ACCTFAX Bulletin Board

GENERAL EDITOR Philip W. Miller NSAC Assistant Education Director (804) 339-9577 pwm01@comcast.net

ASSISTANT EDITORS Greg Taylor Williams & Company 806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

Bill Erlenbush Education Director (309) 530-7500 nsacdired@gmail.com

WARNING: IT’S CRUNCH TIME FOR PRIVATE COMPANIES ON REVENUE RECOGNITION We have been talking about the new Revenue Recognition standard for several years now. We pointed out that private companies (most of us) got additional time to implement the standard. But, guess what? It is now crunch time!! The November 2018 issue of The Journal of Accountancy provides some valuable insight into the task ahead.

“It’s understandable that FASB’s new revenue recognition standard might not be top-of-mind for private company finance personnel despite the impending effective date. The standard takes effect for private companies for annual reporting periods beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. So effectively, private companies must adopt by the 2019 year end. That doesn’t give them much time to work on implementation, but it’s still easy for them to overlook the importance of this new standard.”

Private company leaders are running out of time to comply with this significant new standard. The most important thing, of course, is to get started. After that, advises the Journal, here’s what private companies can do to make sure they’re able to make an effective transition to the new standard.

“Identify your “point person.” Your organization needs somebody in charge of this implementation to make sure it gets done correctly. That’s likely to be someone from the finance department. It’s also important to make sure this person

has the support of people from operations, sales, legal, and other departments to help the implementation go smoothly.

Determine the resources you will need. Will your point person be able to handle this implementation alone? Will it be necessary to get other help, perhaps from consultants or temporary accounting services? You need to make sure you have the right people to do this job.

Develop a timeline. A well-organized set of milestones, roles, responsibilities, and accountabilities will help you make orderly progress.

Scrutinize your contracts. The information in your contracts is the key to complying with the five-step revenue recognition process described in the new standard. In some cases, this close examination of your contracts may show you improvements that can be made in operations. For instance, if you find that certain contracts are losers from a revenue perspective, you may choose to renegotiate them.

Evaluate systems. “Do I have those controls in place, and am I able to implement this? And on top of that, you have to look at, ‘Does my accounting system give me the ability to do this?’” If your system can’t do the job, it may be time for an upgrade.

Create strong controls over adoption. If your adoption processes are not airtight, you will be susceptible to problems later.

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Pick the right transition method. In many cases, the modified retrospective version will be easier for companies to implement. But the full retrospective transition will provide investors and others with more of the information they need to compare the past to the present.

Pay close attention to disclosures. One of the principal goals of the revenue recognition standard was to provide investors with more disclosures and useful information than in the past. It’s important to make sure your systems capture the right data to enable those disclosures to be made correctly.”

All this implementation work will be a significant task for some private companies. And with 2019 just a couple months away, ignoring this task now may lead to a lot of angst for companies next year.

RELATED: FASB STAFF PAPER PROVIDES EDUCATIONAL EXAMPLES OF REVENUE RECOGNITION IMPLEMENTATION FOR PRIVATE COMPANY FRANCHISORS On November 5, 2018, the Financial Accounting Standards Board (FASB) announced the release of an educational FASB staff paper that provides implementation examples to help private company franchisors preparing to implement the revenue recognition standard in 2019.

“Stakeholders asked us to clarify how private company franchisors should recognize certain franchise fees when the revenue recognition standard takes effect next year,” stated FASB Chairman Russell G. Golden. “In response to their requests, the FASB staff prepared an educational paper that provides illustrations that should help these stakeholders successfully implement the standard.”

The FASB staff paper primarily targets questions related to the use of judgment in identifying performance obligations. Under current accounting guidance, a franchisor typically recognizes an initial franchise fee when a new franchise location opens. Consequently, the franchisor has not had to assess whether preopening services are a separate deliverable.

Under the new revenue recognition guidance, the franchisor will be required to determine if the preopening activities contain any distinct goods or services. To help franchisors transition to the new guidance, the FASB staff paper provides educational illustrations of how a franchisor may make these assessments.

