal controls over financial reporting, unreliable financial information, the need to restate financial statements, a rising risk of fraud, and a loss of investor confidence.
Corporate Governance and Finance: What Matters Today?
Depending on the size of the company and where it is in its growth journey, today’s corporate governance programs usually involve assessing financial, operational, and compliance risks under an internal audit function; and setting up internal controls or tightening them up as part of a SOX compliance program.
Corporate finance and corporate governance experts customize appropriate policies and practices for the company—tailored to its industry, its people, its size, and its complexity. Developed and refined (“rightsized”), these efforts will lead to new efficiencies in an existing SOX program; financial statements that can be relied upon by management, investors, lenders, and other stakeholders; readiness for strategic transactions (M&A, IPO); and reduced compliance risk.
What Does Corporate Governance in Finance Entail?
For public companies, and some private companies that know they are IPO bound, corporate governance efforts in the finance organization largely center around SOX, which has significantly evolved since the law was enacted nearly 20 years ago. Companies that have mastered SOX compliance have built in efficiencies into their SOX program, overcome past tendencies to accept a bloated controls system, and know they need to be flexible. Key areas of risk change every year, as do the view of what controls are sufficient.
For instance, we once helped a public tech company with its inaugural SOX program, and for several years, continually updated and simplified its controls until the company went private. Our initial focus was on creating a lean, easy-to-maintain SOX program that worked with the company’s particular workflow. It worked so well that the company continued to keep its Sarbanes-Oxley program in place even when they were no longer obligated to comply with SOX.
What Is the Relationship Between Corporate Governance and Finance?
Corporate governance and finance go hand in hand. Developing or improving corporate governance practices is done for the benefit of the entire company, but at the heart of this effort is the finance organization. Corporate governance in financial management is necessary for ensuring clear roles and responsibilities on the team, segregation of duties, and tight internal controls that can stand up to testing—all of which lead to financial statements that can be relied upon. The need for changes may be driven by strategic plans (going public), or the board of directors may have picked up on lax policies that are affecting the confidence investors have in the company. Finance and accounting experts can help you evaluate what is needed at your company, depending on what the company has in store or what past practices require improvement.
Did this blog post get you thinking about corporate governance and financial management at your company? If it’s time for a new corporate governance structure, you need to tap internal audit expertise, prepare for SOX compliance, or explore how your programs could be more efficient, the RoseRyan team is here for you.
Financial Planning and Analysis: Unleashing Strategic Value Through FP&A
What Does Financial Planning and Analysis Entail?
Many FP&A teams are focused on assessing the annual budget, forecasting, and conducting monthly variance analysis. That’s the nuts and bolts behind the typical financial planning and analysis function, but there can be so much more to it, as a strategically-minded FP&A team brings concrete, strategic value to senior-level decision-makers and forges strong connections with key business leaders and team leads.
These connections, along with fresh perspective, are necessary for building trust as the FP&A team draws out information from the various organizations and, as partners, work together to decipher what’s working, what’s not, what the potential fixes could be—and bringing all of those findings to the forefront. With lots of competing priorities between the product management team, engineering team, and sales, for instance, an FP&A expert acts as a neutral party to bring all the viewpoints and ideas together and parse through the information. After all, every business decision comes with tradeoffs and potential impacts on other projects in the works—the financial planning and analysis expert brings these to light.
Inquisitive and forward-looking, FP&A experts ask many “why?” questions, to help the business think through the answers, and generate new ideas and possible moves forward. We sometimes look back at historical data to inform our understanding, but we’re leaning forward most of the time, as we uncover strategic insights for developing your company’s future.
How is the Business Really Doing?
FP&A experts examine and evaluate the company’s financial records to not only understand how the company has performed, but to help it make insightful, data-driven decisions for future growth. They can help devise key performance indicators, for example, and evaluate whether these are met. They can help the CFO, CEO, and the board of directors understand where stumbling blocks to growth lie, and undertake FP&A modeling to explore potential growth paths.
