Accounting standards may not be on the top of your list of New Year's resolutions, but they are worth some time and consideration before 2018 gets underway. Public companies in particular face a challenging year; the long-awaited revenue recognition standard will affect their year-ends. Private companies will have a few of their own accounting standards updates (ASUs) to deal with as well, and the earlier changes can be made to financial reporting, the easier the 2018 year-end will be. The following highlights some of the key provisions going into effect for 2018 that should be on your radar.
Public Companies (Public Business Entities)
The transition to the changes released under ASU 2014-09, Revenue from Contracts with Customers (Topic 606) will be a time-consuming effort. Every contract will need to be evaluated and its accounting adjusted to meet the new requirements. Retailers may have issues with the breakage of gift certificates. Brokerage firms may find they have more performance obligations in the new standard. Franchisors might be recognizing initial franchise fee at a later time.
Selecting a transition method will be important, as it could result in issues with "lost revenue" or "double expenses." Keep in mind that reporting systems, disclosure processes, and internal controls over contract reporting will likely need updates.
Clarifying the Definition of a Business
Another major accounting standard affecting public companies in 2018 is the change to a definition of a business released in ASU Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard introduces a screen to transactions involving asset acquisitions, narrows the definition of an output, and introduces new requirements related to inputs and processes. It will likely result in more transactions being accounted for as asset acquisitions instead of business combinations. Changes must be adopted prospectively.
Derecognition of Nonfinancial Assets
The FASB's second phase of the business definition project also takes effect for public companies in 2018. ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets clarifies that entities will derecognize nonfinancial assets when the noncustomer in the contract obtains control of the asset. In partial sales, the entity will derecognize a distinct nonfinancial asset when the entity does not have a controlling financial interest in the legal entity that holds the asset, and the transfer of control of the assets is in accordance with the revenue recognition guidance. Entities will no longer have to determine whether the partial sale is in substance real estate. Guidance is also clarified for joint venture transfers of nonfinancial assets. An entity will follow ASC Topic 610-20 guidance for transfers to nonconsolidated investees and the entity transferring the asset will recognize a gain or loss on the noncontrolling interest it retains.
Financial Assets and Liabilities
ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities requires all equity instruments, excluding those that qualify for the equity method of accounting and a few other exclusions, to be recorded at fair value with changes in fair value included in net income. Instruments that do not have a readily determinable fair value may use the practicability exception, where qualifying instruments are measured at cost minus impairment, until an observable price is available resulting from an orderly transaction. Public companies will be required to disclose the fair value of instruments recorded at amortized cost, but they will no longer need to include the significant assumptions used to estimate fair value.
The standard requires financial assets and liabilities to be presented by measurement category and form of financial assets on the balance sheet. It also clarifies that the valuation of deferred tax assets for available-for-sale debt securities be performed in conjunction with other tax-deferred assets.
Restricted Cash Presentation
Released as part of the Emerging Issues Tax Force, ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash offers some accounting simplification for how restricted cash should be presented in the cash flow statements. Under the standard, statements of cash flow must explain the change to total cash, cash equivalents, restricted cash, and restricted cash equivalents during the reporting period. Restricted cash would be included with cash and cash equivalents when reconciling beginning- and end-of-period amounts.
Several other standards that are narrower in scope may also impact a public companies financial statements in 2018, including:
Private Companies (Nonpublic Business Entities)
Balance Sheet Classification of Deferred Taxes
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes will require private entities to present deferred liabilities and assets as noncurrent in their financial statement. All entities will continue to present net deferred tax liabilities and assets of separate tax-paying components and tax jurisdictions separately.
ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting aims to simplify share-based payments including accounting for income taxes upon settlement of the award, presentation of tax benefits, accounting for forfeitures, and withholding requirements for presentation of income taxes.
Private companies have two practical expedients to choose from. They can elect to estimate the expected term of the share-based option or other performance-based awards by using a model that represents the midway point between the service period and the contractual expiration of the award. If a performance condition is not likely to occur, private companies can equate the expected life of the asset to its contractual term to simplify the accounting for the estimated fair value of the award.
The second practical expedient is to elect to measure all awards classified as liabilities at intrinsic value rather than at fair value.
Several other standards that are narrower in scope may also impact a private companies financial statements in 2018, including:
Public companies have a busy year ahead to prepare for their new accounting standards. Management teams should be convening early and often to ensure that the appropriate updates are being made to accounting processes and internal controls.
It is a much quieter adoption year for private companies, but entities can use the time to prepare for revenue recognition and leasing so that they can begin to engage with their financial statement users, such as lenders, about the impacts of the changes and to make the adoption of those standards as smooth as possible.
For more information about the standards taking effect in 2018, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at firstname.lastname@example.org.
Published on December 19, 2017