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CECL December deadline

Non-Financial Institutions Are Being Impacted by The CECL Deadline

With the credit loss accounting standard update deadline coming up this December, non-financial institutions are now trying to catch up and understand the impact of how the Current Expected Credit Losses or CECL change will affect their profits.

The CECL is mainly focused on how the details of contracts and transactions are assembled.

For example, in trade receivables, there doesn’t appear to be a significant change to the allowance for noncollectable trade receivables. While usually, the Financial Accounting Standards Board (FASB) suggests using the aging schedules to determine an allowance, the CECL is broadening that method as well as others.

All receivables now need to be considered

This means that as soon as a receivable has been recorded, an allowance calculated and designated to it.

This change also reflects the notable transformation by the CECL in the financial services industry where a new loan must receive an allowance from the initiation point. A comparable requirement is set for the trade receivables as well.

Considering the future economic conditions

Another noticeable change that comes with the CECL’s new standard is the requirement that you must consider the future economic conditions when determining an allowance. Not only that, but other future implications could be impactful if not properly considered.

Contracts set up with customers may be initially set up as short term and low risk for CECL but if not structured to consider the contract’s off-balance sheet exposure a company could unintentionally offer credit terms to customers that require attention beyond the short-term receivable.

Examples include: 

  • Deals with terms to extend the receivable in combination with other purchases.
  • Guaranteed delivery of future purchases despite the customer not meeting a threshold with their other receivables.
  • Establishing a future purchase well in advance and extending the credit terms for those purchases before recognizing the receivable.

These situations don’t typically fall under the scope of the CECL but with the details of the contracts, they could. As such, the risks of these possible impacts should be considered on a contract-level review.

Other impacts

Stemming from the subsidiary transactions of third parties is the off-balance-sheet exposures that could be causing an impact on the non-financial institutions. The CECL doesn’t directly pertain to intercompany transactions, but it could apply to exposures that exist for those subsidiaries.

The structural and contractual obligations

With non-financial companies, there is much more uncertainty in the corporate line items.

Corporations utilize their time before the implementation date to review the deal structures that they have in place and consider how they will be held accountable. Being prepared before the date arrives is a great way to understand how calculations will be performed.

ASC 842

Learning From Companies That Implemented ASC 842

The ASC 842 is a new standard that is impacting both lessees and lessors and creating a significant compliance challenge for both public and private companies. The implementation deadline for private companies is approaching, and by now, most public companies have already implemented the FASB’s new lease accounting change. 

How ASC 842 is making an impact

Previously, lessees didn’t have to report operating leases on their GAAP balance sheets. With the new lease accounting change, leases have been reclassified. It now requires lessees to recognize operating leases as an asset on their balance sheets with a comparable lease liability.

Companies are seeing a significant increase in their assets and liabilities as a result of this update.

Some targeted changes are intended to help align lessor accounting with the lessee accounting changes and update revenue recognition rules.

What compliant companies are learning about this new standard:

Adopting the changes is difficult

According to a survey from PwC, 87% of the respondents report that adopting the changes has been difficult. Do not underestimate the amount of effort required to implement these changes. It’s recommended that you start taking an inventory of all of your vital data and documents needed for analyzing and accounting leases. 

This includes:

  • Initial agreements
  • Amendments
  • Exhibits
  • Non-lease arrangements

Choose the proper software

According to the same survey, more than half of the companies have chosen to accept and implement the new lease management software. Meanwhile, another 17% adapted their current software to meet the changes, and another 22% are continuing to use spreadsheets. Spreadsheets might work for smaller companies, but larger companies might find that the new software can streamline the workflow and provide better accuracy for financial records.

Testing is important

Before the deadline arrives, it is a good idea to run through a mock case using the lease accounting system in place. By manually calculating or using Excel, you can check to make sure that the results of the system are accurate. 

Continue to look for opportunities to improve the process

Many public companies found ways to gain better controls, be more efficient, and reduce costs around their lease accounting processes by taking the time to streamline and enhance their accounting processes.

Going forward lease negotiations may be impacted

With the new rules in place, lessees may want to negotiate the terms in their lease payment structures. Lessees may also prefer to have a shorter lease term because they can choose to not include leases with a term of 12 months or less on their balance sheets.

What private companies should do now

With private companies having more time before needing to implement the ASC 842, they should use the identified challenges made by the public companies to help themselves to achieve the process with less of a hardship. By gathering the necessary resources now and understanding how it can affect their businesses, they can develop a plan and put it into a team to put it into motion.

Click here for a closer look at ASC 842

ssfs 1

AICPA Introduces SSFS 1

The Statement on Standards for Forensic Services No. 1, (SSFS 1) was announced by The American Institute of CPAs (AICPA) in July of 2019.  SSFS 1, developed by the AICPA’s Forensic and Valuation Services Executive Committee, gives better authoritative and enforceable guidance for the CPAs performing forensic accounting services. It applies to all AICPA members, AICPA member firms, and their employees.

