Author: CFOconnections

By CFOconnections

Curing CPAs and Business Owners’ Pain

Most of us are home owners. With home ownership comes the responsibility of maintaining your homes… doing yard work, trimming trees, cleaning the pool, servicing and maintaining equipment and appliances, etc. The list goes on and on. The challenges most home owners face are time and expertise. Most neither know how to properly maintain their homes nor do they have the time because of their demanding professional lives and busy families. So what is the solution? Home owners often outsource these responsibilities to professionals. Enter the yard guy, the tree guy, the pool boy and the handyman.  The outcome is a house well maintained, more time to focus on their career and spend with family.

If you are also a business owner, you face a very similar situation when running your business… managing your workforce, staying at the forefront of technology, marketing your products and services, staying out of legal troubles and the most dreaded one of all – managing your accounting, finance and reporting compliance. For most business owners, managing the accounting function is simply a distraction from what they love to do – growing their business. Accounting is mostly seen as a regulatory burden and most small to medium sized businesses do not have the time or expertise to proactively manage their business finances. This is especially true for emerging and fast growing businesses when most of the resources are dedicated to marketing and growing sales. To make matters worse, it is often difficult for businesses to find competent accounting professionals. The end result is a frustrated business owner unable to rely on his books and records and for outside accountants to spend a significant amount of time fixing errors clients make.

So what is the solution? Enter CFO Connections – accountants and business owners’ life saver. We want to share with you the struggles that some of our clients faced and how we were able to cure their pains for them.

An SEC reporting company is in an industry that is rapidly accelerating and growing. The founder of the operations maintains dual role as the company’s CEO and CFO. With investors knocking on his door, he knew that he was in the right place at the right time and that it is important to maintain reliable information for existing and potential investors. However, he couldn’t find the time away from managing the company’s accounting, reporting, compliance and risk management issues. CFO Connections was hired to manage these important functions for the company. With the pain of handling the accounting off his shoulders, our client was finally able to devote more time on investor relations and bring better focus to operations. We have been successful in eliminating the CEO and CFO’s stress by collaborating with the company’s auditors, attorneys and insurance brokers on important accounting, reporting, compliance and risk management matters.

Another one of our clients has a great accounting team in place but is lacking the expertise to handle an element in their accounting and reporting function that requires a heavy dose of management’s estimates. This has become a stressor for the company in meeting its reporting deadlines. CFO Connections was brought in to cure this pain for our client. We provided a road map for the CFO in developing its estimates, helped him anticipate questions from the auditor and provided a disclosure framework that was easy to follow. The end result was the new found time and expertise for our client. CFO Connections is now part of the company’s strategic growth team to help align the proper resources and position the company for growth.

A fast growing service company has great plans for growth but its financial controller just wasn’t on the same page with the company and eventually parted ways with the company. Due to rapid growth, the company was in desperate need of finding a financial controller before the accounting becomes unmanageable. In the interim, the company hired CFO Connections as its interim financial controller. We not only bridged the “GAAP” for the company, but also saw areas where improvements were much needed, e.g. internal controls, team coaching and mentoring, financial planning and analysis, etc. We were able to eliminate the stress of accounting from the owners, transition the new financial controller into his role, and collaborate with management team on processes and internal control improvement.

Are you a business owner, CFO or controller who is experiencing pain? If you are an accountant in public practice, are your clients in pain? Do you have poor realization on your time because you spend too much time fixing your client’s mistakes? It is very important to address the source of the pain timely before it becomes unmanageable. The holiday is upon us. Will you be spending time feeling stressed out and worried? Or will you be spending time with loved ones? Let CFO Connections give you that time and cure your pain!

Hurricanes Related Accounting and Report Issues
By CFOconnections

Hurricanes Related Accounting and Report Issues

Four different hurricanes have made a U.S. landfall in 2017. This is the first time as many as four hurricanes have made a U.S. landfall since 2005.Hurricane Nate was the fourth hurricane to landfall in the United States in 2017, the first time that’s happened in a single hurricane season in over a decade. Nate made landfall around 7 p.m. CDT Oct. 7 near the mouth of the Mississippi River as a Category 1 hurricane, then made its final landfall near Biloxi, Mississippi, just after midnight Oct. 8. Hurricane Maria made landfall with winds of 155 mph on September 20 in Puerto Rico. In the weeks before Maria, hurricanes Harvey and Irma made landfall at Category 4 intensity with 130 mph winds on August 25 in Rockport, Texas, and September 10 in the Florida Keys, respectively.

