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November 14, 2016

BIG GAAP – LITTLE GAAP

 

Generally Accepted Accounting Principles, or GAAP, is considered to be the standard for financial accounting in the U.S. GAAP is used to guide accountants through the business of recording, summarizing, and preparing financial statements. As a small business owner, many of you have to submit financial statements to outsiders for credit purposes.  As time goes on, the standard-setters in the accounting universe have modified the rules to encompass many pronouncements that mean nothing to the small business. Many owners of privately held businesses simply find GAAP too complex or unnecessary, and thus opt not to use it.  Your accountant will advise you accordingly, but alternatives to GAAP aren’t pretty.  If there is little significance to the financial statements, they may simply ignore the new standards.  If significant, the accompanying report must describe the departure from GAAP and either “qualify” their opinion or disclaim an opinion.  Financial statement users don’t like disclaimers.  Some elect to ignore the significant matters and issue a “clean opinion” regardless of the issues.  This option is a no-no, for both you and your accountant.

 The Financial Accounting Standards Board (the standard-setter for GAAP) hopes to reduce some of the complexity of its standards by leveraging the work of its sister organization, the Private Company Council, (PCC) which has been working to adjust the accounting rules for the scaled-back needs of smaller businesses.  The PCC has proposed a number of changes in GAAP standards for private companies in areas such as intangibles recognized in business combinations, goodwill, certain interest rate swaps and certain variable interest entity situations. FASB has sent out the recommendations for public comment, and the PCC will be redeliberating them and holding public roundtable discussions with the public. The PCC will also be doing “lookback” work on disclosures, perhaps using the Disclosure Framework that FASB has been developing.

 

Closing the gap between Big GAAP and little GAAP standards ultimately requires creating a common sense solution for a complex problem. 

Here are a few examples of what is to come:

 ·        FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and   (Topic 350): Accounting for Goodwill, permits a private company to subsequently amortize goodwill on a straight-line basis over a period of ten years, or less if the company demonstrates that an  useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill. Goodwill is the residual asset recognized in a business combination after recognizing all   identifiable assets acquired and liabilities assumed. Under the accounting alternative on goodwill, goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of a company (or a reporting unit) may be below its carrying amount. A private company that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting unit level. 

 ·         FASB Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, gives private companies—  than financial institutions—the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments  Under the accounting alternative provided for interest rate swaps, when a private company applies the simplified hedge accounting approach, the income statement charge for interest expense will be similar to the amount that would result if the company had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and an interest rate swap. 

 ·         FASB Accounting Standards Update No. 2015-03, Simplification of Debt Issuance costs. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For all non-public entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.

 ·         In discussion or with significant impacts: 

    o   Reporting of cash flows on a direct basis, showing cash inflows (i.e. cash received from customers) and cash paid for expenses (i.e. cash paid for payroll, cost of sales, operating expenses, etc.)

o   2016-02, Lease Accounting:  Under the new rules, operating leases are essentially dead, and virtually all leases will be recognized on a company's balance sheet.  See Below. 

o   In doing your own research, remain cognizant of the term “accounting alternative”.  This language has been added to the new standards as alternative treatment of the pronouncements specifically allowed for small business.  This language suggests a simpler, less complex treatment that must be elected by the small business.

Accounting Standards Updates 

The full text of the FASB documents listed below can be downloaded from the FASB website.  This is an abbreviated summary of selected pronouncements applicable to smaller businesses.  Refer to the pronouncements themselves for a full description of the pronouncement, interim adoption requirements and “earlier application” detail.

FINAL DOCUMENT

DATE ISSUED

EFFECTIVE DATES

Accounting Standards Updates

Update 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

August 2016

For all non-public entities, the amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.

Update 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

June 2016

For all non-public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020.

Update 2016-12—Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

 

May 2016

The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year.

Update 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

 

April 2016

The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). See Above.

Update 2016-08—Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

March 2016

The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). See Above.

FINAL DOCUMENT

DATE ISSUED

EFFECTIVE DATES

Update 2016-04—Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products

 

March 2016

For all non-public entities, effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period.

Update 2016-03—Intangibles—Goodwill and   (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance

March 2016

The amendments are effective immediately.

Update 2016-02—Leases (Topic 842)

·         Section A—Leases

·         Section B—Conforming Amendments Related to Leases

February 2016

For all non-public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early application of the amendments in this Update is permitted for all entities.  This pronouncement effectively requires all leases to be treated as capital leases, with no grandfathering of existing leases.  Related party lessor/lessees should consider restructuring leases for periods of less than one year.

Update 2016-01—Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.

January 2016

All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

Update 2015-17—Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

 

November 2015

For all non-public entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

FINAL DOCUMENT

DATE ISSUED

EFFECTIVE DATES

Update 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

September 2015

For all   entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

Update 2015-14—Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
  

August 2015

See Above also. All non-public entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.

Update 2015-11—Inventory (Topic 330): Simplifying the Measurement of Inventory
  

July 2015

For all non-public   entities, effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

Update 2015-07—Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

May 2015

For all non-public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016.

Update 2015-05—Intangibles—Goodwill and  —Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

April 2015

For all non-public entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.

Update No. 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
  

April 2015

For all non-public entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.

Update 2015-02—Consolidation (Topic 810): Amendments to the Consolidation Analysis
  

February 2015

For all non-public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.

FINAL DOCUMENT

DATE ISSUED

EFFECTIVE DATES

Update No. 2015-01—Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
  

January 2015

Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements.

Update No. 2014-15—Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
  

August 2014

For all entities, the new requirements are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted.

Update No. 2014-09—Revenue from Contracts with Customers (Topic 606)

 

May 2014

For all non-public entities (nonpublic entities), effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

Update No. 2014-08—Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
  

April 2014

For most nonpublic entities, it is effective for annual financial statements with years that begin on or after December 15, 2014.

 

 

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