Closing the GAAP on Accounting Changes

Written by Derrel Curry, CPA, CGMA

Several accounting and reporting changes are effective for your calendar year 2016 financial statements or your fiscal year-end 2017 financial statements, collectively referred to as 2016 effective changes. Others are effective in future periods but are of such significance that the changes warrant your consideration and evaluation as soon as possible.

Capitalized loan costs
Prior to 2016, entities have reported their capitalized loan costs as other assets. Effective for calendar 2016, capitalized loan costs generally should be reported net of the debt liability balance. This net approach will be disclosed in the debt note to the financial statements with details reflected in tabular form. If debt issuance costs are incurred prior to year end but the debt agreement is not executed until after year end and, therefore, there is no liability reported in the 2016 financial statements, the entity will report the capitalized loan costs as an other asset consistent with prior practice. Early adoption was permitted so some entities have previously adopted this guidance. This net presentation would be retrospectively applied to comparative periods presented.

Going Concern Evaluation
There are two significant changes related to the consideration of an entity’s ability to continue as a going concern and potential financial statement note disclosures. For calendar years prior to 2016, the guidance related to this consideration was included in audit guidance, a nuance that was unique and inconsistent with other financial reporting considerations included in GAAP. As a result, the FASB issued guidance as a 2016 year effective change to require management evaluation and potential financial statement disclosures. Management is to document this evaluation, including what factors, conditions, and events were considered and the potential impact these items may have on their organization. This guidance also changes the time period of consideration from the year following the entity’s year end to one year after the date that the financial statements are available to be issued. This timing revision effectively eliminates an entity’s ability to hold its financial statements for one calendar year to confirm going concern continuance prior to issuance.

Other changes and their effective calendar year date for private companies – do not be lulled into complacency by the extended future dates as the dates are extended due to the expected lead time required for implementation.

Revenue Recognition (2019)
The intent is to “simplify” financial statement preparation by reducing numerous requirements under broad concepts in previous guidance. The revisions will require the identification of all Performance Obligations (distinct and separately identifiable goods and services included in transactions) and allocate the transaction price to the various Performance Obligations. The guidance will be retrospectively applied to all existing transactions. The overall effect is expected to be the deferred recognition of some revenue previously recognized immediately.

Leases (2020)
The intent is to require the reporting of lease obligations as liabilities on the Balance Sheet. Under current guidance, leases have “bright line” criteria for determining capital leases reported on Balance Sheets versus operating leases reported in the Income Statements only with obligation disclosure in the financial statement footnotes. Leases are often “engineered” to avoid capital lease designation. Under revised guidance, leases will qualify as finance leases if they meet any one of five criteria or operating leases if not. The major change for leases is that both finance and operating lease obligations will be reported as liabilities on the Balance Sheet as well as a Right to Use asset. The lease types will have differing income statement and cash flow presentations. A short-term lease provision for non-recognition of a Balance Sheet liability is provided for lease terms of 12 months or less and no existence of a purchase option that the lessee is reasonably certain to exercise. The guidance will be retrospectively applied to all existing leases. The overall effect is expected to be the Balance Sheet recognition of a very significant volume of lease liabilities. Debt covenants will very likely require discussions and revisions at the time of or before this effective date.

The BMSS team will be pleased to discuss your entity facts and circumstances relative to these GAAP changes with your management team as requested.