Source:https://weather.com/storms/hurricane/news/2017-10-07-four-us-hurricane-landfalls-nate-maria-irma-harvey

Estimates for the cost of Hurricane Harvey’s damage have come in at $65 billion, $180 billion, and as high as $190 billion — the last of which would make it the costliest disaster in US history. The numbers from the second record-breaking storm that hit the US this summer, Hurricane Irma, meanwhile, are still rolling in. But totals range from $50 billion to $100 billion.

Source:https://www.vox.com/explainers/2017/9/18/16314440/disasters-are-getting-more-expensive-harvey-irma-insurance-climate

Here are some of the accounting and financial reporting implications of these events.

Financial Statement Reporting and Disclosure Considerations

Companies that incurred losses may need to expand its footnote disclosure to discuss circumstances surrounding the losses, any insurance claims made and any expected insurance reimbursements. Any uncertainties related to the claims should also be disclosed. These considerations are especially important for publicly traded companies since the SEC has in the past asked registrants to expand disclosure to discuss the effect of natural disasters on their operations quantitatively and qualitatively, such as loss of a major supplier or customer.

Assets Impairment Considerations

Were assets damaged or destroyed as a result of the hurricanes? The most commonly affected assets after a natural disaster are fixed assets, inventories and accounts receivable. Writing off these assets may be necessary if they are destroyed.

How about the projected cash flows from certain assets? Are they negatively affected? Companies should consider writing down assets that were damaged and revisit their estimated useful lives.

Loans and Banking Considerations

Financial institutions, especially those that have a substantial amount of loans in the affected areas, should consider the need to increase their allowance for loan losses. In the immediate aftermath of Hurricanes Harvey and Irma, a number of financial institutions waived late fees and extended payment deadlines to their customers. Therefore, special considerations should be given to disclosing loss of revenues.

On the other hand, companies may need additional financing or amend the terms of their existing credit agreements with banks to increase its borrowing capacity. Companies should evaluate whether the amendments represent modification of existing debts, or extinguishment of the existing debts and commencement of new arrangements.

As a result of the negative impact the hurricanes had on companies’ operations, companies may be in violation of their loan covenants – assets as collaterals destroyed or financial covenants not in compliance. This may trigger default and affect the classification of the debt on the balance sheet.

Accounts Receivable and Revenue Recognition

Companies that do businesses with those in the affected areas should consider collectability, write offs or reserve against the receivables. Companies that allow extended payment terms to the affected businesses should consider its effect on revenue recognition (Topic 606) since revenue can only be recognized when collection is probable.

Idle Capacity

Companies may experience below normal production level as a result of power interruption or fuel shortage. When assets are temporarily idle, depreciation should continue. On the contrary, depreciation should discontinue when assets are permanently unproductive.

Insurance

To properly manage the risk losses from natural disasters, companies have insurance policies to cover property, casualty and business interruption claims. When companies believe that reimbursement from insurance is probable, the companies should recognize a receivable for the amount expected to be recovered. However, the amount recorded cannot be greater than the recorded losses. If companies expect to be reimbursed for an amount greater than its recorded losses, the different should be treated as a gain contingency, i.e. recognized only when realized.

For companies that filed claims under their business interruption policies, they would also follow the accounting for gain contingency, i.e. recognized only when realized.

The classification of insurance proceeds in the income statement depends on the nature of the claims. Proceeds should be recorded in the income statement once the gain contingency is resolved. There are not guidance provided for many different types of claims and therefore judgement should be applied.

Insurance proceeds should be presented in the statement of cash flows based on the nature of the item insured. If the proceeds are for damaged fixed assets, it would be an investing cash flow. If the proceeds are for business interruption, it would be an operating cash flow.

Tax Considerations

Since profitability is negatively affected, companies should evaluate whether deferred tax assets are “more likely than not” that they would be realized and whether a valuation allowance is necessary.

By CFOconnections

Revenue Recognition 5 Steps Model – steps 3 to 5

The new revenue recognition model is a 5 steps model that guides companies in determining the amount and the timing of when revenues should be recorded. It shifts from the existing risk and reward model to one that emphasizes control. Here are the 5 steps:

  1. Identify the contract with the customer
  2. Identify the performance obligation, i.e. the goods and services to be provided to the customer
  3. Determine the transaction price
  4. Allocate the contract value to the goods and services to be provided
  5. Recognize revenues as goods and services are delivered to the customer

Last month’s newsletter provided you some insights on steps 1 and 2 and now, we’ll take a look at steps 3 to 5.

