In 2018, the Generally Accepted Accounting Principles (GAAP) is undergoing major changes that will impact all businesses no matter the industry, although public companies may be more affected by the current changes. For this reason, the finance and accounting departments of companies need to be aware of these changes to submit proper financial projections and reports beginning this year. While there is some confusion over the new GAAP accounting standards, the fact is that they are designed to make financial reporting and disclosure processes simple and easy to navigate. To learn more about these new GAAP changes and how they might affect your business's accounting and financial departments, keep reading.
Why the GAAP Change?
The US Securities and Exchange Commission (SEC) are using these changes that were put in place by the Financial Accounting Standards Board (FASB). The U.S. GAAP is under the authority of The Financial Accounting Foundation (FAF) and the FASB, and a public review of the GAAP is conducted annually. As stated above, the changes were made to simplify the reporting and disclosure process for both public and nonpublic companies.
What are the Implementation Dates of the New GAAP Standards?
This depends on your company type. According to Brett Cohen, Partner, and David Morgan, Senior Manager at PwC, these changes will make a great impact on companies, who may also find them somewhat difficult to put into practice. For this reason, the implementation of the changes has been pushed back. For public companies, the deferral date for these new GAAP standard began after December 15, 2017. On the other hand, nonpublic companies will incorporate these fiscal changes beginning on December 15, 2018, and then again on December 15, 2019. The delay for public companies has already begun. However, for nonpublic companies, the next two years will require all financial and accounting departments to navigate through these new changes.
What are the New GAAP Standards?
According to Denise Lugo of Bloomberg, the new standards that will affect an organization's financial statements and reporting include:
- Cash flow
- Allocating deferred taxes
- Clarifying inventory measurement
- Employee share-based payment accounting
Lugo goes on to further explain each of these changes:
The changes related to cash flow are meant to give a company transparency and direction when it comes to how this information should be categorized, whether that be financing, investing, or operating. This is something that, in the past, has not been included in the GAAP and will take some time to get used to for financial and accounting departments across all sectors.
When it comes to revenue, the change in standards, which correlate to ASC 606, should be taken very seriously this year. The major change is a five-step process regarding customer-contract revenue that aims to focus on transfer of control instead of transfer of risk and rewards. This means that companies are required to administer any disclosures that center on the amount, nature, timing, and ambiguity of cash flows and revenue from all customer contracts.
The point of the new GAAP change being used to classify deferred taxes is meant to provide both simplicity and efficiency. The new change requires that companies allocate all deferred taxes as noncurrent, which simplifies the previous complex calculations that were needed to determine "what is going to happen within the year and what happens after that.”
The change to clarifying and simplifying measurement standards aims to change the measurement principal for inventory that will affect many companies that sell or discontinue products.
Finally, the change to employee share-based payment accounting will make it easier to account for stock losses when the occur rather than trying to predict or estimate them. The classification of stock compensation awards for tax withholdings will give the company an opportunity to withhold the maximum rather than being limited to the minimum statutory rate, which may affect a company's net income.
What is the Changing Taxonomy of GAAP?
The FASB Release Notes that compare changes to past years show a decrease in new elements, along with the definition changes. Deprecated elements stayed the same, although there was a small increase. These changes are made by the FASB to give companies stability and simplification.
How to Move Forward from Here with the New GAAP Standards
According to Bradley C. Brasser, Rory T. Hood, Joel T. May and W. Stuart Ogg of Jones Day, there are two methods that companies can take to disclose financial reports for 2018:
1. The Full Retrospective Method: This involves adapting prior revenue periods, as well as expenses to mirror the new GAAP standards.
2. The Modified Retrospective Method: This method applies the new GAAP standards to accounting contracts that are begun after the new GAAP adoption date. Prior contracts will leave an open balance sheet for any contracts entered into before the new changes but which still remain open.
Feeling Unsure about the New GAAP Standards? You're Not Alone
The GAAP accounting changes have been going on since 2014. However, public companies are still trying to understand these new standards and how they relate to the company's disclosure practices and their bottom line. Although all companies will be impacted, the level of impact depends upon a company's size and current financial state. Over the summer of 2018, Apple submitted disclosure statements that were vague when it comes to the new GAAP standards while Microsoft was much more specific in their disclosure statements. In time, as more public companies disclose reports, it will be easier to determine the method they used as well as the challenges they encountered in the process.
Historic GAAP Changes
Public companies who are required to submit financial earnings and other disclosures are finding themselves affected by this historic change in accounting. Lugo goes on to say that of all the changes, what will be most affected are balance sheets, revenue reporting, and net income. Changes like these have not been seen in the U.S. market in decades and need to be taken seriously by all finance and accounting departments in order to comply with the new GAAP regulations.
What You Should Do
According to Neri Bukspan, a Partner with Ernst & Young in their Financial Accounting Advisory Services division, companies need to think about constructing an easy-to-follow and understand plan about what these changes are and should also include how these disclosure changes have affected the company's results. These changes must be presented in layman's terms to be sure employees understand the changes and can implement them properly.
According to Adam Brown, BDO USA LLP’s Partner and National Director of Accounting, companies should have conversations with their investor relations team so the issues and standards can be clearly articulated. The goal is to keep all stakeholders "in the know" when it comes to a public company's financial health and reporting during this time of immense change to the GAAP reporting standards.
In the article “New Accounting Guidance Creates Volatility in Effective Tax Rates,” writers explain that corporate tax directors will need to implement accumulative processes in order to foresee the stock option impacts, as well as income tax expenses and intercompany sales assets. Because corporate tax directors maintain an important role in predicting these forecasts, they need to understand the impact of implementing these new GAAP rules and regulations. Furthermore, organizations with stock-based compensation programs can expect to encounter upsets with income tax reporting, along with impacts seen on net income and earnings per share. Therefore, companies that create compensation packages should keep in mind the volatility of the new GAAP standards impact that can affect both the recipient and the company's financial predictions.
All key employees of a company need to be brought up to speed regarding GAAP standards for delivering disclosures to investors. This way, stakeholders will not be surprised by how the company is affected by the new GAAP. There is also a paramount need to include the audit committee in processes and disclosures and how the new GAAP will affect a company's financial statements.
It is important for companies to remain proactive when implementing the new GAAP standards and how these changes will affect the company's finances. Furthermore, for those wishing to enter into the accounting and financial sectors, it would be wise to study these new GAAP reporting standards to give them an edge over the competition and provide value to an organization or business accounting department. Not fully understanding these new standards may prohibit job seekers from landing the job they want within a corporate financial department.
The Bottom Line
While the new GAAP standards are meant to simplify reporting and disclosures, companies still need to take the time to carefully study these new changes to insure that their financial department is complying with the new set of rules and regulations. Every employee should, in fact, receive training on what these changes are, what they mean for the company, whether private or not, and how this will affect the bottom line and best practices for disclosure and financial reporting. While there is still time for non-public companies to fully understand these changes, public companies are already in the midst of these new standards and need to apply them correctly. Click below to find the talent you need to keep up with these changes.