Sure, FP&A experts can block and tackle with standard fare like the budgets, reforecasts, or helping to finally check off that goal of moving to rolling forecasts. But to make the leap toward bringing strategic value to the organization, the FP&A function takes on sensitivity analysis and modeling/what-if analysis. They can tease out and then test assumptions—for example, they will explore whether the company is better off developing internally or using M&A activity to bring in a particular product or resource. They can model an infrastructure modernization program to see what’s needed today and over varying lengths of time.
Strategic Financial Planning: 5 Major Ways FP&A Provides Value
Unlock the strategic value within your FP&A function by understanding how this type of expertise and knowledge can be better mined and put to use for making more informed decisions. Here are a few examples.
Asking the tough questions. When you are running a business or overseeing the finances of an organization, there’s a constant question you need to answer: Are you making the right decision?
If it turns out you’re not—if that significant internal project you just okayed turns out to be a failure—then you’ll find out too late that you gave up funds and resources that would have been much better allocated toward something more worthwhile. With the right mix of skills in the FP&A team, you can have confidence in the decisions you’re about to make—or know that it’s time for a change in direction.
Speaking the language of many aspects of the business. A strong financial planning and analysis expert is multilingual—they speak accounting, operations and sales, and thrive on getting all the cylinders pumping in the same direction. I can’t tell you how many meetings I’ve witnessed where everyone nodded in agreement and then later in the hallway, or via Slack or Microsoft Teams, I am asked to translate what was said. As a finance planning and analysis expert, this is second nature to me—but it can be a concern for companies that do not have a robust FP&A function and may be dealing with unnecessary misunderstandings at times.
Keeping strategic projects rolling. M&A deals are understandably reviewed at length before the go/no go decision, but what about all the projects and investments your company should also be considering—and acting on? You need data and analysis for the benefits and trade-offs of internal investments with an unbiased framework.
Should you bring on 20 new sales reps as your company grows? What does your company need as it launches its next product? What competitive pressures will cause growth obstacles? Is a streamlining of the business in order? FP&A experts provide real-time analysis to help direct the company’s next move.
Conducting a pre-mortem. After a project has wrapped up, a post-mortem, or review of what went well and what didn’t, is a typical step. These assessments often reveal what procedures and practices should be carried over to other projects—and what should not be repeated again. Potentially even more effective and powerful is a pre-mortem, when the FP&A team instigates a review before the project is complete, to assess “What could go wrong?” This proactive review can reveal where to install some guardrails, where to shore up the information, and helps make sure the deliverable is on track while anticipating challenges.
Adopting—and adapting to—new planning software. Moving beyond Excel and into planning tools increases scalability, decreases iteration time, allows for more nimble reporting (and slicing and dicing differently on the fly), to get at a more robust, single source of truth. It’s not easy to make the move, however: Implementing new software can take a toll on an in-house FP&A team, as it can detract attention away from the core job at hand as everyone gets accustomed to the changes. Avoid burnout and ease the effort by turning to FP&A experts who have experience using a variety of tools in companies of various industries, size and complexity.
Creating a Stronger, More Strategic FP&A Function
The world is very fluid now, and we can all use any advantages we can gain. Get a leg up by uncovering the hidden power of FP&A consultants. We help companies overwhelmed by current initiatives who could use our expertise, and we can help elevate an existing FP&A team by creating a framework that will help them stretch and grow—and become the kind of team that provides reliable, insightful information all the time. Reach out to RoseRyan today to find out how we can help create, enhance, train, or be your FP&A team.
As a senior consultant at RoseRyan, Suzanne Yost excels at financial planning and analysis, revenue recognition, general operational accounting, and other vital finance and accounting functions. She previously served as financial planning revenue and revenue accounting director at Genomic Health, and she also worked at Teros and Caliper Life Sciences.
Factors That Determine Your Company’s Financial Health
Assessing a Company’s Financial Situation
By outward appearances, a fast-growing company can seem to be incredibly finally strong if it’s been able to, say, win over a large number of new customers in a short amount of time or quickly expand into another geographic location. But if the financial health of the company does not match up to these developments, it could be in for a rude awakening. It may turn out that the company is not able to fully support all those customer orders, it can’t pay off its loans for funding the expansion, or it’s about to run out of cash.
