Top Five New Accounting Changes Applicable to Companies in 2017


This year companies are gearing up for the most historic accounting changes to hit U.S. capital markets in decades stemming from new rules on revenue, leases and credit losses, which take effect over the next one-to-three years.

Companies are now directly prepping to implement these new standards plus additional narrower rules relevant to stock compensation and other topics applicable to 2017 financial statements, practitioners told Bloomberg BNA.

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

Applicable to 2017 Financial Statements.
Practitioners highlighted the following as the top five most impacting new standards companies can apply to 2017 financial statements:

1.Revenue.

Revenue from Contracts with Customers (ASC 606), which is effective 2018, can be applied as of Jan. 1, 2017 by companies that want to early adopt it. The far reaching rules are applicable to all companies, sectors and certain employee benefit plans.

Companies that plan to adopt the rules this year include Microsoft, the Redmond, Wash.-based multinational technology company. Microsoft has said it expects material impacts to its consolidated financial statements as a result of adopting the new rules.

The standard replaces numerous, industry-specific requirements and areas of it converges with international accounting rules. It requires a five-step process for recognizing customer contracts revenue, and 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 revenues 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 and their effects on company results and comparability—past and future, Neri Bukspan, partner in EY’s financial accounting advisory services practice told Bloomberg BNA.

2. Employee Share-based Payment Accounting.

Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, was issued March 2016, but is effective 2017. Earlier application is allowed.

The standard simplifies accounting 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 also mean companies won’t have to track historical excess tax benefit pools—“additional paid in capital (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, Inc. said it is currently evaluating the standard and expects the standard to have material impact on its consolidated financial statements.

“It will impact net income and therefore earnings per share—it does impact profitability," BDO USA partner Adam Brown told Bloomberg BNA.

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, Brown said.

3.Cash Flows.

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash payments, is effective 2018, but can be early adopted for 2017 statements. The changes are relevant to all companies and all industries and are aimed at providing simpler, less costly rules.

The standard 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.

Companies will therefore have clarity for whether an item should be categorized as operating, financing or investing.

4. Simplifying the measurement of inventory.

Inventory (Topic 330): Simplifying the Measurement of Inventory, was issued July 2015, but is effective this year. Companies in the manufacturing and retail sectors that account for inventory using the first-in, first-out method (FIFO) method are eligible to apply the rules.

The new rules 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,” Deloitte & Touche LLP partner Bob Uhl told Bloomberg . “It’s not changing when you have impairment, it is 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—loses value—in situations whereby a product is being discontinued.

5.Classifying Deferred Taxes.

Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, was issued November 2015, but takes effect this year for all companies that issue a classified balance sheet.

It requires companies to classify all their deferred taxes as noncurrent instead of having to go through more complex calculations to determine what’s going to happen within the year and what’s after that.

Companies won’t have to determine what portion of their deferred taxes are “current” versus “noncurrent”, which—under old provisions—was somewhat costly and time consuming.

“It benefits the users because they were confused,” said Deloitte's Uhl. “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.

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