“The FASB staff paper is one of many examples of how we’re continually monitoring and supporting the successful implementation of our standards,” added Mr. Golden. “These efforts are made possible by the valuable input provided by organizations like the International Franchise Association and its members, and we thank them for their assistance in ensuring our standards are, in fact, ‘standards that work.’”

“IFA commends the FASB for working with our members to issue educational resources that illustrate how franchise brands should recognize revenue related to initial franchise fees,” said IFA President and CEO Robert Cresanti. “This educational material will help accountants accurately apply the standard and contribute to the financial stability of franchise companies.”

The FASB staff paper, along with complete information about the revenue recognition standard, is available at www.fasb.org.

FASB PROPOSES NARROW-SCOPE IMPROVEMENTS TO CREDIT LOSSES STANDARD On August 20, 2018, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would amend the transition requirements and scope of the credit losses standard issued in 2016. Stakeholders are encouraged to review and provide comment on the proposal by September 19, 2018. First, the proposed ASU would mitigate transition complexity by requiring entities other than public business entities to implement it for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. This would align the implementation date for their annual financial statements with the implementation date for their interim financial statements.

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Second, the proposed ASU would clarify that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard.

More information about the proposed ASU can be found at www.fasb.org.

FASB IMPROVES THE EFFECTIVENESS OF DISCLOSURES IN NOTES TO FINANCIAL STATEMENTS On August 28, 2018, the Financial Accounting Standards Board (FASB) issued two changes to the FASB’s conceptual framework and two Accounting Standards Updates (ASUs) that improve the effectiveness of disclosures in notes to financial statements.

A new chapter in the Conceptual Framework on disclosures. The chapter explains what information the Board should consider including in notes to financial statements by describing the purpose of notes, the nature of appropriate content, and general limitations. It also addresses the Board’s considerations specific to interim reporting disclosure requirements.

An update to an existing chapter of the Conceptual Framework for its definition of materiality. The amendment aligns the FASB’s definition of materiality with other definitions in the financial reporting system. The materiality concepts will now be consistent with the definition of materiality used by the U.S. Securities and Exchange Commission, the auditing standards of the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants, and the United States judicial system.

An ASU on Fair Value Measurement disclosure requirements. The standard improves the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.

An ASU on Defined Benefit Plan disclosure requirements. The standard improves disclosure requirements

for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020, for public companies, and for fiscal years ending after December 15, 2021, for all other organizations. Early adoption is permitted.

More information about the Conceptual Framework changes and the ASUs can be found at www.fasb.org.

LATEST DISCUSSIONS AT FASB’S PRIVATE COMPANY COUNCIL On October 9, 2018, the FASB Private Company Council (PCC) discussed and provided input on the following topics:

Consolidation Targeted Improvements to Related Party Guidance for Variable Interest Entities: PCC members were briefed on an additional criterion added by the Board to address concerns raised by some stakeholders that would preclude the private company accounting alternative from being applied to any legal entity in which a private company holds a majority of the legal entity’s voting interest. The PCC did not object to the additional criterion, noting that it should not preclude private companies from applying the accounting alternative to sibling entities under common control.

Leases Implementation: The PCC discussed ongoing lease accounting implementation activities of the FASB.

Distinguishing Liabilities from Equity: PCC members broadly supported the FASB’s efforts to simplify the accounting for the issuance of financial instruments with embedded conversion features. Several PCC members stated that current disclosure requirements for these financial instruments are adequate and did not recommend any additional disclosures for convertible instruments.

Disclosure Framework: Disclosure Review – Income Taxes: The PCC discussed the Disclosure Review project relating to Income Taxes, focusing on three main areas:

● Additional disclosures that may be needed as a result of the Tax Cuts and Jobs Act

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● Disclosures that may no longer be relevant as a result of the Tax Cuts and Jobs Act

● Proposed disclosures that comment letter respondents indicated may not provide relevant information.