Ideally, just like you should go to the doctor for regular checkups, the financial health of a company should be regularly evaluated. Find out whether the company is on the right track or needs to make some adjustments. Determine the company’s ability to create and monitor its financial objectives. Companies that lack a solid financial foundation have an incomplete financial history and a loose understanding of business performance. Companies unable to close their books in a timely way are in this financial situation.
The Most Important Factor for Determining Financial Health
So, how financially healthy is your company? The answer depends on this critical factor: visibility. All companies need visibility into where the money is going, its revenue, the state of its cash flow, and the costs that go into running the business. Timely, accurate financial reporting provides the base for knowing this information and gauging how the company is doing.
Financial records can be dissected and analyzed to get at understanding whether current decisions are sound and helping decision-makers make the right choices for the company—whether that’s to move forward with a particular initiative or make a directional shift in the current plans.
What Is Financial Health?
Many factors can affect a company’s financial health assessment, or its ability to continue to thrive in today’s current market and sustain growth. Can it meet its short-term and long-term financial obligations? Is it profitable (since not all companies are, solvency is an important consideration)? Is it operating efficiently, or could the finance operations use an overhaul? The following aspects of the finance function need to be in place for a company to keep tabs on these factors and its overall financial health.
Having the right systems and processes in place. Is the way the company collects and processes information meeting its current needs, or has it become inefficient and prone to errors or data gaps?
Reporting and projection capabilities that keep up with the company’s growth. Does the company have reliable financial records? As companies grow, they also need to upgrade their systems (early on, homegrown spreadsheet systems no longer cut it). And does the company have financial and accounting expertise on hand to turn its financial data into useful insights for making smart decisions and thinking through strategies?
A skillful finance and accounting team. The makeup of the finance function will fluctuate as a company grows (a part-time controller and a full-time bookkeeper could be a perfect fit for a smaller business, for example). What matters is having access to the right expertise, at the right moments. The finance function provides the backbone of the company’s financial health and requires a mix of finance and operational experience to ensure the company’s directional moves are supported.
Financial Health Services: How to Improve Your Financial Health?
At RoseRyan, we help VC-funded companies determine their financial health through the RoseRyan Rapid Assessment for Emerging Growth. This interactive, specialized tool assesses 16 areas of financial health of startups and helps these companies see where there are cracks along their financial foundation. These findings can inform the start of a recovery plan or provide affirmation on current finance operations.
Oftentimes, companies need an outside, fresh perspective to see the financial and operational risks to their growth goals and opportunities they may have overlooked. We have found financial health assessments to be a good way to get to know a company—at every stage—and to reassess their progress over time. Knowing current financial and operational strengths and weaknesses helps to determine whether your current plans are sound—and what needs fixing—so you can move forward.
Is it time to assess your company’s financial health? Contact our finance and accounting consulting firm to fully understand your financial situation and gain valuable insights on how to improve it.
What Is an Accounting Consulting Firm?
Depending on the skills breadth of their consultants, accounting consulting firms can offer a wide range of services, to a wide range of companies (across industries and company sizes), or they may have a narrower niche or specialties. Searches for accounting consulting firms can turn up a smaller accounting and consulting firm that is primarily focused on bookkeeping and helping some clients grow their finance operations, and you can find accounting advisory firms firms that offer finance and accounting solutions that can grow with your emerging growth company or fit the exact needs of a problem facing your newly publicly traded company. You will also find that Big Four accounting firms offer accounting consulting services.
For an accounting advisory firm like RoseRyan, our 100+ consultants become a part of a client company’s finance organization, to take on a one-time need or perform ongoing work. As the term advisory implies, we do offer advice and guidance, and we also roll up our sleeves and do some of the same work that a full-time person at the client company may do, including leading the finance organization, serving as controller, providing financial reporting and analysis, revenue accounting, or streamlining financial operations.
Accounting Firms vs. Accounting Consulting Companies
Accounting consulting firms take on a variety of finance and accounting issues and projects that are either too much for a company’s current team to tackle or requires a specialized level of expertise that the full-time employees don’t possess, such as technical accounting matters and process improvements. Another way these consultants fill a critical gap is when the company anticipates needing a financial audit. Generally speaking, an accounting firm or CPA firm is primarily focused on preparing companies for tax time or auditing their financial statements. These firms may refer a client to a consulting firm that can help the client prepare for an audit (this way, the CPA firm can maintain its arm’s length independence and give a fairly objective review of the financial records).
