Friday, March 24, 2017

SEC chief accountant highlights revenue recognition, internal control topics

By Amanda Maine, J.D.

SEC Chief Accountant Wesley Bricker recently addressed the Annual Life Sciences Accounting and Reporting Congress in Philadelphia, where he discussed the progress of companies transitioning to FASB’s new revenue recognition standard. He also touched on the importance of effective internal controls over financial reporting in transitioning to the new standard.

Revenue recognition. Bricker praised issuers that have made use of the transition guidance for the new revenue recognition standard on contracts with customers, which was issued by FASB and the IASB in May 2014 and will be effective for all issuers for the annual reporting periods beginning after December 15, 2018. However, he noted that some companies are lagging behind and need to make significant progress this year in their implementation of the standard. According to Bricker, eight percent of respondents in an October 2016 survey of public companies had not started an initial assessment of the new standard, and an “overwhelming majority” of the other respondents were still assessing its impact.

Bricker noted that none of the 108 submissions to FASB’s Transition Resource Group (TRG) remain open and that TRG discussions have been published by FASB as a resource for preparers and auditors to understand the application of the new standard’s core principles and their application. The AICPA and other industry groups have also published guidance, and the SEC’s own Office of the Chief Accountant has received consultation requests from registrants about the new standard, with the issue of whether a registrant is a principal or an agent in a revenue transaction being among the most common, he said.

Guidance on revenue recognition has also changed, Bricker said. The current recognition guidance is primarily a risk and rewards-based model; however, the new standard is focused on control, Bricker advised. Additional judgments may be needed in applying the new standard, Bricker said, and OCA staff will continue to respect well-reasoned, practical judgments when they are grounded in the principles of the new standard. Still, he emphasized the need for preparers to understand the underlying transaction behind the judgment, including the registrant’s specific facts and circumstances and contractual terms.

In addition, Bricker explained that if a company does not know the expected financial impact of the new standard, that fact should be disclosed. The SEC staff will expect such disclosures to include a qualitative description of the effect of the new accounting policies and a comparison to the company’s current accounting, Bricker said.

Internal controls. According to Bricker, “it is hard to think of an area more important than ICFR.” When implementing the new standard, companies should do a “refresh” of components of ICFR such as professional competence, he said. “Having resources with sufficient training and competence is fundamental to the effectiveness of a company’s overall control environment,” Bricker declared.

He also stressed the importance of setting the right “tone at the top” and expectations for responsible conduct throughout the company. Taking a fresh look at a company’s IT and communication ICFR components should be part of implementing the new standard, Bricker advised.

In addition, Bricker implored companies to keep in mind that the effectiveness of changes to internal controls are predicated on the comprehensive and timely assessment of risks that might arise in the wake of the new standard. These risks may exist in different areas of the company, and management and employees from the accounting and financial reporting function should be involved in assessing these risks, according to Bricker.