Posts Tagged ‘gaap’

Tax Law Changes – The GAAP Effect

By Lisa Blankman, CPA
Manager, Audit & Assurance Services
LBlankman@sponselcpagroup.com

The tax reform is here, with significant changes to both individual and business taxation that have been covered extensively in recent weeks. As you’re closing out your books for 2017 and preparing the year-end financial statements, you may be wondering if the tax law changes have any direct effect on your company’s GAAP financial statements? The answer is yes, they do — if you have a C corporation.

For C corporations, deferred tax assets and liabilities are recorded based on temporary differences between book and tax reporting. For example, if a company has a significant net operating loss carryforward, the deferred tax asset recorded will represent expected tax relief in future periods.

Deferred tax assets and liabilities are recorded as of the balance sheet date based on expected future tax rates. With the tax law changes in effect by the end of 2017, the new effective tax rates starting in 2018 should be used when calculating and recording the deferred tax asset/liability. For GAAP financial statements with footnotes, there will also be a new paragraph added to disclose the change in tax rate, including the prior rate and the newly enacted rate. Considering the tax law changes, this is a relatively minor change to the presentation/disclosure in your financial statements, but it’s something to be aware of when preparing and reviewing your 2017 financial statements.

If you have any questions, please call Lisa Blankman at (317) 613-7856 or email LBlankman@sponselcpagroup.com.

New Accounting Standards Your Organization Needs to Know

adam-parkhurstBy Adam Parkhurst
Staff, Audit & Assurance Services

Beginning Dec. 15 this year, several significant changes are going into effect for financial statements reported under Generally Accepted Accounting Principles (GAAP). These Accounting Standard Updates (ASUs) could affect the reporting requirements of your business or not-for-profit.

Below is a quick rundown of what these new standards could mean, broken down by types of organizations.

The following ASUs are becoming effective for all applicable entities:

  1. ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities

This ASU significantly changes financial reporting for Not-For-Profit entities by making changes to net asset classes, expense presentation, statement of cash flows requirements and disclosure requirements. For more information on this ASU, please see 5 Things You Need to Know About the New Not-For-Profit Accounting Standard (ASU 2016-14).

  1. ASU 2017-09 Compensation – Stock Compensation: Scope of Modification Accounting

The purpose of this ASU is to provide clarity and reduce diversity in practice, as well as cost and complexity, when applying stock compensation guidance to a change in the terms or conditions of a share-based payment award.

The following ASUs are becoming effective for non-public entities, but are already effective for public entities:

  1. ASU 2015-17 Income Taxes: Balance Sheet Classification of Deferred Taxes

The purpose of this ASU is to eliminate the presentation of current deferred income taxes. All deferred taxes will now be presented as non-current.

  1. ASU 2016-05 Derivative and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

This ASU clarifies whether the use of hedge accounting for a derivative arrangement must be discontinued when there is a change in counterparty.

  1. ASU 2016-06 Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments

This ASU clarifies that the four-step decision model should be utilized when evaluating whether contingent call (put) options in debt instruments are clearly and closely related.

The following ASUs are becoming effective for public entities for fiscal years beginning after Dec. 15, 2017, and will become effective for non-public entities in the future.

  1. ASU 2015-14 Revenue from Contracts with Customers (previously ASU 2014-09)
  2. ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments
  3. ASU 2016-16 Intra-Entity Transfers of Assets Other Than Inventory
  4. ASU 2016-18 Restricted Cash
  5. ASU 2017-01 Clarifying the Definition of a Business
  6. ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

For further information regarding the upcoming effective ASUs and how they might apply to your organization, please contact Adam Parkhurst at (317) 613-7858 or email aparkhurst@sponselcpagroup.com.

What to Do About Leases

Mike BedelBy Mike Bedel, CPA, MBA, CGMA
Partner, Director of Audit & Assurance Services
mbedel@sponselcpagroup.com

Balance sheets are changing! A new update released by the Financial Accounting Standards Board (FASB) in February of this year spells out the changes resulting from a lengthy deliberation on the treatment of leases in U.S. Generally Accepted Accounting Principles (GAAP).