What you need to know about SSFS 1

The new standard helps to clarify the definition of “litigation and “investigation” for accounting purposes. It also helps to establish clear boundaries on what services members can deliver. 

SSFS 1 defines investigation as:

Collecting, analyzing and evaluating evidence to assist clients, the board of directors, independent auditors, or regulators in reaching a conclusion. [Source]

SSFS 1 defines litigation as:

Appearing at a regulatory proceeding as an expert witness, consultant, mediator, or arbitrator in connection with the resolution of disputes between parties. The term litigation is inclusive of all forms of alternative dispute resolution. [Source]

Anne Stalker, chair of the AICPA’s Forensic and Valuation Services Executive Committee says, “These new forensic standards are the first time we are codifying best practices for litigation and investigation consulting work.” She also goes on to state, “Forensic accounting is a diverse practice, and this standard is unique because it is applied based on why a service is provided -litigation or investigation- rather than what skill set is employed.”

Additionally, SSFS 1 also brings clarity to the following topics:

  • A member acting as an expert witness, may not work under the Agreed Upon Procedures Standard.
  • The judge, jury or mediator, not the member, makes the ultimate decision of fraud. However, based on an objective assessment, the member can suggest whether the evidence is consistent with fraud.

For more news relating to accounting and finance professionals, check out: The Accountants’ Code of Ethics is Under Revision.

SOX compliance training

Finance Team SOX Compliance Training

In 2006, the Sarbanes-Oxley Act (SOX) was passed, and this was a moment that changed the finance sector forever. Essentially, this act regulated financial practices. Thirteen years later, many businesses have succeeded with the implementations, but others are still struggling with SOX compliance.

As with any new financial compliance, the transition can be somewhat challenging, especially for companies who heavily relied on a regulation that has been significantly changed.  However, companies that find themselves non-compliant can certainly make a move in the right direction by incorporating a SOX compliance training program for their employees.

Make the Investment

Proper SOX compliance training will take a bit of time, money, and additional resources to incorporate in your business. However, it is certainly worth the effort. This type of training will cover the basics of the SOX act as well as teaching how small errors could lead to big impacts on the long-term success of the business. The type of training, time commitment, etc. is something leadership will have to determine. The size, budget, and goals of the company should all be taken into consideration.

Add Value to Your Business

It’s imperative to have professionals on your team who have proper SOX compliance training. Each person that learns and understands SOX will be able to help steer the company toward financial compliance goals.

Options for SOX Training

There is a multitude of options when it comes to the educational platforms for this type of training. One of the most common choices is in-house training, while other people choose to rely on the expertise of a consultant. This choice is likely determined by the size and existing resources of the company. Either way, the choice to incorporate the training into your business is a sound investment.

Overview

SOX compliance training is a critical resource for your company. It’s important to determine the status of your employee’s SOX knowledge and how they incorporate the knowledge into their role with the company. A simple training could yield a rewarding result for your business. 

credit losses standard

Credit Losses Standard Tips for Audit Committees

The new credit losses standard being introduced by FASB focuses on new credit losses. And the financial services sector will certainly have to wade through some challenges as it’s implemented. 

However, the good news is that there is also a tool that can be used to help reduce some of the concerns and keep businesses on track as much as possible. It’s critical for companies to be aware of the new standard even though it won’t be fully introduced in the private and public sectors for a couple of years.

What are the Requirements of the New Credit Losses Standard?

The new standard requires an expected credit loss (CECL) model and is intended to outline financial reporting of credit losses that financial institutions are expecting for the future. Fortunately, a new Center for Audit Quality (CAQ) tool is being implemented in order to provide committees with valuable information that can help them see how certain aspects could impact their overall business function.

The new standard will be in full swing for public sector companies in the year 2021, and private companies will be effective in 2022.

What Should Committees be Aware of?

In the oversight role, the CAQ indicates that the audit committees should be aware of the following:

  • A full understanding of the standard
  • The methods to make proper credit loss estimates
  • Any issues associated with the company’s previous methods and credit loss experiences
  • A thorough understanding of how the company is forecasting credit loss
  • Just how the standard will impact the financial institution
  • Effectively communicating the new standard both internally as well as with investors
  • How accounting will respond to financial deterioration
  • Permissibility of reversal of credit losses based on net income

Overview

While the new credit losses standard may take some time for companies to implement into their business, the tool will help keep things in mind as you move forward. This doesn’t necessarily mean that it will go without issue, but it could reduce some of the expected issues and get financial leaders on track.

You may also enjoy, Accounting for Collaborative Arrangements.

trouble shooting ASC 606

Troubleshooting ASC 606

Private equity CFOs are certainly in a challenging position. While it is a slightly different role than you’ll see within the public sector, the great thing about it is that they can still learn from the challenges and obstacles that the public industry faces. This is especially true when it comes to ASC 606, as we’ve already seen how it impacted the private industry last year.

What is ASC 606?

