Be Careful to Match Accounting to Business Arrangement: SEC

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By Steven Marcy

Dec. 6 — Companies must pay careful attention about where decision-making authority resides within strategic alliances or risk getting their accounting wrong, an SEC associate chief accountant told a financial reporting conference.

The expected proliferation of various types of business arrangements over the next year raises many issues over how to implement new guidance on revenue recognition, leasing, business combinations and asset impairment, Jonathan Wiggins, a Securities and Exchange Commission associate chief accountant, told the American Institute of CPAs’ annual conference on SEC and PCAOB developments Dec. 5.

Evaluate Characteristics Carefully

“These highly structured arrangements can raise issues across various accounting topics, including consolidation, gain recognition, revenue recognition, derivatives, and leases,” Wiggins said.

“Whether an arrangement is a joint venture, partnership, long-term contract, or other type of structure, you should carefully evaluate the characteristics of the arrangement because they can have a significant impact on accounting conclusions.”

Entities must carefully consider whether their decision-making authority is “consistent with the substance of the underlying arrangements” for corporate governance, Wiggins said.

The SEC’s Office of the Chief Accountant has consulted companies on where in the organization such control resides and how it affects activities that “most significantly impact the economic performance of a variable interest entity,” he said.

Revenue Recognition Caution

In applying the new revenue-recognition standard, “it is important to distinguish between arrangements where the other party obtains the output of your ordinary activities, and arrangements where you participate in an activity with another party and share in the related risks and benefits (such as developing an asset in a collaboration arrangement),” Wiggins said.

Companies should invest the necessary time to determine how to apply the new standards to their various business arrangements and understand that making these determinations will require considerable judgment, Wiggins said.

To contact the reporter on this story: Steven Marcy in Washington at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

For More Information

Wiggins remarks prepared for the conference are at

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