Every year CFRA’s accounting experts produce an annual research report on the accounting hot topics all investors should understand.
Below is an excerpt of our 2017 report for your educational benefit.
The accounting hot topics for 2017 will include revenue recognition as the adoption deadline for the new global revenue recognition standard is less than a year away. Income taxes will also be a hot topic due to a number of FASB amendments issued in 2016 and the widely expected legislative actions on corporate taxes. Some companies may have to retrospectively change the classification of certain transactions on the cash flow statement. The FASB released 3 major final standards in 2016, credit losses, recognition and measurement of financial instruments and lease accounting, which generally will be effective in 2018-2020. Other major changes on the horizon include proposed changes to pension expense presentation and hedge accounting.
Key Accounting Topics
- Revenue Recognition. The mandatory effective date is January 2018 for both US GAAP and IFRS companies. The numerous amendments finalized in the past year do not change the core principles of the standard, but may result in differences between US GAAP and IFRS.
- Financial Instruments. 1) Credit losses: the new standard will require an expected credit loss model rather than the current incurred loss model, change the accounting for debt securities in a significant loss position and the accounting for assets purchased at a discount due to deterioration in credit quality. 2) Recognition and measurement: the most significant change will be to fair value most equity instruments with changes recognized in earnings.
- Leases. The new standard will require essentially all leases to be reported on the lessee’s balance sheet. IFRS companies will likely see more significant impact on P&L and cash flow from operating activities compared with US GAAP companies.
- Taxes. 1) Share-based compensation: the tax effects are now required to be included in income tax expenses and operating cash flows. Based on our analysis, early adopters of the new guidance benefited materially in EPS, cash flow from operations and their growth rates. 2) Intra-company transfers: IP intensive companies may report higher volatility in effective tax rates and earnings, as the tax effects associated with intra-entity transfers of assets (excluding inventory) will have to be recognized immediately rather than deferred. 3) Tax rate changes: CFRA Legal Edge discusses whether the expected corporate tax rate changes could be or are likely to be retroactive, and also how the law would deal with changes in the rate in the middle of the tax year.
- Cash Flow Classification. Some companies may have to retrospectively change the cash flow classification for certain transactions such as contingent acquisition considerations, specified debt payments, dividends from equity method investments, subsequent receipts in receivable securitization and insurance proceeds. There was no specific guidance in these areas previously.
- Pension Expense. The FASB is expected to soon finalize a new standard on the presentation of pension expense. Under the proposal, only service cost would be eligible for capitalization, and only service cost would be presented above operating income.
- Hedge Accounting. We believe the recently proposed standard will expand the risk management activities for which hedge accounting is allowed, reduce the cost and complexity of hedge accounting by easing the burden of effectiveness testing and documentation, and improve financial statement transparency.
Wishing you much investment success in 2017!
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