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Small private companies may need more time to adopt to changes in how companies report revenue on their annual financial statements.
Members of the Financial Accounting Standards Advisory Council March 20 encouraged accounting standard-setters to consider giving small companies more time to comply with revenue recognition standards.
The revenue recognition standard more precisely depicts how and when companies record revenue from a sale or transaction. Public companies must begin using the standard when they file quarterly reports this spring. Private businesses are set to begin applying the standard in 2019.
Members of the council raised concerns that these small firms don’t have the staff or experience to address the complex change and may rely too heavily on their outside auditors for guidance, possibly reducing the auditor’s objectivity.
Tom Parry, chair of the American Institute of CPAs’ Peer Review Board, cautioned that small businesses aren’t paying attention yet and could end up relying too heavily on their auditor for help.
“It becomes difficult for firms in that situation to not cross over that line and start to impair their independence,” Parry said.
Financial Accounting Standards Board Chairman Russell Golden told Bloomberg Tax that the concerns raised would be discussed in April with the Private Company Council, which also advises the board.
Related technical concerns that might help simplify revenue recognition implementation for small companies will also be on the agenda, Golden said.
The call for help comes as a substantial number of publicly traded companies are having trouble getting set for their first use of broad revenue reporting rules.
“Most everybody underestimated just how much time and cost this was going to take,” said Sydney Garmong, a partner with Crowe Horwath LLP, during a discussion over lessons learned from the standard change.
PepsiCo Inc. racked up more than 1,000 hours on its roll-out and spent more than $500,000, said Marie Gallagher, the beverage company’s controller.
In comparison, Richard Forrestel, treasurer for Cold Spring Construction Co., Akron, N.Y., said he is the only finance person on staff at his employer and there are thousands of other companies out there in the same situation, he told the council.
These firms rely on auditors to train and educate them. “The auditors will be put in the position of judge and jury and I’m looking at impairment issues. It’s an unintended consequence,” he said.
Forrestel told the council that more time would help prepare private companies for the pending accounting change.
Joan Waggoner, a partner with Plante Moran PLLC, called it a real risk especially if businesses delay or take no steps to adopt the standard. Her firm is trying to coax their private company clients to comply with the standard. “We can’t do it for them,” she said.
She said that any training for smaller companies should be tailored to help accountants navigate through a simplified set of business scenarios.
More training and education is needed too for lenders who often require audits and financial statements meeting generally accepted accounting principles for these small companies, Waggoner said.
Council members didn’t define small companies and urged FASB members to consult with its other advisory councils to determine which companies might get an extension.
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