10 Things to Consider Ahead of Year-End Financial Reporting

Overview

Whether you are a publicly or privately held company, there are a lot of things to consider as you prepare for the year-end from a financial reporting outlook. To assist with the process, we have compiled the below list of our top 10 financial reporting reminders and considerations for public and private companies.

Top 5 For Private Companies

  • Significant Transactions – Valuation, Audit and Tax Considerations
  • ASC (Accounting Standard Codification) 606 Adoption
  • Simplification – ASU (Accounting Standards Update) 2017-09 and ASU 2017-01
  • Cash Flow Considerations – ASU 2016-15 and ASU 2016-18
  • Planning Ahead – ASC 842

Top 5 For Public Companies

  • Significant Transactions – Valuation, Audit and Tax Considerations
  • Learning from Others – SEC Comment letter trends
  • ASC 842 Adoption
  • Financial Instruments: ASU 2016-01
  • SEC Simplification Considerations

Top 5 for Private Companies

  1. Significant Transactions – Valuation, Audit and Tax Considerations

Did you complete any significant transactions during the year? Significant transactions such as acquisitions, divestitures, and material debt or equity transactions may require valuation assistance, which take time and could cause delays in your year-end financial reporting process, if not planned for appropriately. Transactions may require a valuation of assets or financial instruments in order for items to be recorded at their appropriate fair value. Documenting the appropriate accounting for these transactions early will streamline the process and can be started as soon as the transaction agreements are finalized. The accounting memorandum should also include a draft of the related financial statement disclosure to facilitate the financial statement preparation process. Documenting your accounting position and liaising with third party valuation team members early will prevent delays in your process, as this will give your auditors more time to consider the transaction.

In addition, in cases where a business or asset(s) were acquired in prior periods, an impairment analysis may need to be conducted in regard to goodwill and intangible assets. Centri can assist companies with preparing accounting memorandums, complex valuations, purchase price allocations, impairment analyses and associated financial statement disclosures in connection with the transaction. In addition, Centri can help to prepare or compile other supporting documentation for management to provide to auditors to give comfort over the amounts recorded in these high-risk areas.

  1. ASC 606 Adoption

Have you completed your revenue recognition assessment and appropriately documented your assessment process in addition to your new accounting policies? As you’re likely aware, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance—FASB ASC 606 or IFRS 15, the IASB’s comparable standard—replaces substantially all existing U.S. Generally Accepted Accounting Principles (GAAP) on this topic. While the compliance deadline for public organizations has already passed, nonpublic organizations must apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2018. Documenting your conclusions reached are important, however, you also need to document the roadmap that you used to get there. How many contracts did you select for testing and why, what costs did you consider for capitalization, and what method do you plan for adoption are just some of the questions that you’ll need to answer as part of the process. In addition, it is critical to prepare a tracking mechanism to organize all revenue contracts for use when performing the analysis, and in addition, to expedite the process for your auditors.

Not sure where to start? Centri can assist with preparing your plan to adopt the standard. We can also provide as much support as you need to perform and document the five-step contract analysis to identify when revenue should be recognized. From thought leadership to contract review and documentation – Centri can help.

  1. Simplification – ASU 2017-09 and ASU 2017-01

ASU 2017-09 was issued to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.

ASU 2017-01 created a new framework for entities to use in evaluating whether an integrated set of assets and activities (collectively a “set”) should be accounted for as an acquisition of a business or a group of assets. It added an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business and removes the need to consider a market participant’s ability to replace missing elements.

These updates provide opportunities to simplify the accounting that your company is using and increase efficiencies in financial reporting. Do you know how you can capitalize on these simplifications? If you are unsure, Centri can help you efficiently evaluate the impacts of the simplifications that may apply to your business.

  1. Cash Flow Considerations – ASU 2016-15 and ASU 2016-18

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows for areas including:

  • Debt prepayment or debt extinguishment costs
  • Settlement of zero-coupon
  • Debt Instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing
  • Contingent consideration payments made after a business combination proceeds from the settlement of insurance claims
  • Proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies
  • Distributions received from equity method investees
  • Beneficial interests in securitization transactions
  • Separately identifiable cash flows and application of the predominance principle

Does your financial reporting team struggle to prepare the statement of cash flows at year-end? These updates provide clarification on these previously obscure areas. Centri can assist your team by providing direction as to where to bucket cash inflows and outflows related to the transactions listed above.

  1. Planning Ahead – ASC 842

ASC 842, also called ASU 2016-02, is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). It will replace the previous FASB lease accounting standard, ASC 840. ASC 842 closes the ASC 840 gap by requiring that all operating leases be capitalized on the balance sheet. The most significant change will be on the balance sheet for lessees. The pattern of expense recognition in the income statement will depend on a lease’s classification and will be consistent with current U.S. GAAP.

Now is the time to start considering how your company will handle the new leasing standard. Companies need to start identifying all operating leases, as they will need to be capitalized on the balance sheet at the beginning of the upcoming fiscal year. Ensuring completeness over the lease population will be a challenge for all companies. For example, there may be leases embedded into service contracts which could easily go undetected without proper consideration. Centri can help by performing a completeness check to ensure that all leases are appropriately recorded on the balance sheet, as well as providing support with the entire analysis.