The main changes will be noticeable to lessees involved in an operating lease – which is probably the most common lease arrangement we see in privately held organizations. Previously these leases were disclosed in the footnotes of the financial statements. After the changes go into effect, these leases will be recognized on the balance sheets of lessees as lease assets and lease liabilities.

The recognized lease asset represents a right to use the underlying leased asset over the term of the lease, and the recognized liability represents the obligation to make lease payments under the related lease agreement. In situations where an extension of the lease agreement terms is anticipated, the extended terms will be used to recognize the related asset and liability.

For example, if you lease a vehicle under an operating lease, the new standards will require you to recognize the value of your right to use that vehicle as an asset and the present value of the lease payments as a liability.

The good news, for now, is that these changes will not take effect until 2020 for most privately held organizations (years beginning after December 15, 2019). This provides time to prepare.

One of the main areas of concern voiced by initial readers of the new standards is that this recognition of assets and liabilities will impact financial ratios often used to manage debt covenants. By recognizing assets and liabilities that were not on the balance sheet before, the equity section of the balance sheet seems to shrink proportionally.

Now is a good time to investigate and start discussions with your trusted advisors about the impact this standard could have on any debt covenants you have with a bank or other financing institution.

The tracking of operating leases has traditionally been fairly simple. Monthly payments were made and recorded to expense. With the new standards, however, the asset will need to be adjusted with each payment and maintained more similarly to a property and equipment schedule.

Similarly, the liability arising from the operating lease payments will need to be tracked and reduced over time. For an organization with one or two leases, this will still be relatively easy. However, if your business model relies on a larger quantity of leases, this may require the purchase of additional software to track the lease assets and liabilities.

Many organizations will also want to take this opportunity to reevaluate the completeness of their list of operating leases. Where a missed lease in the past was difficult to identify, the missing asset and liability may be more impactful on the updated balance sheet under the new rules.

Finally, organizations will need to make a determination about when to implement the new lease standards. The FASB will allow early adoption of the leasing standards, but full compliance is required by 2020.

We will be sharing more technical implementation ideas about the changes in lease standards in the future. If you have any questions, please contact Mike Bedel at (317) 613-7852 or email mbedel@sponselcpagroup.com.

Private Company Accounting Update: New Option for Common Control Leasing

Mike_Bedel_smallLast week during the madness of the NCAA Men’s Basketball Tournament, the Financial Accounting Standards Board (FASB) approved an opportunity for privately held companies to cease consolidating certain related entities.

The practice of consolidating “variable interest entities,” originally referred to as “FIN46,” has been one of the most discussed and disliked accounting standards implemented in the last 10 years. FASB just released Accounting Standards Update 2014-07, which provides an elective accounting alternative on consolidation requirements for certain common control leasing arrangements.

This election is available to privately held companies in situations where four specific conditions exist in their relationship with a lessor entity:

  1. The private company lessee and the lessor entity are under common control
  2. The private company lessee has a lease arrangement with the lessor entity
  3. Substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities between those two entities
  4. If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor entity.

 This elective accounting alternative is available to all entities except public business entities, non-profit entities and certain employee benefit plans. When elected, it must be applied to all current and future lessor entities that meet the criteria above.

By electing this alternative, an entity will not be required to provide the traditional variable interest entity disclosures about the related lessor. In place, the FASB has established other disclosures for the private company lessee to include in their statements.

This is the third accounting standards update in 2014 designed to provide an elective accounting alternative for privately held companies. ASU 2014-02 and ASU 2014-03 were released in January 2014. Like the other two, early adoption of ASU 2014-07 is permitted for financial statements that have not yet been issued.

If you are interested in learning more about this most recent elective accounting alternative, please contact Mike Bedel at (317) 613-7852 or email mbedel@sponselcpagroup.com.

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