Companies preparing for accounting and auditing changes in 2014 have only a handful of recently adopted standards that will take effect in the new year to worry about. The far bigger concern, however, is the major standards with dramatic longer-term implications that are likely to get completed in the coming year.
Easily the biggest issue on corporate accounting agendas in 2014 is the soon-to-be-issued standard on revenue recognition. The Financial Accounting Standards Board and the International Accounting Standards Board are in the home stretch of a decade-long process to write converged, comprehensive new standards for how all companies should recognize revenue in financial statements. The final U.S. standard is expected in the first quarter of 2014 with an expected effective date of 2017.
“It is right around the corner,” says Peter Bible, a partner with audit firm EisnerAmper. “I would hope people have started to prepare their systems and processes to implement it. If they haven't, they've got some work ahead of them.”
Bob Laux, senior director of financial accounting and reporting at Microsoft, says the company has indeed started work on revenue recognition, but he expects to devote significantly more time and energy to it in 2014. “It's going to be the big one for us,” he said. “Internally we've thought about implementing it and done some work, but 2014 marks the beginning of going full bore into implementing it. There will be a lot of changes for a number of companies, and Microsoft is one of them.”
The company has some fairly engrained systems devoted to capturing revenue, he says, so those certainly will be affected. He plans to closely watch the work of FASB and IASB as they form resource groups focused on implementation, which are expected to address early implementation concerns as companies begin the process. “It's a high-level standard with not a lot of detail, so there will be questions about how things work,” he says.
Implementation will be a huge undertaking for all companies, even if they don't expect significant changes to financial statements, said Russell Hodge, global controller at General Electric, at a recent national accounting conference. “It involves looking at all contracts under a new lens,” he said. It will take a significant cross-functional effort, including not just the finance team, but commercial, tax, and information systems representatives as well, he said. “That's what makes this particular adoption unique. It is going to be quite a project.”
Beth Paul, a partner at Big 4 audit firm PwC, says companies will want to keep a close eye on the effective date and whether the Securities and Exchange Commission makes any comment on it. Companies are required to present as much as five years worth of financial data in their filings, which could mean they would need to state revenue figures under the new standard in 2017 dating back to 2013. “The SEC has said they are not going to comment yet on whether companies need to present a full five years under the new standard,” she said. “They have said they are going to wait for the final standard.”
Taking Control
Also at the top of accounting and audit agendas in 2014 is implementation of the new Internal Control — Integrated Framework, published in 2013 by the Committee of Sponsoring Organizations. Risk-management experts agree it's an important issue for companies to address in 2014, although the level of effort necessary to address it is expected to vary by company. “It's a mixed bag as to whether it will be a lot of work or a little work,” says Kelley Wall, director at consulting firm RoseRyan. “The first step should be to go to your auditor and ask: What do you expect of me? That will be telltale in terms of how much work it is going to be.”
“Companies are going to need to put more controls into place to identify problems around related parties. Audit committees will particularly need to get up to speed.”
—Neil Ehrenkrantz,
Partner,
Friedman
Bible says that if companies are adequately compliant with the 1992 framework, which COSO updated but didn't alter, then compliance with the 2013 framework shouldn't be difficult. Neil Ehrenkrantz, a partner with audit firm Friedman, says the adoption of the new framework is potentially complicated by the significant focus that the Public Company Accounting Oversight Board is placing on internal controls. The board recently published a practice alert for auditors spelling out a long list of concerns regarding auditors' work around internal controls. “On the company side, you're going to have to look into how this guidance is relevant even with the new framework,” he says. “That's going to be a major topic for 2014.”
Also on the horizon, the PCAOB is expected to finalize a new standard in 2014 on related parties, giving auditors new guidance on how they are expected to scrutinize transactions when a company is doing business with individuals or entities that already have ties to the company. “Companies are going to need to put more controls into place to identify problems around related parties,” said Ehrenkrantz. Audit committees will particularly need to get up to speed, he says. “I don't think everyone has a set plan now, but it needs to be addressed.”
REVENUE RECOGNITION OBJECTIVES
Below is a summary of FASB's proposed revenue recognition model and the project objectives.
Revenue is a crucial number to users of financial statements in assessing an entity's financial performance and position. However, revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs), and both sets of requirements need improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions. Although IFRSs have fewer requirements on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply. In addition, IAS 18 provides limited guidance on important topics such as revenue recognition for multiple-element arrangements.
Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:
1.Remove inconsistencies and weaknesses in existing revenue requirements.
2.Provide a more robust framework for addressing revenue issues.
3.Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
4.Provide more useful information to users of financial statements through improved disclosure requirements.
5.Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
To meet those objectives, FASB and IASB are proposing amendments to the FASB Accounting Standards Codification and to IFRSs, respectively.
Source: FASB.
Another audit issue that will get lots of attention in 2014 is the continuing debate over proposed changes to the auditor's report. The PCAOB is expected to spend at least the early part of 2014 deliberating over feedback to its controversial proposal to require auditors to add a great deal of new information to their reports, including discussion of the “critical audit matters” that prove difficult or contentious in arriving at an audit opinion. “That could have a huge impact on reporting,” says John Keyser, a partner with McGladrey. “It's going to change the dynamic between the auditor, management, and the audit committee as they work through what that audit report is going to say.”
As for standards that take effect in 2014, companies will be following new guidance under Accounting Standards Update No. 2013-11 for how to present unrecognized tax benefits when net operating losses or other similar tax losses are carried forward, says Mark Bielstein, a partner with KPMG. The guidance could lead to complex analysis of tax rules in any number of jurisdictions to determine where net presentations may be in order, he says.
Companies will also need to bone up on a number of other new standards that are mostly narrow in scope, he says. “But they could be very significant for companies that are potentially affected,” he says. Those include new rules around foreign currency issues, investment companies, and the liquidation basis of accounting, among others.
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