To get an idea of how varied and wide reaching a consulting firm’s solutions can be, consider what a finance and accounting consulting company is capable of:
What to Look for in Accounting Consulting Firms
More often than not, a company looking for help from accounting consulting companies has a one-time or narrow need, such as an interim replacement of the controller role while the company recruits, preparing the company for Sarbanes-Oxley compliance, or implementing a new accounting standard. Accounting and consulting firms will respond to this need with one or sometimes multiple consultants, depending on timing and how many experts are needed to get the job done. Consultants could work at the client company on a five-days-a-week basis for a stretch of time or just a few hours a week.
The scope of what accounting advisory firms provide sometimes changes as new issues arise. For example, during the course of a restatement process, as the problems that led to the need to restate financial statements come to light, so do the need for process improvements and tightening of internal controls. You want the kind of accounting consulting firm, equipped with the right mix of talent, that can peel back the onion to identify such issues and come up with solutions—so that the risk of a future restatement is severely minimized. New processes and policies, stronger SOX controls, training of staff, and other changes may be in order. For these reasons, it’s helpful to choose a company that’s highly adaptive, with a range of talent among its consultants to be able to quickly provide additional support, and the kind of expertise that can address problems as they arise.
How Do I Hire an Accounting Consulting Company?
Referrals from employees or other experts in your orbit (such as your tax accountant or law firm) can put you in touch with the kind of accounting consulting companies that can best help you. As you reach out to one of these accounting advisory firms and research what they can do for you, keep the following general criteria in mind:
As a finance and accounting advisory firm since 1993, RoseRyan offers financial management and accounting solutions from highly experienced consulting professionals. We understand the many finance and accounting challenges faced by growing and established businesses. Find out how our accounting consulting company can guide your company forward by contacting us today.
It’s 10-K Filing Season – Are You Aware of All the New SEC Disclosure Requirements?
Before anyone gets excited and tries to pack away 2020 for good, there’s a bit of looking back left to do for public companies, as 10-K reporting becomes due. The forthcoming filing requirements have a twist this year: The Securities and Exchange Commission recently adopted amendments to modernize, simplify and enhance its disclosure requirements. These changes aim to make disclosures more “meaningful” while also simplifying compliance obligations for SEC registrants.
Highlights of the SEC’s Disclosure Changes
The latest changes took the SEC more than a hundred pages to spell out, so we’re not going to cover every detail here. Instead, here’s a brief summary of some of the more significant amendments, to get you going in the work ahead. (Effective dates vary, but you may want to early-adopt some of the later ones.)
First, we’ll go over some changes made to Regulation S-K that are effective for filings made on or after Nov. 9, 2020 (see the finalized rule changes here). The idea was to make the disclosure process less prescriptive and more principles-based. So, rather than focusing on “bright line” requirements of what time frames and topics to include, you are now required to give thought to what would be meaningful to an investor—in terms of determining the period involved and what information is material to share.
Item 101—Description of Business. Some of the more substantial 10-K reporting changes can be found in how you describe your business. Thinking about what is material to investors might take some time, and coordination with your disclosure committee, so it’s best to get started if you haven’t already.
Some things to think about: Have you been including information that is not really material to your story? Were you leaving out information about your products, services, and major customers that you should be discussing—such as dependencies on key products or customers, trends in market demands, competitive landscape, new product development, and so on?
You also need to discuss your human capital, and not just the number of people employed. Address what human capital measures your company uses to manage this area of the business, such as objectives around developing, attracting, and retaining employees.
Item 103—Legal Proceedings. To minimize duplicative disclosures, companies are now allowed to cross-reference or hyperlink to legal disclosures elsewhere in the document. Also new are changes to the disclosure thresholds for environmental proceedings in which the government is involved.
Item 105—Risk Factors. Cluing investors in on the most significant factors that make an investment speculative or risky will likely take some time to update under the latest SEC guidance. This discussion should be “concise and organized logically,” with each risk factor listed under a sub-caption and described. Also explain how the risk affects the company.
