Lease Standard Implementation Falls Behind Schedule
Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), the lease standard published by FASB in February 2016, was billed as an accounting change that would have less impact than the wide-ranging revenue guidance that goes into effect for public companies in less than six months. As businesses and auditors dig into the details of the standard, however, they are finding the workload heavier than expected. More worrisome as the standard’s 2019 effective date for public companies looms, a recent survey shows many businesses are behind schedule on implementation. This is not because the details of the new accounting are so complex, but because they reach so many day-to-day transactions. Businesses rent everything from storefronts to airplanes to cash registers, and the standard will require them to report the costs of the transactions on their balance sheets for the first time. “We are trying to raise the alarm at this point because it takes a lot of runway to gather the data needed here,” said Deloitte partner Jeanne McGovern. “And I think people are finding that to be a much more onerous process than originally thought.”
Congress Urged to Preserve Cash Accounting for Services Businesses
On July 17, the AICPA urged Senate Finance Committee Chairman Orrin Hatch to avoid limiting the use of cash method of accounting by audit firms and other professional services businesses. Under cash accounting, businesses record revenue and expenses when they are received and paid, respectively. This simpler method is available to small businesses with annual gross receipts of less than $5 million, as well as professional services firms of all sizes. Under accrual accounting, which is viewed as a more appropriate method for large and complex businesses, revenue is recorded at the time it is earned and expenses when they are incurred. The AICPA has for years sought to fend off reform efforts that would result in larger accounting firms being forced to switch to the accrual method. “The cash method of accounting is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the related income,” the AICPA wrote in the letter to Hatch.
Materiality Guidance Takes Shape
The IASB has decided to scrap guidelines about assessing covenant breaches from its forthcoming guidance. A 7–5 majority agreed to remove the information about covenant breaches, with those in favor of the removal saying keeping the guidance intact could create confusion because of conflicting guidance in auditing standards and with local securities regulations. “For this to work, we need a group of people to work in partnership,” IASB Vice Chairman Sue Lloyd said. “The document is better served by removing a clear point of tension in the document.” Several board members offered the opposite view, however. “The purpose of the Practice Statement is to give guidance to preparers on how to apply materiality,” IASB member Gary Kabureck said. “Giving no guidance on something heatedly discussed and exposed seems to be the wrong answer.” The board wants its Practice Statement, set to be published by the end of the year, to help businesses use judgment when drawing up financial statements.