Financial Accounting Updates
Do you know how financial reporting has changed recently? Are you tracking other changes that are coming?
The next few years will continue to see new accounting principles come into effect; many with significant impacts on financial statements. Here, we highlight some of the major changes that you can expect to see on interim and year-end statements in the next few months.
Short Reads
Update: January 2019
Lease Accounting: Lessee
New Policy:
- Leases one year or less in duration can be expensed as rent expense during the period; this is similar to how operating leases traditionally were expensed and regarded as off-balance sheet
- Leases greater than one year will either be classified as a Finance Lease or an Operating and reported on separate lines on the balance sheet
- Finance Leases: accounted for as a traditional capital lease where the asset and liability are reported on the balance sheet of the lessee
- Operating leases: accounted for on the balance sheet using a new straight-line method (for further information regarding this new method of accounting please refer to our Self Study Lease program)
Effective Date:
For public companies, periods after December 15, 2018 (to be seen in 2019 statements) and for non-public companies for periods after December 15, 2019.
Impact:
What were previously called operating leases will now be on balance sheet resulting in an increase in assets and debt for many businesses. Finance leases will affect EBITDA calculations the same as a capital lease. Lease expense and the cash lease payments for operating leases will appear in operating activities, as under the old accounting rules.
Update: January 2019
Investments Accounting
New Policy:
- Changes focus mainly on accounting for equity investments of less than 50% ownership (non-controlling interest) and applies to all businesses except those using specialized accounting (mainly broker-dealers, defined benefit pension plans, and investment companies)
- There will no longer be trading and available-for-sale security categorizations, but rather all securities with a fair market value will be classified as Fair Value through Net Income (FVTNI) and adjusted to fair value as of the reporting date with unrealized gains/losses reported in income (consistent with how Trading securities were reported)
- If there is no fair value for the security (and it does not qualify for Net Asset Value valuation) the equity investment will be accounted for at cost, subject to impairment
Effective Date:
For public companies, periods after December 15, 2017 (to be seen in 2018 statements) and for non-public companies for periods after December 15, 2018
Impact:
The previous volatility from marking to market Available-for-Sale securities in Other Comprehensive Income will now be reflected in the Income Statement of the investor affecting EBITDA calculations and profitability ratios
Update: January 2019
Loans and Receivables
New Policy:
- New accounting for how to determine credit losses on loans, accounts
receivable, trade receivables and debt securities classified as Amortized Cost (Held-to-Maturity) and Fair Value through Other Comprehensive Income (FVTOCI) – formerly called Available-for-Sale securities, et. al - A switch from the Incurred Loss Model to the Current Expected Credit Loss Model (CECL)
- Credit losses should now consider reasonable forecasts of future events, which were not previously included in the estimate
Effective Date:
For public companies, periods after December 15, 2017 (to be seen in 2018 statements) and for non-public companies for periods after December 15, 2018
Impact:
Significant subjectivity in the assessment of credit losses now that unknown future events must be considered. There will be more volatility in each investor’s provision for credit losses and less consistency from company to company and industry to industry
Update: January 2019
Taxes
New Policy:
- There are many financial statement effects from the new tax laws initiated in late 2017 and early 2018
- The lowering of the corporate tax rate will result in revaluations of deferred tax assets and liabilities with an increase or decrease to tax expense
- Net Operating Losses (NOLs) can no longer be carried back to receive a refund of previously paid taxes, but there is now no limit on the carry forward period, which may mean there is no need for a valuation allowance write-down (keep an eye out for how companies will be dealing with this!)
- A decrease in the repatriation tax for companies that want to repatriate earnings of foreign subsidiaries to the US
Effective Date:
January 2018
Impact:
Volatility to the calculation of tax expense on the Income Statement and deferred taxes and tax obligations on the balance sheet
Longer Reads
Update: March 2024
Crypto Assets
Contents:
- In December 2023 the FASB issued new standards for accounting for certain crypto assets; particularly intended for investments in crypto assets like Bitcoin. The new standard applies to all entities – publicly traded, private and not for profit. This Quick Update provides an introduction to the criteria used to determine which crypto assets use the new standard, what the new standard is, and the reporting requirements.
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Update: December 2023
Government Assistance
Contents:
- Due to the pandemic there has been an increase in government funding and grants that impacts businesses. Though the FASB is currently updating the accounting standards for government grants this 4th Quarter 2023 Quick Update outlines current reporting guidelines.
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Update: March 2023
GAAP vs. non-GAAP numbers
Contents:
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In preparing financial statements companies use Generally Accepted Accounting Principles (GAAP). However, when discussing their results for the period many companies use non-GAAP numbers. These non-GAAP calculations exclude or include numbers management believes readers should consider when analyzing the company. Adjustments can be beneficial by providing a better indication of performance or misleading to readers of financial statements and reduce comparability to other companies.
