The ever-changing world of accounting standards
Common findings seen by the General Industries Review Task Force
Joseph T. Berndt, CPA | February/March 2021 Footnote
Editor's note: Updated January 31, 2021
Keeping apprised to the changes in accounting standards is a challenge in the best of years. Then you throw a pandemic into the mix and it only makes it that much harder.
This year, the MNCPA General Industries Review Task Force met virtually to provide feedback for 22 financial statements covering a wide array of industries. This year, the construction and not-for-profit industries made up the majority of the statements reviewed, totaling 14 of the 22 received.
What is the task force?
The General Industries Review Task Force is a group of volunteer MNCPA members (19 in 2020) who annually assist firms with improving the quality of their financial reporting. The task force reviews audited, reviewed and compiled financial statements, voluntarily submitted by Minnesota CPA firms, and supplies constructive, educational and confidential feedback. The reports and financial statements are given to task force members anonymously and are considered confidential. The task force is not part of the MNCPA Peer Review Committee or any other sanctioning authority.
Financial statements submitted are distributed to task force members based on their individual industry experience. Each financial statement is reviewed by two task force members. The comments from those reviews are then combined and provided to the firms that submitted the financial statements.
The following are some of the common findings identified during the 2020 review process:
Revenue recognition
Lack of disclosure of the new revenue recognition policies was the most common finding in the financial statements submitted by firms. ASC (Accounting Standards Codification) 606,
Revenue from Contracts with Customers, eliminates the transaction and industry specific revenue recognition guidance under previous U.S. GAAP (Generally Accepted Accounting Principles) and replaces it with a principles-based approach for determining revenue recognition. ASC 606 was effective for years beginning after Dec. 15, 2018 (Dec. 31, 2019, year-end). Per ASU 2020-05, issued in June 2020, FASB delayed the effective date for entities that had not yet issued their financial statements to annual reporting periods beginning after Dec. 15, 2019. However, the majority of the reports reviewed were issued prior to the extension and did not implement ASC 606.
Inventory
ASU 2015-11,
Simplifying the Measurement of Inventory, is applicable for entities who measure inventory using first-in, first-out (FIFO) or average cost. Inventory should be measured at the lower of cost or net realizable value. The amendments in this update were effective for nonpublic entity financial statements issued for fiscal years beginning after Dec. 15, 2016. Several reports disclosed inventory based on the old reporting standard.
Subsequent events
Given the impact of COVID-19 on the world economy, almost every report issued subsequent to the declaration of the pandemic should have included a subsequent event footnote disclosure describing the impact or lack thereof on the reporting entity. Several of the reports reviewed that were issued post-pandemic declaration were missing this disclosure.
Other financial statement disclosures
The following disclosures were noted as either missing or lacking sufficient content from some of the financial statements reviewed:
- Disclosures regarding liquidity in a not-for-profit.
- Including a significant accounting pronouncements disclosure regarding the ASU 842 leases.
- Unrelated business income tax disclosure in not-for-profit reports.
- Related party disclosures, including the nature of the relationship(s), a description of the transaction(s) and amount(s) involved, and any amount(s) due from or to related parties.
- Disclosure related to the advertising expense accounting policy.
Reports and financial statements
The following items were noted regarding the financial statements:
- In several cases, items were improperly combined or classified on the balance sheet.
- Various reports had issues with footing and calculation.
- In some financial statements, the statement of cash flows did not properly classify operating, investing and financing activities, and missed disclosures for noncash items.
- The gain (loss) on the sale of equipment should be reported as an operating item, not another income (expense) item per ASC 360-10-45-5.
Joseph T. Berndt, CPA is a partner with Thoresen Diaby Helle Condon & Dodge, Inc. and has served on the General Industries Review Task Force for several years. You may reach Joe at 763-398-4529 or jberndt@tdhcd.com.
THANK YOU
A sincere thank you to each volunteer on the 2020 General Industries Review Task Force. Your service to your fellow MNCPA members is greatly appreciated!
Next fall, consider volunteering for the task force. One-on-one and group discussions take place with other task force members, providing a great opportunity for professional growth. Contact Heidi Janssen at
hjanssen@mncpa.org if you are interested in volunteering.