But don’t try to list every possible risk known to man—the SEC discourages disclosure of generic risks that could apply to any company. They also want the information to be easy to follow. If the risk factor disclosures exceed 15 pages, you’ll need to put together a quick summary (no longer than two pages) of significant risks in bullet form.
Updating MD&A Requirements
In another round of SEC filing rule amendments (see the finalized changes here), the SEC focused on modernizing MD&A requirements, to eliminate the five-year selected financial information disclosure and update Regulation S-K quarterly information disclosures.
These changes are effective Feb. 10, 2021, but companies are not required to implement them immediately—instead, each company will have a “mandatory compliance date” of its fiscal year that ends on or after Aug. 9, 2021. However, companies have the option to comply with the new rules any time after the effective date (early implementation is on an S-K item-by-item basis).
Item 301—Selected Financial Data. This change is simple—the SEC removed the requirement to disclose five years of selected financial data.
Item 302—Quarterly Information. A fairly straight-forward change, this amendment lets companies omit quarterly information from a 10-K filing as long as it has not been materially, retrospectively changed. When there are material retrospective changes, you will need to explain the reasons for the changes and disclose summarized financial information for each affected quarterly period and the fourth quarter in the affected year.
Item 303—Management’s Discussion and Analysis. These extensive revisions to MD&A clarify that the objective of the MD&A is to discuss material information to enable investors to understand the business from management’s perspective. Companies should provide analysis of historical financial operations as well as forward-looking perspectives.
Companies must also provide a discussion of the underlying reason for material changes in financial statement line items from period to period, both in quantitative and qualitative terms.
Other 10-K reporting updates:
Feeling overwhelmed? This list doesn’t even cover all the changes, and is intended to get companies thinking about how they’ll approach updating their own disclosures. Make the process easier to take on by relying on finance and accounting experts who understand all the latest SEC filing rules and can get your company through the latest compliance requirements. Contact us today to get started.
Closing the Books on 2020: What Areas of Your Finance and Accounting Need Special Attention?
By RoseRyan
2020 has been a craptastic year for most people in some way. Many companies were significantly adversely impacted by the economic fallout due to COVID-19, and yet others saw their business go through unprecedented growth. We all look forward to wrapping up this year and moving on, but you have a few areas to focus on before 2020 comes to a close.
Accounting and Reporting Considerations
Impairment tests. Impairment tests for long-lived assets, intangibles and goodwill are based on forward-looking cash flow projections. It’s always been a challenge to see what’s going to happen, but the view is even foggier: There is a lot of uncertainty around COVID-19’s impacts: How bad will this get? How long will it last? When will things recover? And nobody has the answers. In the meantime, impacts to your supply chain, customer demand, ability to collect receivables, and so much more, should all factor into your projections.
Our best advice:
Don’t forget: The accounting guidance for impairment requires you to evaluate assets in a particular order. For more about this and the other issues that auditors will be closely reviewing, see “Time for a Checkup: How COVID-19 Can Affect Your Financial Statements?.”
Debt. Any forgiveness or restructuring requires scrutiny for appropriate accounting treatment.
Lease agreements. Have you recently had lease modifications? If so, you weren’t alone—many companies renegotiated lease terms and were granted concessions by their landlords. That raised a lot of accounting questions, and the FASB responded with a Q&A document to help clarify how to apply the lease accounting guidance for concessions related to the pandemic .
Companies finding themselves with excess space may need to update assumptions used in their impairment analysis, as demand for office space in many locations has plummeted and finding a subtenant may not be feasible.
Equity awards. Did you make any modifications to incent employees whose compensation was adversely impacted by market price declines or missed performance goals? Remember to update your accounting for this, too.
Reductions in force (RIF). If you’ve gone through a RIF or have excess manufacturing capacity, remember to reassess costs capitalized to inventory, including overhead allocations. Declining demand or prices for your company’s products may signal the need for potential write-downs for excess inventory and valuation at lower of cost or market.
Another potential accounting effect of a RIF is on assumptions you are using for the expected term on your equity awards—this may need another look as well.
Revenue recognition. You’ll need to update your estimates for variable consideration. Did you modify any customer contracts, such as granting extended payment terms or other concessions? Check to be sure you have applied the appropriate accounting guidance.