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Update: November 2022
PPP Loans
Contents:
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In 2020 companies and organizations started receiving Paycheck Protection Program (PPP) loans. More recently companies have started to deal with the payment and/or forgiveness of these loans. This Quarterly Quick Update outlines the accounting behind these loans and the impact on the financial statements that analysts need to consider in evaluating financial statements.
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Update: September 2022
ESG Disclosures
Contents:
- In 2020 companies and organizations started receiving Paycheck Protection Program (PPP) loans. More recently companies have started to deal with the payment and/or forgiveness of these loans. This Quarterly Quick Update outlines the accounting behind these loans and the impact on the financial statements that analysts need to consider in evaluating financial statements.
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Update: June 2022
Private Company GAAP
Contents:
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Private company GAAP (primarily for non-publicly traded Small and Medium-sized entities – SMEs) is a separate set of accounting rules that allow for reduced financial accounting disclosure compared to publicly traded companies. In this Quick Update we outline the reasons for differentiation and some of the main departures from GAAP
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Update: February 2022
PPP Loans
Contents:
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As an analyst, analyzing a cash flow statement is never as easy as it seems in textbooks. This Update is a look at some of the cash and non-cash transactions that commonly occur and need to be understood.
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Additionally, we take a brief look at the operating activity section of the cash flow statement where many items do not appear to reconcile to the balance sheet to understand the causes of those discrepancies.
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Update: December 2021
Understanding Working Capital in the Pandemic World
Contents:
- Understanding working capital in the abstract can be difficult to this quarterly update reviews the basic concepts of working capital. Examples illustrate working capital as a source or use of funds for a company.
- As management of working capital is important to all companies, how working capital has been affected by the pandemic is discussed along with a brief outline of accounting for government assistance provided to many businesses.
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Update: August 2021
Has Accounting Fraud Gone Away?
Contents:
- While the golden age of financial reporting fraud has passed due to legislation such as Sarbanes Oxley, examples still exist today where companies use simple tactics to improve their financial results.
- This Update provides a brief look at where the more current cases of fraud occur, with some specific examples, and some Points to Remember for analysts when reviewing financial statements.
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Update: May 2021
Secured Overnight Financing Rate (SOFR)
Contents:
- The change from LIBOR to SOFR (or other new benchmark rates) is occurring now, to be fully complete by the end of 2023
- Areas where impact will be felt include derivatives and credit products, et.al
- The impact of the changes is anticipated to be minimal but there may be adjustments to certain areas of the financial statements that analysts may encounter
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Update: March 2021
Pension Accounting
Contents:
- Types of pension plans
- Components of pension cost
- Understanding funding status
- Components of pension fund assets and liabilities
- Impact on valuation and risk analysis
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Update: November 2020
Introduction to Derivative Risks
Contents:
- Different types of risk (market, counterparty, liquidity, et. al.)
- Focusing on four commonly used derivatives (options, futures, interest rate swaps, and foreign currency)
- Understanding Notional and Market Values
- Master Netting Agreements
- Financial Disclosure
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Update: September 2020
Understanding the Impact of New Lease Accounting
Contents:
- How do the new lease accounting rules impact financial analysis?
- Summary of the new
- Comparative chart showing the differences on the balance sheet, income statement and cash flow
- Treating operating leases as rent
- Treating operating leases as debt – adjusting Earnings (EBIT, EBITDA) and cash flow calculations
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Update: April 2020
COVID-19: The Coronavirus Issue
Contents:
- How are businesses being affected?
- Where on financial statements will you see an effect?
- As a financial analyst, what should I “do”?
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Update: February 2020
Understanding Service Contracts for Cloud Computing
Contents:
- Why are companies moving data, applications, and platforms to the cloud?
- What are service contracts?
- How have companies accounted for service contracts up to now?
- What is different about the new accounting standard?
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Update: September 2019
Understanding how the Current Expected Credit Loss model affects A/R
Contents:
- Are the basics of accounting for Accounts Receivable changing?
- What is changing and why?
- When is the new accounting in effect?
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Update: April 2019
How the new tax law will affect financial statements
Contents:
- How the new tax law will affect financial statements
- Changes to Net Operating Losses
- Effect on deferred tax assets and liabilities
- Example of the impact through Apple Inc. footnote disclosure
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Update: April 2019
New Revenue Recognition Principle Transition Accounting
Contents:
- Do you know how to interpret the new rule?
- How is the transition being handled?
- What do the transition options really mean?
- Some real world examples
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Update: February 2019
New Revenue Recognition Principles (ASU 606)
Contents:
- Details on the new Revenue Recognition Standard ASU 606
- Discussion of the new Revenue Recognition Process
- Industry-specific Issues: Retail, Pharmaceutical and Life Sciences, Technology and Communications
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