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Revenue recognition, going concern are on the peer review radar

Document your policies, procedures for ASC 606 and assess the going concern effect of COVID-19

By Barbara Beltrand, MLS, MBA, CPA

and Faye Hayhurst, MNCPA director of finance and administration

Two new accounting topics – one long anticipated and one a 2020 surprise – are affecting financial statements and have the potential to be missed by both companies and their auditor or financial statement preparer. This in turn can have ramifications on a CPA firm’s peer review.
 
What are these topics?

  • Implementation of  ASC 606, commonly referred to as the revenue recognition standard.
  • Evaluation of the impact of COVID-19 on a company’s operations and ability to continue as a going concern. 

Revisiting the revenue recognition timeline

The deadline for implementing the revenue recognition standard underwent many changes. To further complicate matters, there are multiple timelines for private and public companies. Essentially, here’s what you need to know:
  • The standard went into effect for private (nonpublic) companies for years beginning after Dec. 15, 2018 (essentially 2019 calendar years and after).
  • In May, FASB deferred the effective date by one year for most entities whose financial statements hadn’t yet been issued as of June 3, 2020. 
  • As follows, financial statements issued before June 3, 2020, for calendar year 2019 and later (as well as all financial statements for calendar year 2020 and later) must reflect a client’s implementation of ASC 606.
If a private company doesn’t implement the revenue recognition standard, any report on the company’s financial statement must show a GAAP departure if the failure to implement has a material effect.

CFOs, controllers: Documentation is key for ASC 606 implementation, going concern

Organizations are responsible for the accounting policies that their financial statements reflect. A company’s capitalization and depreciation policy are prime examples and most likely documented in company records. In the same spirit, an organization must have a policy regarding revenue recognition that adheres to the new accounting standard and procedures that ensure the policy is being followed. Materiality, or the lack thereof, is not a safe harbor and adoption of the revenue recognition accounting standard is not optional.
 
Furthermore, an organization’s ability to continue as a going concern in these times of the COVID-19 pandemic may be at risk. Evaluation of the business impact of COVID-19 and possible risk of an inability to continue must be documented. Depending on the level of risk, the footnotes to the entity’s financial statements may require a subsequent event or going concern disclosure.

Auditors: Peer reviewers are watching

Auditors or independent CPAs preparing compilations and reviews must document assessment of the  client’s policy and procedures relevant to revenue recognition, and how the adoption of ASC 606 is embedded in their financial statements and disclosures. If the firm issues audit, review or compilation reports on financial statements that do not reflect the client’s implementation of ASC 606, and the peer reviewer finds no evidence that ASC 606 implementation was even considered by the auditor/preparer, the peer reviewer will likely deem the engagement(s) non-conforming. One or more non-conforming engagements can have an impact on the peer review rating received by a firm, particularly for engagement reviews.
 
In short, a CPA firm’s peer review rating may be affected regardless of the materiality of non-implementation!
 
Peer reviewers are already seeing implementation of ASC 606 being missed. Therefore, at a minimum:
  • Document your assessment of your client’s implementation of ASC 606 and the effect on the financial statements and disclosures.
  • Consider recommending that your client not only have an ASC 606 policy and procedures for ensuring the policy is followed, but also have a “standard” disclosure about the adoption of new accounting standards.
Auditors and financial statement prepares should also document an evaluation of the client’s assessment of COVID-19 impact and possible subsequent event and/or going concern disclosure. The AICPA has provided many COVID-19 resources, which may be found at https://www.aicpa.org/content/aicpa/eaq/covid19.html.
 
Finally, a CPA firm that has provided consulting services to a client regarding the Payroll Protection Program (PPP) or other aid programs and issues a report on financial statements that assert independence must be sure to document how they maintained independence in the provision of non-attest services.

Takeaways

Companies: Document consideration of ASC 606 and how it has been implemented, evaluate the impact of COVID-19 on your organization’s future operations, and be prepared to discuss both with your auditor/financial statement preparer.
 
CPA firms: To ensure the best possible peer review outcome, carefully review all your firm’s audit, review and compilation engagement files for appropriate documentation in these two areas.
 
Barbara A. Beltrand, MLS, MBA, CPA is an assistant professor at Metropolitan State University and has worked in audit and accounting services since 1997. Faye Hayhurst, CPA, CGMA is the MNCPA’s director of finance and administration, and serves as the CPA on staff for the MNCPA's peer review program.