The FASB remains committed to reducing the cost and complexity of accounting while maintaining or improving the usefulness of financial statements. What started as several narrowly-targeted improvements has expanded to embedding simplification as a mindset from the start of a project.
While the volume of recent standard setting might put short-term stress on companies, the benefits of these changes should not be overlooked.
"Everyone who participates in the system of financial reporting benefits when unnecessary complexity is reduced."
Complex standards can be costly for preparers. But beyond the obvious opportunity to reduce the cost of compliance, there are a number of other benefits to reduced complexity. When standards are easier to read and interpret, it is easier for preparers to comply with them and users are better able to understand the resultant financial information.
While many companies are focused on implementing the revenue, leasing and impairment standards, other changes are on the horizon—some sooner than later. However, in a recent PwC poll, over 70% of the participants were not aware of or were not closely following the simplification initiatives.
Some of the simplification guidance isn’t effective yet but can be early adopted now. Here’s a few that companies won’t want to miss.
The FASB’s new hedging guidance will change how all types of companies account for and disclose hedges. The new guidance will more closely align hedge accounting with companies’ risk management programs, simplify its application and increase transparency.
The changes to the definition of a business will simplify a company’s analysis of whether a transaction is an acquisition of a business or an asset. The new guidance will likely result in more acquisitions being accounted for as asset acquisitions, especially in the real estate, oil and gas and pharmaceutical sectors. The accounting for transaction costs, in-process research and development, goodwill, contingent consideration and other areas is different depending on whether the transaction involves assets or a business.
The FASB’s new guidance to simplify the accounting for goodwill impairment removes Step 2 of the impairment test that was criticized as being overly complex and costly. A goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill.
These are only some of the improvements that companies will want to consider adopting early.
So, while the focus may be on the 3 new big standards, preparers need a process in place to assess and implement the other changes, too. And users need to understand the potential impacts. Change is easier said than done—sometimes it’s an up-hill battle, even with an end goal of making it easier.
"“… simplification is a complex process."
Implementing changes to accounting standards isn’t new territory, and with proper preparation, the process can go smoothly.
Of course the accounting and IT departments are generally affected by accounting changes. However, when considering new standards, management needs to consider the potential impact broadly and may need to involve a cross-functional team to do so.
Consider the amendments to the definition of a business. While those who work in mergers and acquisitions need to be aware of the new guidance, think broadly. The nature of the transaction could be impacted by the terms of legal agreements and might impact tax strategies, so educating general counsel and the tax department might be warranted.
The implementation of any new accounting guidance could impact systems, processes and controls—even when they are meant to simplify the process. For example, the new hedging standard will allow additional transactions to qualify for hedge accounting, so companies will need to modify
their controls that identify transactions eligible for hedge accounting.
It’s important to get a jump start on understanding the impact to systems, processes and controls to ensure any required changes are implemented in a timely manner. Even relatively minor changes to systems could take a significant amount of time and effort, so allowing enough lead time is critical to successful implementations.
Once designed and implemented, the controls will need to be tested prior to the go-live date to ensure they are operating effectively. Companies will want to allow adequate time to remediate any deficiencies. This is critical to avoid surprises in the assessment of internal control over financial reporting in the year of adoption.
In addition to educating the relevant parties internally, certain impacts may need to be communicated externally, too. Nobody likes surprises. Communicating expected volatility, impacts to key financial metrics or changes in accounting for certain transactions on a timely basis will be important.
Besides the big 3 standards, there are many other changes coming. Companies should stay informed by monitoring the FASB’s activities. They should stay engaged in the standard-setting process by providing feedback through comment letters or other means when warranted with a focus on the long-term goals of simplification.
Companies also need to keep users top of mind through enhanced transparency of the potential impact to their financial statements as a result of upcoming accounting changes.