Share-Based Compensation: PCC members discussed recent outreach performed with tax, valuation, and legal experts regarding the tax requirements for valuing share-based payments and the other economic factors influencing the strike price in relation to the fair value of the underlying share. The PCC expressed support for a practical expedient to assume the strike price is the fair value of the underlying share when valuing an equity-classified award, subject to certain “guardrails” to prevent entities from abusing the practical expedient. The PCC and Board agreed that the language used in the expedient should be carefully considered to ensure that the intended cost relief is realized when applied in practice.

The next PCC meeting will be held on Tuesday, December 11, 2018, in Norwalk, CT.

FASB IMPROVES CONSOLIDATION ACCOUNTING On October 31, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). A variable interest entity is an organization in which consolidation is not based on a majority of voting rights.

“Simplifying VIE guidance for private companies is based on recommendations from the Private Company Council (PCC) and addresses stakeholder concerns that it is difficult to apply current consolidation guidance for VIEs under common control,” said Russell G. Golden, FASB chairman. “It provides private companies the choice to not apply VIE guidance to their common control arrangements—thereby reducing costs without compromising the relevance of the financial reporting information to financial statement users.”

Private Company Accounting Alternative The new guidance supersedes the private company alternative for common control leasing

arrangements issued in 2014 and expands it to all qualifying common control arrangements.

Under the new standard, a private company could make and accounting policy election to not apply VIE guidance to legal entities under common control (including common control leasing arrangements) when certain criteria are met. This accounting policy election must be applied by a private company to all current and future legal entities under common control that meet the criteria for applying the alternative. A private company will be required to continue to apply other consolidation guidance, specifically the voting interest entity guidance.

Additionally, a private company electing the alternative is required to provide detailed disclosures about its involvement with, and exposure to, the legal entity under common control.

Decision-Making Fees The standard also amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). Therefore, these amendments likely will result in more decision makers not consolidating VIEs.

For organizations other than private companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this ASU are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.

More information about the ASU, including a FASB In Focus overview, can be found at www. fasb.org.

FASB IMPROVES ACCOUNTING FOR COLLABORATIVE ARRANGEMENTS On November 5, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the interaction between the guidance for certain collaborative arrangements and the Revenue Recognition financial accounting and reporting standard.

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A collaborative arrangement is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. The ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard.

The ASU also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. It accomplishes this by allowing organizations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition standard.

For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other organizations, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.

More information about the ASU is available at www.fasb.org.

FASAB PROPOSAL SEEKS CLEARER MATERIALITY GUIDANCE The Federal Accounting Standards Advisory Board (FASAB) is asking for public comment on a proposal to clarify the implementation of materiality concepts in the issuance of federal financial statements.

A proposed Statement of Federal Financial Accounting Concepts (SFFAC) titled Materiality, issued Oct. 16 by FASAB, would (1) provide materiality concepts, (2) specify the scope of materiality, and (3) list factors to consider when applying materiality.

“The intent is for clearer materiality guidance to improve the understanding and comprehension of federal financial reports by financial statement users,” FASAB Chairman Scott Showalter said in a news release.

Comments on the exposure draft are due by Jan. 23, 2019. FASAB is encouraging respondents

to view the exposure draft and respond to specific questions contained in the document. The ED and the questions are available on the FASAB website at fasab.gov/documents-for-comment.

RELATED: IASB CLARIFIES DEFINITION OF MATERIAL In an effort to make it easier for companies to make materiality judgments, the International Accounting Standards Board (IASB) has issued a clarified definition of “material.”

The definition of materiality is a crucial element in accounting because it helps companies decide whether information is important enough to be included in their financial statements. To clarify the definition, the IASB amended IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Under the new definition, information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions that the primary users of generalpurpose financial statements make on the basis of those financial statements, which provide financial information about a specific entity.

The old definition stated that omissions or misstatements of items are material if they could, individually or collectively; influence the economic decisions that users make on the basis of the financial statements.

