IPO Filers Face New Hurdles After Accounting, Tax Law Changes

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By Denise Lugo

Companies that file initial public offerings are facing additional financial reporting challenges this year.

New revenue accounting rules and the 2017 tax act ( Pub. L. No. 115-97) are adding extra work and costs to the IPO process, accountants told Bloomberg Tax. These changes are squeezing company resources already stretched from gearing up for a public filing.

“Companies have a lot to digest in a very short period of time between revenue recognition, the change in tax laws, and leasing coming up,” said Peter Bible, chief risk officer at EisnerAmper LLP in New York. “A lot of companies dealt with it by hiring outside firms to help, but even then you still had a lot of systems implementation that take some time to get through.”

Ninety new IPOs have been filed in the U.S. so far this year, a 23 percent increase from the same period in 2017, according to Renaissance Capital LLC, a Greenwich, Conn.-based global IPO investment adviser.

In 2014, $86.6 billion was raised by companies through 275 IPOs, including Alibaba Group Holding Ltd., GrubHub Inc., and GoPro Inc. This year’s May IPO filers include:

  •  BJ’s Wholesale Club Holdings Inc., a membership only retailer based in Westborough, Mass.;
  •  Focus Financial Partners LLC, a New York-based wealth management company;
  •  Adaptive Insights Inc., a software company based in Palo Alto, Calif.;
  •  Avalara Inc., a Seattle, Wash.-based software company;
  •  U.S. Xpress Enterprises Inc., a Chattanooga, Tenn.-based transportation company; and
  •  DropBox Inc., a file hosting service based in San Francisco.

Navigating Historic Changes

IPO filers this year—and next—must operate in a financial reporting environment full of historic accounting changes, the effects of which are still unfolding in the public company marketplace.

The new revenue rules change how companies report earnings from customer contracts—figures critical to profitability and share price. Similarly, tax reform introduces refinements that require new disclosures and the evaluation of financial reports.

Public companies also must prepare their systems to record long-term lease commitments in 2019 on balance sheets—another first-time change. Balance sheets are expected to balloon as these figures are recognized.

Companies have had to hire consultants and change their internal software systems to record the necessary data required for public financial reports, accountants said. The work is time-consuming and can be costly.

“Depending on how sophisticated the private company’s internal house is, they can spend” from $250,000 to $500,000 to prepare their systems, Bible said.

“Then you have the lawyers’ fees, the underwriting fees, and added staff to deal with the increase of regulatory reporting. So there are a lot of costs involved,” he said.

Caution: Check Emerging Growth Status

It’s not all bad news. Some IPO filers still have time to adapt to the new accounting changes. IPO filers that qualify as emerging growth companies can adopt the revenue rules in 2019, and the lease accounting rules in 2020—the implementation date for private companies.

KPMG LLP accountants cautioned in a May 30 webcast that a company’s emerging growth status isn’t guaranteed, and needs to be checked.

Emerging Growth Companies are issuers that have annual revenue of less than $1 billion when shares are first issued and a market capitalization of less than $700 million. They lose their EGC status if revenues exceed $1million or public float exceeds $700 million at the end of their fiscal year.

Companies that are near or above the revenue threshold for qualifying as an emerging growth company need to adopt the new revenue rules in 2018 and lease accounting in 2019—the timeline for public company adoption, said Meredith Canady, a partner in KPMG’s department of professional practice in New York. Don’t assume, she warned.

More tech companies will see a need to comply, given that more of them are going public this year versus last year, said Heather Gates, national managing director of Deloitte LLP’s emerging growth company practice in San Jose, Calif.

Going forward, Gates said, companies can prepare for significant accounting changes by conducting analysis, reviewing their systems, and rebooking transactions ahead of due dates.

“This all takes time and resources,” she said.

To contact the reporter on this story: Denise Lugo in New York at dlugo@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

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