Top 5 Year-end financial reporting reminders

Video , PwC US Dec 14, 2017

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PwC highlights the top five financial reporting reminders for 2017. These reminders include accounting for disasters and insurance recoveries, the new goodwill standard, valuation allowances, the definition of a public business entity, and changes to auditor reporting.

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Hi, I’m Alexis Cunningham a senior manager in our National Office.

And I’m Kevin Jackson, also a senior manager in our National Office.

This time of year can be kind of hectic. Especially this year from a financial reporting perspective given the adoption of the new revenue standard in 2018 and preparing for the adoption of the lease and credit loss standards as well.

So to help you prepare as you go into year end, we would like to share with you our top 5 financial reporting reminders for 2017.

Let’s start with number one - Disaster related issues. This year we have seen record-breaking natural disasters from hurricanes to earthquakes to wildfires...and many companies have been impacted in their wake. Let’s touch on some of the accounting and disclosure implications. It’s important to remember that even companies not directly affected by the natural disasters should still consider related financial reporting implications.

That’s right, while companies directly affected need to think about issues such as impairments and insurance recoveries, companies with significant loans or receivables from customers that have been impacted by natural disasters should consider whether reserves or write-off are warranted.

Kevin, what about disclosures - anything in particular companies should keep in mind going into year end?

Yes, companies should consider expanded disclosures on the impacts of natural disasters, as well as quantifying the effect of the disasters on current and future operations. Companies should also be mindful of the SEC’s guidance around non-GAAP disclosures if they intend to communicate the impacts using non-GAAP measures.

That’s a good point. Thanks Kevin.

Moving to Number 2 - the FASB has issued several accounting standard updates that are part of its Simplification Initiative. This initiative is designed to update targeted areas of GAAP by reducing cost and complexity in financial reporting without sacrificing information that is important to investors.

It seems that many of the recent accounting standard updates reflect the FASB’s focus on finding a “sweet spot” by balancing feedback from both preparers and users of financial statements.

Most of these updates can be early adopted. One that may be of particular interest as you consider your year-end reporting is the new update for goodwill impairment. Under the new standard, companies will measure goodwill impairment as the difference between the carrying value and the fair value of the reporting unit.

So Kevin, does this effectively eliminate the need to determine the amount of implied goodwill by reperforming a purchase price allocation, or what is commonly referred to as the “Step 2” test?

That’s right Alexis. Additionally, the new guidance doesn’t remove the option to perform a qualitative assessment to determine if a quantitative assessment is required. All in all, we anticipate that many companies will welcome the reduced burden related to goodwill impairment testing.

Moving to Number 3 - Valuation Allowances on Deferred Tax Assets, or “DTAs” for short.

This is an area that requires significant judgment and is highly subjective...now, the tax accounting guidance hasn’t changed but there can be other variables impacting your DTAs…these could be as obvious as enacted tax reform or could result from something like the impacts of natural disasters, which could impact a company’s future profits.

A valuation allowance is needed when there is a greater than 50% probability that some or all of the DTAs will not be realized. In making this determination, you need to weigh all positive and negative evidence, giving more weight to the evidence that is objectively verifiable.

It is interesting to note, Kevin, that there are differences in the guidance related to valuation allowance assessments and other impairment assessments. For example, a company might determine that it doesn’t need to record a goodwill impairment, but might conclude that it does needs a valuation allowance on its DTAs. Although both assessments typically start with the same financial forecasts, only the portion of the forecast that is objectively verifiable can be used to support future taxable income projections in a valuation allowance assessment. So, keep in mind that goodwill impairment and valuation allowance assessments are different and could produce different results.

Great point Alexis. With that, let’s cover reminder number 4 -Definition of a Public Business Entity, or PBE for short.

Absolutely.

In talking about adoption of significant accounting standards, determining whether a company meets the FASB’s definition of a PBE can have significant financial reporting implications and making this determination is not always clear-cut.

To help companies in making this determination, we would like to highlight that in October the AICPA staff issued a technical question and answer publication that addresses several questions companies have raised related to the definition of a PBE.

This publication is worth reviewing in determining whether a company meets the definition of a PBE and understanding the related impact for financial reporting purposes. This definition not only affects accounting alternatives and disclosures but is also used to establish effective dates for accounting standard updates.

That’s helpful, thanks Alexis.

That brings us to reminder Number 5, the Auditor’s reporting model.

On October 23, the SEC approved the PCAOB’s new auditor reporting model, which sets forth the most significant changes to the auditor’s report in over 70 years.

The new standard retains the existing “pass/fail” opinion but makes significant changes to the form and content of the report for public companies, including provisions on auditor tenure and communication of critical audit matters, or “CAMs” for short.

That’s right Kevin. I think it’s also important to note that there are phased in effective dates with the initial changes coming into effect this year end for calendar year end companies. Communication of CAMs will be required for some companies starting in 2019... Now, it’s the communication of CAMs that will be the most significant change in practice for auditors, companies and audit committees. So we encourage companies to engage in conversations with their auditor to discuss these changes.

Great point Alexis. That rounds out our top 5 financial reporting reminders for 2017. Thanks for joining us! For more information on any of the topics highlighted today, you can read our Year-end In depth publication, available on CFOdirect.com.

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