The Accounting Policy & Practice Report ® provides financial accounting policy makers, advisors, and practitioners with the latest news, expert insights, and guidance on emerging, evolving,...
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:
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.
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 firstname.lastname@example.org
To contact the editor responsible for this story: S. Ali Sartipzadeh at email@example.com
Copyright © 2018 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)