ASC 606 is a new standard that influences when and how a company recognizes revenue. And yes, this will impact private companies as well—it was adopted January 1, 2019. While there were certainly a lot of issues in the public sector, private companies can learn from those and move forward at a faster, more secure rate.

Essentially, proper revenue reporting is the cornerstone to company success, but it also provides critical insight that may influence investor interest in a company.

What Can Private Companies Do?

The best thing that the private industry can possibly do is stay ahead of the issues. Being prepared for the potential fallout and concerns of investors is almost a guarantee. Let sponsors in on the process and be as forthcoming as possible about what the new revenue reporting looks like.

Not only will this keep the investor’s confidence intact, but it will help the business run more smoothly overall.

You’ll likely experience shifts in revenue swings, and while this is expected, a good CFO will know how to ride that wave so that the company remains on task and investors understand the impact.

Getting Back to the Basics

While ASC 606 is likely to create some confusion and even possibly some upset initially, a quality CFO will utilize their strategic thinking to ensure that the financial climate remains as consistent as possible. This will mean utilizing good judgment, quality communication, and remaining calm during any type of revenue rollercoaster created.

 After all, it’s the skill and ability of the CFO that ensures that new standards don’t totally overtake a company’s ability to thrive. Only those that have such skills will be able to troubleshoot their way toward success.  

You may also enjoy, Understanding ASC 842

Collaborative Arrangements

Accounting for Collaborative Arrangements

The Financial Accounting Standards Board (FASB) has issued new guidance about how entities should account for collaborative arrangements. Because there was no previous guidance, this led to businesses employing a variety of standards and processes when it came to collaborative agreements. The diversity in approach caused some confusion that the new guidelines hope to simplify.

What are Collaborative Arrangements?

A collaborative agreement is simply two entities that agree to work together to complete business tasks. Typically, there is a contract in place that establishes the guidelines of the agreement. Because all parties are subject to both potential success and risk, it’s important that the arrangement is clearly explained via the contract.

Key Points of the New Guidance

The primary areas of focus for the new guidance are revenue scoping, a unit of account, and non-revenue transactions.

Revenue Scoping

The scope of the new revenue recognition standard appeared not to be included in collaborative arrangements, previously. New guidance indicates that the collaborative arrangements may be within the scope of Topic 606 if the unit of account is distinctly for a customer.

Unit of Account

Of course, in order to truly identify what falls within the scope of Topic 606, the unit of account must be clearly identified. In order to be in true accordance, the collaborative participant is a customer for part or parts of the transaction. However, if the bundle of goods or services is not with a customer, then it does not meet the criteria to be considered a unit of account.

Non-Revenue Transactions

Just as important, is identifying which transactions are considered “non-revenue transactions.” The new guidance indicates that an entity must base its accounting policy on an analogy to the authoritative accounting literature. If the entity is unable to do this, then they should instead rely on a reasonable accounting policy election. A non-revenue transaction model was officially created by the new guidelines.

Potential Impact

There’s no way to determine how the new guidelines will impact every single entity, but it will be important that they align their policies with the latest standards. Those that already have a similar process in place will not be as impacted as those that do not.  

You may also enjoy, New Lease Standards: IFRS vs U.S. GAAP

ASC 842

The Impact of the New Loss Accounting Rule

The upcoming changes in how US financial institutions report loan losses will have significant impacts on some banks. While the effects on the banks will be unequal, it is expected that institutions with large portfolios of consumer loans as well as those with high loan-to-asset ratios may be among those that are the most impacted by the new loss accounting rule.

A look at what the changes are and how they could potentially impact the financial institutions is certainly worth a closer look.

What is Changing?

The Financial Accounting Standards Board’s is now going to require banks to make considerations for future losses on loans rather than just focusing on credit losses. What does this mean exactly? It will require US banks to have loan loss reserves. According to S&P, this will have a negative impact on capital ratios.

Expected Impacts of the New Loss Accounting Rule

Although the new loss accounting rule won’t actually take place until January 2020, banks are already indicating how it will impact them. For example, Citigroup says that the new loss accounting rule will increase its loan loss reserves by 10%-20%. Likewise, US Bancorp suggests a 20%-30% increase while JP Morgan indicates their reserves could soar to 35%.

To break it down, S&P indicates that even a 10% shift could cut seven to eight basis points off the aggregate Tier 1 capital ratio.

A Call for Study

US banks would like to see a delay in the implementation and instead focus on understanding how such changes could impact the institutions now and well into the future. Banks are also interested in presented other ideas for how to manage loan losses that may have a less severe impact.

The Future

While the Financial Accounting Standard Board has not agreed to the requests of the US banks, they are allowing banks to adopt the new loss accounting rule over a three-year period. The focus here is to implement the change in the least disruptive way possible and avoid targeting any single bank. Only time will tell what kind of impact this has on banks initially as well as years to come.

You may also enjoy, New Lease Standards: IFRS vs GAAP