The IASB updated the definition because some companies had difficulty using the old definition. The amendments are intended to clarify both the definition of material and how the definition should be applied. The explanations that accompany the definition have been changed with the intent of providing more clarity, and the amendments are intended to ensure that the definition of material is consistent across all IFRS.

The changes take effect on Jan. 1, 2020, but early application is permitted.

SEC INVESTIGATIVE REPORT: PUBLIC COMPANIES SHOULD CONSIDER CYBER THREATS WHEN IMPLEMENTING INTERNAL ACCOUNTING CONTROLS On Oct. 16, 2018, the Securities and Exchange Commission issued an investigative report cautioning that public companies should consider cyber threats when implementing internal accounting controls. The report is based on the SEC Enforcement Division’s investigations of nine

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public companies that fell victim to cyber fraud, losing millions of dollars in the process.

The SEC’s investigations focused on “business email compromises” (BECs) in which perpetrators posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. The frauds in some instances lasted months and often were detected only after intervention by law enforcement or other third parties. Each of the companies lost at least $1 million, two lost more than $30 million, and one lost more than $45 million. In total, the nine companies wired nearly $100 million as a result of the frauds, most of which was unrecoverable. No charges were brought against the companies or their personnel.

The companies, which each had securities listed on a national stock exchange, covered a range of sectors including technology, machinery, real estate, energy, financial, and consumer goods. Public issuers subject to the internal accounting controls requirements of Section 13(b)(2)(B) of the Securities Exchange Act of 1934 must calibrate their internal accounting controls to the current risk environment and assess and adjust policies and procedures accordingly. The FBI estimates fraud involving BECs has cost companies more than $5 billion since 2013.

“Cyber frauds are a pervasive, significant, and growing threat to all companies, including our public companies,” said SEC Chairman Jay Clayton. “Investors rely on our public issuers to put in place, monitor, and update internal accounting controls that appropriately address these threats.”

Stephanie Avakian, Co-Director of the SEC Enforcement Division, said, “In light of the facts and circumstances, we did not charge the nine companies we investigated, but our report emphasizes that all public companies have obligations to maintain sufficient internal accounting controls and should consider cyber threats when fulfilling those obligations.”

The issuance of the SEC’s report coincides with National Cybersecurity Awareness Month.

EFRAG PUBLISHES DRAFT COMMENT LETTER ON FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF EQUITY The European Financial Reporting Advisory Group

(EFRAG) has issued a draft comment letter on the IASB discussion paper DP/2018/1, ‘Financial Instruments with Characteristics of Equity’. The IASB published its DP for comment on 28 June 2018. Final comments are due to the IASB by January 17, 2019.

While EFRAG supports changes to IAS 32 Financial Instruments: Presentation, in its draft comment letter, EFRAG explains several “reservations” it has about the amendments proposed in the DP. These reservations include:

● the balance of costs and benefits of the information provided by the attribution approaches;

● separate presentation in the statement of financial position and statement of financial performance of derivatives, embedded derivatives and hybrids;

● accounting for standalone derivatives to extinguish an equity instrument consistently with a compound instrument;

● the proposed removal of the foreign currency rights issue exemption; classification changes for financial instruments that do not raise concerns in practice.

The draft comment letter also discusses new terminology introduced by the IASB’s DP:

EFRAG acknowledges that a better articulation of IAS 32’s underlying principles could be an effective way to improve the consistency, clarity and completeness of the requirements and would require new terminology. However, new terminology would also require preparers and auditors to reconsider a wide range of past classification decisions. Accordingly, this approach, while addressing various interpretive issues, will also cause some disruption, create additional costs for preparers and risks the emergence of new issues and uncertainties.

The letter also asks that the IASB consider accounting for all standalone and embedded derivatives and derivative assets and liabilities under the scope of IFRS 9.

Comments on EFRAG’s draft comment letter are requested by December 3, 2018. For more information, see the press release and the draft comment letter on the EFRAG website. EFRAG has also released a four-minute video introducing the draft comment letter.

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