 

Top 5 for Public Companies

  1. Significant Transactions – Valuation, Audit and Tax Considerations

Did you complete any significant transactions during the year? Significant transactions such as acquisitions, divestitures, and material debt or equity transactions may require valuation assistance, which take time and could cause delays in your year-end financial reporting process, if not planned for appropriately. Transactions may require a valuation of assets or financial instruments in order for items to be recorded at their appropriate fair value. Documenting the appropriate accounting for these transactions early will streamline the process and can be started as soon as the transaction agreements are finalized. The accounting memorandum should also include a draft of the related financial statement disclosure to facilitate the financial statement preparation process. Documenting your accounting position and liaising with third party valuation team members early will prevent delays in your process, as this will give your auditors more time to consider the transaction.

In addition, in cases where a business or asset(s) were acquired in prior periods, an impairment analysis may need to be conducted in regard to goodwill and intangible assets. Centri can assist companies with preparing accounting memorandums, complex valuations, purchase price allocations, impairment analyses and associated financial statement disclosures in connection with the transaction. In addition, Centri can help to prepare or compile other supporting documentation for management to provide to auditors to give comfort over the amounts recorded in these high-risk areas.

  1. Learning from Others – SEC Comment letter trends

SEC comment letter trends illustrate the agency’s focus on the following areas:

  • Revenue Recognition –performance obligations, gross versus net presentation, variable consideration, timing of revenue recognition, costs to obtain a contract, and disaggregated revenue
  • Fair Value Measurement – valuation techniques & key inputs, quantitative information provided for significant unobservable inputs, and sufficiency of disclosure related to non-recurring fair value measurements, such as impairments.
  • Goodwill & Other Intangibles – identification of reporting units, particularly when multiple components have been combined into a single reporting unit, and at-risk reporting units, including key assumptions used to determine fair value and test for impairment, as well as timing of any impairment charges.
  • Business Combinations – purchase price allocations (“PPA”), completeness of PPA disclosures when the allocation is preliminary, and compliance with the pro forma financial information requirements for business combinations in Regulation S-X Article 11.
  • Management’s Discussion and Analysis – results of operations, including description of unusual events or significant economic changes, critical accounting estimates, and liquidity and capital resources.
  • Income Taxes – effective tax rate reconciliations and uncertain tax positions, valuation allowances, and the indefinite reinvestment assertion, including circumstances that led to changes in indefinite reinvestment conclusions.

Trying to ensure your company does not receive SEC comments on its 2018 10-K? Does your Company need help responding to a SEC comment letter? Centri is familiar with the areas that the SEC focuses on, as well as identifying exactly what they will be looking for in your company’s financial statements. Our expertise in financial reporting can help your team to prepare all required financial statement disclosures.

  1. ASC 842 Adoption

Lessees, lessors, and practitioners will need to comply with the leasing standard ASU 2016-021 (“ASC 842”); issued by the FASB in 2016, taking effect beginning 2019. Under its core principle, a lessee will recognize right-of-use (ROU) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. The pattern of expense recognition in the income statement will depend on a lease’s classification. For calendar-year public business entities the new standard takes effect in 2019, and interim periods within that year; for all other calendar-year entities it takes effect in 2020, and interim periods in 2021.

How will your company assert the completeness of its lease population moving into the new fiscal year? Centri can assist in ensuring a complete lease population, as well as providing valuation services to record the corresponding leasing assets and liabilities on the books at the appropriate value. This new standard is mandatory for all public companies in the 2019 fiscal year, so as soon as year-end financial statements are filed, focus will need to be shifted immediately to the new leasing standard. Centri can help perform the analysis and prepare the disclosures required for your 2019 first quarter financial statements.

  1. Financial Instruments: ASU 2016-01

ASU 2016-01 amends ASC 825, Financial Instruments, so that all equity investments will be measured at fair value, and changes in the fair value will be recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Furthermore, entities will present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the amendments in this update will eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, as well as the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.

This update makes significant changes to way that financial instruments will be measured, and how changes in fair value will be run through the income statements and other comprehensive income. Does this apply to your Company? If you have questions, reach out to Centri – we can help!

  1. SEC Simplification Considerations

The SEC voted to adopt amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. These amendments apply primarily to public reporting companies (including foreign private issuers). Some of the amendments also apply to other entities the SEC regulates, including Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations. The SEC disclosure requirements eliminated due to redundancy relate to areas including financial statement consolidation and combination, balance sheet obligations, income tax disclosures, warrants, right & convertible instruments, related parties, contingencies, earnings per share, and changes in accounting principles. Do not waste valuable time at year-end preparing SEC disclosure that are no longer required! Centri can help to increase the efficiency of your company’s financial reporting team during the year-end financial statement preparation process.

 

Centri Business Consulting is dedicated to providing the highest quality finance and accounting consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their strategic accounting and reporting demands. From complex technical accounting transactions to periodic financial reporting, our professionals can offer any organization specialized expertise and multilayered skill sets to ensure the work gets done right.

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