Prepare Your Accounting Year-End Processes for the End of 2018

Before you close the door on 2018, you may want to take a quick review of the changes that will affect 2018 financial statements. For public companies, the long awaited changes to revenue recognition are being applied. Private companies have several small modifications that may make their reporting a little easier.

Changes Affecting Both Public and Private Entities

The release of major accounting standard updates in 2016 and 2017 made for a quiet time for additional significant updates. Nevertheless, private and public entities should keep the following on their radar.

Stock Compensation: A minor change issued under Accounting Standards Update 2017-09, Compensation—Stock Compensation (Topic 718) could be a major time saver for entities that issue share-based payments. Updates in ASU 2017-09 clarify when a change in terms or conditions in a share-based payment will require an entity to apply the modification accounting guidance in ASC Topic 718. Effective for fiscal years and interim periods after Dec. 15, 2017, entities will use the ASC Topic 718 modification accounting guidance unless three conditions are met.

Public Business Entities

Revenue Recognition: Adoption of the new revenue recognition standard could result in 2018 public company financial statements looking very different from 2017 financial statements. ASC Topic 606 changes the timing and evaluation of revenue recognition and may result in differences in when an entity recognized revenue in 2018 compared to previous years. Franchisors, for example, may be recognizing revenue at a later time. It may also cause issues with gift certificate breakages for the retail sector, increase performance obligations for brokerage firms, accelerate revenue for software companies, and affect debt covenants.

The other major impact caused by ASC Topic 606 is a requirement to significantly increase disclosures for virtually all public companies. Many companies that file with the U.S. Securities and Exchange Commission (SEC) have received comment letters asking for additional information about the decisions reached and judgements made in applying the new revenue recognition guidance. It may be useful for public companies to take a close look at the quarterly disclosures that were made about the adoption and application of the new guidance and consider where those disclosures can be improved to clarify the significant judgements that are relevant to financial statement users. Another common concern raised by the SEC has been the appropriateness of the disaggregation of revenue. Public companies should continue to evaluate all of their communications to the market in order to assess the appropriate level to disaggregate their sources of revenue for disclosure.

Definition of a Business: Public companies going through acquisitions had to apply new guidance in 2018 as a result of ASU Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The accounting update narrowed the application of business combination accounting by creating a screen for transactions involving asset acquisitions. It redefined “output” and also introduced new requirements for inputs and processes. In addition to the direct impact on the accounting for acquisitions, the new definition of a business can also impact the scope exceptions in the variable interest entity consolidation guidance and the accounting for the derecognition of assets (and liabilities) that no longer meet the definition of a business.

Another accounting update also affected business combination accounting and may have simplified partial asset sales, particularly for the commercial real estate sector. 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 updated the definition of nonfinancial asset and removed the requirement for companies to consider whether an asset transfer was in substance real estate.

Presentation of Financial Assets and Liabilities: Public companies implemented changes to presentation of certain financial instruments. Under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, public companies recorded equity instruments that did not qualify for the equity method of accounting at fair value with changes in fair value included in net income. Public companies should ensure that other financial assets and liabilities are presented by measurement category and form on their balance sheet, or in the disclosures to the financial statements.

Presentation of Restricted Cash: Public companies simplified their approach to restricted cash reporting in 2018. Changes released as part of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash require entities to include restricted cash in cash and cash equivalents when reconciling beginning- and end-of-period amounts. Cash flow statements must also explain changes in total cash, cash equivalents, restricted cash and restricted cash equivalents during the reporting period.

Narrow Scope Improvements: Several other updates went into effect in 2018 that may have a significantly more narrow scope, including:

Private Companies

2019 promises to be a bigger year for accounting changes for private companies. By comparison, the changes affecting 2018 financial statements involve only minor accounting changes designed to make certain accounting elements more streamlined. Private entities adopted ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which removes the requirement to report the current portion of deferred taxes in the balance sheet.

For private companies that issue share-based payments, ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting offers accounting simplification for income taxes, excess tax benefits, forfeitures, and withholding and presentation requirements.

Minor simplification updates also make elements of derivative and hedge accounting easier for private companies for their 2018 financial statements.

Not-for-Profit Organizations

All not-for-profit organizations will have a significant change to work through for their 2018 financial statements. They will be implementing the changes in ASU 2016-14, Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities. Early adopters found the many of the changes in the ASU did not require significant changes to existing reporting processes, but in some instances, changes to disclosures and internal controls around elements of financial reporting will need to be modified.

For More Information

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 mwiniarski@cbiz.com

Published on December 11, 2018