Watch our associated Impairment Tests video, in which finance and accounting consultant Mary Castellucci shares some examples of impairment considerations for right-of-use (ROU) assets and the importance of building a flexible model.
Going concern evaluation. This may have been a relatively easy task for your team in the past, but due to the economy falling off a cliff this year, you likely have a less straightforward task ahead of you. Remember the timeframe—you need to assess the ability to continue as a going concern for 12 months from the date of issuance of your financial statements. In thinking about your ability to generate sufficient cash to finance your company during this assessment period, consider the extent of operational disruption, such as:
Also think about potential noncompliance with debt covenants and whether that will accelerate due dates or result in restrictions on future borrowings—and put a squeeze on your working capital.
As with impairment testing, we recommend building a flexible framework for your assessment that you can update for changes in assumptions and to perform sensitivity analyses (also be sure to gather supporting documentation for your assumptions). You will want your operations people involved so that your finance team is armed with the best understanding of your business and cash flow as they assess the assumptions and sensitivities used.
Watch our associated Going Concern video, in which RoseRyan consultant Vicki Velez discusses how best to tackle your going concern assessment.
PPP Loan Forgiveness and Accounting Issues
No discussion about 2020 would be complete without a discussion about PPP loans. As of August, 5 million SBA loans totaling $525 billion were approved under the Paycheck Protection Program, but uncertainty lingers as companies seek 100% forgiveness.
Forgiveness timing. When should you file for forgiveness? While the intent was for the loan forgiveness to be a nontaxable event, the IRS published Notice 2020-32 stating that expenses related to loan forgiveness are not deductible, which in effect made the loan taxable for a number of companies. This was further reinforced in November when the IRS published Revenue Ruling 2020-27 indicating that it doesn’t matter if a taxpayer applies for forgiveness in 2020, or waits until 2021, since the amount is foreseeable in both situations. Therefore, taxpayers can’t deduct the expenses on their 2020 tax return. Revenue Procedure 2020-51 provides a safe harbor for deductibility of these expenses in 2020; however, the company will need to represent and disclose in the 2020 return that the forgiveness was denied or that the company decided not to request forgiveness of the loan.
Members of Congress, the AICPA, practitioners and taxpayers have requested that the IRS change its position regarding the deductibility of these expenses. At this point, it will take an act of Congress to make the change. Lawmakers have said that they are working to include legislation that taxpayers qualify for expense deductions even if their loans are forgiven. This could be included in government spending legislation that Congress must pass by December 11th.
There are now multiple forms available for taxpayers to request forgiveness. Companies should review the forms to determine which one is applicable to them.
Accounting. Another consideration is how to classify the PPP loan on your balance sheet. There is no specific authoritative guidance for this, so you’ll need to analogize—the most appropriate method for accounting for PPP forgivable loans is to follow the guidance under FASB ASC 405‐20 Liabilities: Extinguishment of Liabilities. You would record the loan as debt, and record the extinguishment of the debt when forgiveness of the loan is officially provided by the lender.
Watch our associated PPP Loan Forgiveness and Accounting video, in which RoseRyan’s founder and chair, Kathy Ryan, answers some frequently asked questions about several sometimes contradictory-seeming PPP loan forgiveness and accounting issues.
SOX Considerations
Changes in the economy and changes in how (and where) work gets done mean you have new considerations as you look at your internal controls and how you attest to them:
Materiality and risk assessments. Be sure to address risks related to external events and their impact on your business. Update your materiality assessment as you have more data—assumptions made earlier in the year may no longer be valid.
Review of control activities. What changed as a result of becoming a virtual workforce? Yes, ideally this would have been addressed back in March when these changes occurred, but if you haven’t, then now is the time.
Watch our associated SOX Considerations video, in which RoseRyan consultant John Shannon talks about the impact of the COVID pandemic, economic fallout and remote work on your SOX controls.
Whether your business experienced big ups or downs this year, 2020 has been a year like no other. And so will be some of the considerations you’ll make as you prepare for the moment we can officially close the door on this period in time. Overwhelmed? Feeling uncertain? Our ‘Checklist for a Smooth Year-End Close’ will get you through it. And finance and accounting experts can help guide you through the uncharted weeks ahead, to prepare your company for 2021.