  1. Determine the transaction price

The transaction price is the amount the entity expects to be entitled to in exchange for its goods and services. Transaction price may include:

  • Variable consideration – this could be explicit or implicit and could include bonus, price concessions, refunds, milestone payments, discounts, returns, and rebates. The entity estimates the amount of the consideration it expects to be entitled to and that it is probable that a significant reversal of revenue recognized will not occur.
  • Returns or refunds – entity must estimate the amount of returns or refunds and reduce transaction price and record a refund liability.
  • Significant financing component – this represents consideration where the entity receives in advance or in deferred payment terms. Advance payment is likened to receiving a loan from the customer and results in recognition of interest expense and increase in transaction price whereas deferred payment is likened to financing the transaction for the customer and results in recognition of interest income and reduction in transaction price. There are several exceptions to reflecting the significant financing component. (1) the customer has discretion in the timing of the transferred goods and services, e.g. gift card sales; (2) payment of the variable consideration is contingent upon an uncertainty that the entity does not control, e.g. milestone payment contingent on regulatory approval; (3) when the difference in timing of payment and performance is not due to financing but for protection to the entity or customer from the other party for not fulfilling its obligations, e.g. construction contracts; (4) when the timing of payment and transfer of goods and services is one year or less.
  • Noncash consideration – its fair value should be included in transaction price. If the fair value of the noncash consideration changes after the contract inception, e.g. value of the customer’s stock, do not adjust the transaction price. If the change is other than in the form of the consideration, e.g. entity’s performance or scope modification, then account for it as a variable consideration.
  • Fixed cash consideration – this could include upfront nonrefundable fees that the entity would recognize revenue as goods and services are transferred to its customer.
  • Consideration payable to customer – it reduces transaction price unless the entity receives distinct goods and services from the customer
  1. Allocate the contract value to the goods and services to be provided

The entity will use a relative standalone selling price model to allocate the transaction price. It will estimate the standalone selling price for each performance obligation, determine if any discount or variable consideration should be allocated to one or more performance obligations and allocate the transaction price.

  1. Recognize revenues as goods and services are delivered to the customer

The transaction price allocated to a performance obligation is recognized as revenue when the performance obligation is satisfied, i.e. when the customer has the ability to direct the use of the goods or services and receives substantially all of the remaining benefits.

When is it effective?

Effective date for public entities is the first interim period within annual reporting periods beginning after December 15, 2017, i.e. 2018 for public companies with December 31 year end; nonpublic entities have an additional year. It also allows early adoption as early as 2017 calendar year.

By CFOconnections

Revenue Recognition 5 Steps Model – Steps 1 and 2

The new revenue recognition model is a 5 steps model that guides companies in determining the amount and the timing of when revenues should be recorded. It shifts from the existing risk and reward model to one that emphasizes control. Here are the 5 steps:

  1. Identify the contract with the customer
  2. Identify the performance obligation, i.e. the goods and services to be provided to the customer
  3. Determine the transaction price
  4. Allocate the contract value to the goods and services to be provided
  5. Recognize revenues as goods and services are delivered to the customer

In this month’s newsletter, we’ll take a look at the first two steps and then steps 3 to 5 next month.

  1. Identify the contract with the customer

A contract is defined as an agreement between two or more parties that create legally enforceable rights and obligations. It can be written, oral or implied based on customary business practices. If a contract provides for each party to terminate the agreement without penalty, then there is no accounting consequences related to the contract since there is not a legally enforceable right and obligation to the parties. However, just because there are legally enforceable rights and obligations, it doesn’t mean that you are in the clear. There are still some criteria that need to be evaluated to determine whether a contract exists.

  1. Does the contract have commercial substance?
  2. Have approvals been obtained and commitment to perform exist for both parties?
  3. Are rights of both parties are identifiable?
  4. Are payment terms identifiable? And
  5. Is collection probable?

Once these criteria are met, reassessment is not necessary unless signification changes in circumstances occur.

What if an entity goes through step 1 and determines that a contract does not exist? In this situation, any considerations received should be recognized as a liability and the entity should reassess the criteria each reporting period. If the criteria continue not to be met, the entity can only recognize revenues when the considerations received are nonrefundable and

  1. There are no remaining performance obligations and substantially all amounts have been received.
  2. The contract has been terminated. Or
  3. The entity has transferred the control of goods and services to which the nonrefundable considerations relate and the entity has no future obligation to transfer additional goods and services.

The last criterion differs from current guidance in that it allows for recognition of revenue in the amount related to the goods and services transferred even though the entity continues to perform under the contract.

Contract modifications – The guidance on contract modifications is new in comparison with existing guidance, except in contract accounting. The accounting for contract modifications allows for prospective treatment, a cumulative catch up adjustment or account for as a separate contract, depending on facts and circumstances. Some of the issues to consider include whether the changes are approved; the pricings of the modifications; any distinct new products or services added, etc.

