Several improvements seen by General Industries Review Task Force
February/March 2018 Footnote
A recurring theme learned through the General Industries Review Task Force's work is the need to embrace change in the public accounting profession.
Our clients regularly go through internal structural, operational and/or financing changes that are ultimately reflected within their financial statements. These changes are combined with the need to determine whether a new or revised accounting standard is now effective, which affects our client's financial statements, and how to apply the new or revised standard(s).
The task force is a group of volunteer MNCPA members (24 in 2017) who have experience in one or more general industries. The group is charged with reading and providing confidential feedback on financial statements, which are composed of a mixture of compilations, reviews and audits submitted by MNCPA members' firms. Feedback is intended to help firms improve overall quality. The task force is not part of the MNCPA Peer Review Committee or any other sanctioning authority.
This year, the task force provided feedback on more than 70 financial statements. At our half-day meeting, there was a concentrated discussion on specific reporting issues, a wrap-up report to the entire task force on findings in each financial statement reviewed, plus an opportunity for socializing with peers. What a great resource this task force is for members!
In general, financial statements submitted this year reflected improvement compared to prior years in incorporating the flurry of new accounting pronouncements, including the new Statements on Standards for Accounting and Review Services (SSARS), fair value measurement and disclosure standards, variable interest entity determination and reporting, and more.
There were also several common findings exposed by the task force. The following outline the most prevalent of these financial statement errors or oversights.
Failure to adopt presentation and disclosure requirements of ASU 2015-03 (also be aware of ASU 2015-15 related to line of credit arrangements), specifically related to debt issuance costs, which were formerly generally reported as intangible assets on the financial statement, and are generally now reflected as a reduction in the carrying amount of the related debt. It is worth noting ASU 2015-03, as it pertains to presentation of debt issuance costs on long-term debt, was the most common finding in the financial statements submitted by firms.
Firms should also note ASU 2015-15, which more specifically addresses a generally different presentation and disclosure of debt issuance costs related to line of credit arrangements.
Consider adding or providing more specific policy disclosure on revenue recognition. Ultimately, upcoming new revenue standards will likely necessitate this change; however, under current standards, the reader of the financial statements should understand when revenues are recognized. Industry-specific disclosures are generally applicable under current standards, such as disclosure of the revenue recognition policy in a financial statement of a contractor with long-term construction contracts.
There were several instances of disclosures of cash equivalents for purposes of the statement of cash flows. In these circumstances, the balance sheet and cash-flow statement would generally be expected to reflect cash and cash equivalents; however, several financial statements only reflected cash on both statements, making it unclear whether cash equivalents were even applicable. In certain cases, it appeared cash equivalents actually included items normally classified as investments.
For not-for-profit financial statements, take note of ASU 2016-14, which likely affects most financial statements. Several financial statements were submitted to the task force that included "underwater" funds, restricted net assets, and multiple program activities, which require new detailed disclosures.
Be aware of the possible presence of union-sponsored benefit plans, and applicability of disclosures when participating in multi-employer pension plans.
There were several instances with the subsequent event footnote in which the date the accountant disclosed was before or after the report issuance date on the accountant's report. Instead, it should have been the same date as the report date.
When restating an amount within the financial statements, be aware of requirements to disclose the balances as they were originally reported as required by standards, which enables the reader to understand what was restated.
Ensure the nature of activities disclosed is still current. Be aware that references to awards won or commentary on the organization's placement as the leader in its industry, charts and graphs, etc., are not customarily found in a basic financial statement.
Appropriate accounting for contractor work-in-process when following percentage of completion will generally require over/under billings to be recorded on the balance sheet, and firms involved with contractors need to be versed on these industry differences. Also, be aware of required disclosures of retainages.
Certain financial statements submitted appeared to have noncash activity (equipment financed with long-term debt). However, no such disclosures were made and the statement of cash flows reflected this activity as actual cash-flow activity.
Finally, don't overlook the many employee stock ownership plan disclosures necessary when there is an ESOP in place.
Tom Zachman, CPA is the managing partner of Thomas J Zachman CPA LLC. He may be reached at 320-493-1296 or firstname.lastname@example.org.
A sincere thank you to each volunteer on the 2017 task force
Next summer, consider volunteering for the General Industries Review Task Force. The task force has members who will guide you through the process. Much is learned by simply participating in the meeting, where one-on-one and group discussions take place with other task force members. Reach out to Chandany McDermottif you're interested in volunteering.