Accounting Standards Update… Are You Getting Prepared? – Ryan Taylor, Partner
As the calendar has flipped to 2019, I wanted to provide you an update and reminder on accounting standards that may now be in effect or are getting closer to implementation so that you will be prepared.
Revenue Recognition (2014-09)
In 2014 the Financial Accounting Standards Board (FASB) issued new revenue recognition standards. The impact of this extensive change is still difficult to determine, its effect varies depending on the industry. How it will affect cooperatives is still being debated and could vary among entities. One particular area that we feel could be impacted the most is the recognition of chemical rebates from suppliers/vendors for products sold. This standard is effective for fiscal years beginning after Dec. 15, 2018. We recommend taking a look at all your revenue streams and having a discussion with your audit team to ensure you are recognizing the income appropriately.
Deferred Income Tax Classification (2015-17)
In 2015 the FASB issued an amendment regarding the classification of deferred income tax items on the balance sheet. Past practice has been to separate deferred income tax assets and liabilities into current and noncurrent amounts. Effective for fiscal years beginning after Dec. 15, 2017, deferred tax assets and liabilities will now be required to be presented as noncurrent on the balance sheet. This change can be applied prospectively with proper disclosure.
We are just under a year away from implementation. This topic has been in discussion for a few years, with many updates and transition rules passed. Required for fiscal years beginning after Dec. 15, 2019 for non-public entities. This will require a lessee to apply a modified retrospective transition approach to implement, permitting an entity to choose one of two methods to recognize and measure leases. An entity will have the option to adjust comparative periods presented or have a cumulative-effect adjustment to retained savings. The key to successful implementation is taking the time NOW to compile a listing of all leases the company has and copies of lease documents to fully understand the terms. We don’t know the full impact yet, but as leases that have been off the balance sheet are put on, it is going to have an impact on financial ratios and maybe even debt covenants.
FASB had a busy 2018 as well, issuing twenty new Accounting Standards Updates (ASU). The majority of these twenty new standards will not be applicable to our clientele; however several are. I’d like to address the most relevant standards and briefly discuss their impacts.
Permits entities to elect an optional transitional practical expedient to not evaluate land easements that exist prior to the entity’s adoption of ASU 2016-02, which were not previously classified and accounted for as leases.
Reclassification from accumulated other comprehensive income to retained earnings for tax effects resulting from the Tax Cuts and Jobs Act.
Provides an additional transition method to adopt the new leases standard (ASU 2016-02). This new and optional transition method allows an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
Removes certain disclosures that are not considered cost effective, clarifies disclosure requirements and adds additional disclosure requirements that have been identified as more relevant. This update is effective for fiscal years ending after Dec. 15, 2020.
Provides clarification for issues discovered in the new lease standard regarding sales taxes, certain lessor costs and recognition of variable payments for contracts with lease and non-lease components.