Revenue Accounting Rules Pose Ongoing Costs but Firms not Pressing for More Changes
FASB was applauded by participants at a recent roundtable for introducing new revenue accounting rules, but many still had concerns, including the ongoing cost of adoption and the grey area that still exists in certain areas. There is no urgent need to amend Topic 606, Revenue from Contracts with Customers, because it aligns well with IFRS, according to roundtable participants, which comprised 20 participants from various companies and sectors who use, prepare, and audit financial statements. However, the costs to adopt the changes are substantial and ongoing. “I want to emphasize that there is an ongoing cost and in particular I think while I certainly agree with the benefits of a principles-based standard there are costs associated with a principles-based standard and in particular a one-size-fits-all standard that are borne in particular by small companies that we sort of sometimes forget about,” Angela Newell, deputy national managing principal-accounting at BDO PC, said. In comparison to the prior industry-specific accounting rules, the costs of the adopting the changes in Topic 606 were “in some cases significantly more” because of the judgment involved in certain areas, panelists also said. “Revenue continues to be the number one accounting topic that’s consulted on in the national office,” Meredith Canady, partner at KPMG LLP, said. “A lot of times it’s companies and teams that just want to talk it through because there is a lot of judgment,” she said. But the principles-based nature of the rules add more costs than the old rules-based guidance, she said, and “that ongoing cost is not that insignificant.” Among other issues panelists raised were that banks don’t like the principles-based nature of the changes around principle versus agent because it adds costs and “a real demand to try to structure things;” and the rules get “very complicated” for digital assets and for software companies who look for ways around it.
Some Firms Daunted by Coming Accounting Rules on Environmental Credits
Some of FASB’s advisers from smaller companies said that rules the FASB is developing on environmental credits are tough to digest, stressing that aspects wade into unfamiliar waters. The discussion of FASB’s Small Business Advisory Committee (SBAC) took place because FASB has a project to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits and for the nongovernmental creators of environmental credits. The scope of the project intends to address credits and programs such as: carbon offsets; renewable energy credits (REC); renewable identification numbers (RIN); cap-and-trade programs; and baseline and allowance programs. Gregory Waina, owner Waina & Company, LLC and a member of the SBAC, said it is difficult to digest the functionality and the operability of the recognition and measurement guidance the board mapped out thus far for the rules. “I don’t know where to go to grab this information or who’s managing this other than there’s compliance around it … but to really go down into the various functions I don’t know what chain of command comes up to reach the C-suite to be able to go down into the detail to find out how you even start addressing it or even know if it’s being accumulated or not.” FASB’s efforts come as environmental, social and governance (ESG) activities, including purchases of environmental credits, are becoming more prevalent. The board heard that there is accounting diversity and differences in practice about how to apply certain provisions and therefore added a project to tackle certain reporting issues.
FDIC Supports PCAOB’s Going Concern Project, Calls for Better Alignment of Accounting and Auditing Standards
FDIC Chairman Martin Gruenberg in a speech said that the banking agency strongly supports the PCAOB’s efforts to revise its audit standard on going concern, which is about the assessment of a company’s ability to stay afloat. “The going concern presumption continues to cause frustration and confusion in the audit profession and the public more broadly,” Gruenberg said at the 2023 PCAOB International Institute on Audit Regulation in Washington on November 7. The high-profile bank failures in March this year especially highlighted concerns that the going concern standard is not working effectively. All three failed banks—Silicon Valley Bank, Signature Bank, and First Republic Bank—had received only days earlier prior clean audit opinions with no mention of substantial doubt about the banks’ ability to continue as a going concern. “This raises questions about the responsibilities of both bank management and the independent external auditor,” said Gruenberg, who earlier in his career worked for Senator Paul Sarbanes. The Sarbanes-Oxley Act of 2002 established the PCAOB to better supervise auditors of public companies following Enron and WorldCom accounting scandals. A going concern evaluation by management and subsequently by auditors is especially important for financial institutions, given the systemic risks they pose to the broader financial system. The board is planning to issue a proposal in 2024.