New Accounting Rules Spell Big Changes for Public Companies

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By Denise Lugo

Public companies—including Inc. and Microsoft Corp.—are gearing up for the most historic accounting changes to hit U.S. capital markets in decades.

The changes, which will affect the reporting of revenue streams, balance sheets and net income, are likely to roil earnings reports. These far-reaching accounting changes stem from new rules on revenue, leases and credit losses on loans.

Corporations are sharply focused on preparing for the bigger accounting standards on revenue (ASC 606), Leases (ASC 842) and Financial Instruments—Credit Losses (ASC 326) that are effective 2018, 2019 and 2020, respectively.

They are also prioritizing attention to narrower rules relevant to stock compensation and other topics applicable to 2017 financial statements, practitioners told Bloomberg BNA.

In their 2017 financial statements, companies also need to apply the updated disclosures in Securities and Exchange Commission Staff Accounting Bulletin No. 74. These require a company to disclose if the corporation doesn’t know or can’t reasonably estimate the impact that adoption of the three bigger standards is expected to have.


The level of work that each organization needs to complete on the bigger standards could affect its ability to address additional smaller rule changes this year, said Pat Durbin, a partner in PricewaterhouseCoopers LLP’s national professional services group.

Rules on accounting for Revenue from Contracts with Customers (ASC 606)—one of the biggest overhauls in financial reporting—factor highly for companies in 2017 because they are mandatory in 2018, but can be adopted this year.

Microsoft, which will adopt the rules July 1, said they will have a material impact on its consolidated financial statements. “We currently believe the most significant impact relates to our accounting for software license revenue,” Microsoft said in its 2016 Q4 earnings release.

Most companies, however, will wait until the 2018 effective date to adopt the revenue standard. “Some companies will likely choose to adopt the new lease accounting rules—effective 2019 but can be applied earlier—at the same time they adopt the revenue rules on its 2018 effective date,” Deloitte & Touche LLP partner Bob Uhl told Bloomberg BNA. This year is therefore a critical prep year for such firms.

Applicable to 2017 Statements

Here are the top five new standards companies can apply in 2017 that will have the most impact on their financial statements:

1. Revenue

ASC 606 can be applied as of Jan. 1, 2017, by companies that want to adopt it early. The far-reaching rules are applicable to all companies, sectors and certain employee benefit plans.

In addition to Microsoft, companies that plan to adopt the rules this year include First Solar Inc., a New York-based solar energy equipment suppler, and aerospace and defense company General Dynamics Corp.

The standard replaces numerous, industry-specific requirements, and areas of it converge with international accounting rules. It requires a five-step process for customer-contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.

Among other provisions, companies are required to provide enhanced disclosures that focus on the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.

If there is a meaningful change beyond the required disclosures, companies should also consider creating another, more robust, plain-English articulation to the market about what the changes are. The disclosure should include their effects on company results and comparability—past and future, Neri Bukspan, a partner in Ernst & Young LLP’s financial accounting advisory services practice, told Bloomberg BNA.

In such cases, more transparency would go a long way to enhance market awareness and understanding, said Bukspan, who is EY’s Americas Disclosure Leader.

2. Employee Share-Based Payment Accounting.

Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, makes it easier to account for stock forfeitures—losses—because they can be accounted for when they occur instead of having to estimate them. It also liberalizes classification of stock compensation awards for tax withholdings and allows a company to withhold the maximum instead of limiting it to the minimum statutory rate.

The rules—which were issued in March 2016, become effective in 2017 and for which earlier application is allowed—also mean companies won’t have to track historical excess tax benefit pools—"APIC pools"—which can be complex. All the tax benefits and tax deficiencies will now go through the income statement.

The rules could impact any company that issues some form of stock-based compensation to its employees. For example: in its 2016 10-Q Amazon said it is currently evaluating the standard and expects it to have material impact on its consolidated financial statements.

Some companies that early-adopted the standard last year saw changes. Irvine, Calif.-based Masimo saw a $7.7 million reduction to its income tax provision for the nine months ending Oct. 1, 2016, according to its Securities and Exchange Commission Form 10-Q filed in November 2016. Masimo is a manufacturer of noninvasive patient monitoring technologies.

The rules could affect some companies’ net income and earnings per share—"it does impact profitability,” Adam Brown, a partner and national director of accounting at BDO USA LLP, told Bloomberg BNA. “Diluted earnings per share will be lower as a result of these changes—it’s a little bit of a sleeper because we were just trying to simplify GAAP, and it did, but the trade-off is now you’ve got a little bit more volatility in earnings,” he said.Brown said companies should talk to their investor relations team or mention the issue on analysts’ calls where the issue would be noticed so that it can be factored in.

3. Cash Flows

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash payments, addresses eight specific cash flow issues that aren’t currently addressed under generally accepted accounting principles (GAAP), including prepayment of debt and contingent consideration payments made after a business combination.

This will provide clarity for companies on whether an item should be categorized as operating, financing or investing.

“Not being asleep at the wheel and maintaining awareness of these issues will be important, because this cash flow standard touches so many different issues that have heretofore not been explicitly answered, BDO’s Brown said.

The standard is effective in 2018, but can be early adopted for 2017 statements. The changes are relevant to all companies and industries, and are aimed at providing simpler, less costly rules.

4. Simplifying Measurement of Inventory

Companies in the manufacturing and retail sectors that account for inventory by using the first-in, first-out (FIFO) method are eligible to apply Inventory (Topic 330): Simplifying the Measurement of Inventory.

The new rules, issued in July 2015 but effective this year, change the measurement principle for inventory from lower of cost or market value to lower of cost and net realizable value. The accounting standard defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

“It only applies if you have an inventory impairment which for the most part you hope that you don’t have,” said Deloitte’s Uhl. “It’s not changing when you have impairment, it’s changing the calculation of it—the old way was more complex and costly and so this is a cheaper and easier way to do it,” he said.

A portion of a company’s inventory can become impaired—lose value—in situations whereby a product is being discontinued.

5. Classifying Deferred Taxes

Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, requires companies to classify all their deferred taxes as noncurrent instead of having to go through more complex calculations to determine what is going to happen within the year and what happens after that. Companies won’t have to determine what portion of their deferred taxes is current versus noncurrent, which under old provisions was somewhat costly and time consuming.

“It benefits the users because they were confused,” Uhl said. “They had indicated to FASB it didn’t provide them with a lot of relevant information to classify deferred taxes between ‘current’ and ‘noncurrent’ and it helps companies in simplifying,” he said.

The deferred taxes amendment was issued in November 2015, but takes effect this year for all companies that issue a classified balance sheet.

To contact the reporter on this story: Denise Lugo in New York at

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

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Financial Accounting