  1. Identify the performance obligation, i.e. the goods and services to be provided to the customer

The overall objective of step 2 is to identify the units of account to which the entity will then apply steps 3 to 5 to. The entity will identify all of the promised goods and services, considering both explicit and implicit promises, based on customary business practices.

Next, the entity needs to consider whether the identified goods and services are distinct. If so, they are accounted for separately as a performance obligation, i.e. unit of account. Otherwise, the entity should combine other goods and services until there is a group that is distinct. The guidance does provide an exception that when goods or services are part of a series of distinct goods or services that are substantially the same, the series of goods or services is the performance obligation. A good example of this is television/cable services – the customers typically are locked into a contract and each hour of the service provided is distinct. However, since each hour of the service is substantially the same and is delivered in the same manner, they are counted as one performance obligation.

Since distinctiveness is a key factor, how does an entity determine whether a good or service is distinct? A good or service is capable of being distinct when a customer can benefit from it on its own or together from other readily available resources. For example, an entity sells equipment to its customers. The customers can sell the equipment on a standalone basis. The customers can use the equipment together with other goods or services that have already been transferred by the entity, i.e. installation service for equipment purchased by the customers; or installation services from other providers in the marketplace.

The entity should also consider whether warranty is a distinct performance obligation. If the customer has the option to purchase the warranty separately, then the warranty is a performance obligation. Otherwise, the entity should allocate part of the purchase price to the warranty and recognize revenues over time.

In addition, if the customer has the option to purchase additional goods and services, the option is a performance obligation for accounting purposes if it provides material right to the customers that the customers would not otherwise have without entering into the contract.

When is it effective?

Effective date for public entities is the first interim period within annual reporting periods beginning after December 15, 2017, i.e. 2018 for public companies with December 31 year end; nonpublic entities have an additional year. It also allows early adoption as early as 2017 calendar year.

Revenue Recognition Standard (Topic 606)
By CFOconnections

Revenue Recognition Standard (Topic 606)

What is it all about?

The new revenue recognition standard applies to contracts with customers except for those within the scope of other standards, e.g. leases, insurance, etc. The new standard eliminates the lack of consistency in revenue recognition across industries. Therefore, it improves comparability and eliminating gaps in guidance.

The new revenue recognition model is a 5 steps model that guides companies in determining the amount and the timing of when revenues should be recorded. It shifts from the existing risk and reward model to one that emphasizes control. Here are the 5 steps:

  1. Identify the contract with the customer
  2. Identify the performance obligation, i.e. the goods and services to be provided to the customer
  3. Determine the transaction price
  4. Allocate the contract value to the goods and services to be provided
  5. Recognize revenues as goods and services are delivered to the customer

The new revenue recognition standard also requires a lot of quantitative, as well as qualitative, information to be disclosed.

When is it effective?

Effective date for public entities is the first interim period within annual reporting periods beginning after December 15, 2017, i.e. 2018 for public companies with December 31 year end; nonpublic entities have an additional year. It also allows early adoption as early as 2017 calendar year.

How is it done?

Companies can select one of the two adoption methods – full retrospective or modified retrospective.

Full retrospective – this requires recasting prior years’ revenues as if the standard has existed from the beginning, i.e. the years shown prior to 2018. This method provides great comparability from period to period which is appealing to investors and analysts and other users of the financial statements but requires more efforts and resources for dual reporting.

Modified retrospective – no recasting is required but companies need to record the cumulative effects of the adoption to beginning retained earnings at the time of adoption. This may seem easier than the full retrospective approach but it also requires more disclosures to improve comparability in a different way.

Why should companies care?

Assessment – Companies should perform assessments to evaluate what kind of an impact this standard will have on their financial statements, if any.  Since the new standard’s issuance in 2014, companies that began their assessments reported that the process of assessment was taking longer than they thought. Even companies that didn’t believe that this new standard applied to them still should carry out such assessment to document that it has no impact on them. A lot of these companies found that once they began assessing the impact, the new standard actually have material impacts to them than originally thought.

Implementation – Significant amount of work that needs to be done during the implementation process in order to adopt the standard. Some companies discovered that they will need to change their processes and systems in order to be able to capture the data needed. Some discovered that they will need to involve personnel outside of accounting, e.g. operations, IT, sales, etc. in understanding their contracts with their customers. Some may decide that they will need to create sub-ledger in order to capture the data in their accounting systems.

Reporting – Much like the new lease accounting standard we discussed in our blog in May, this new revenue recognition standard could also have significant impact on certain financial covenants.

Although the 5 steps model may seem easy, the devil is in the details!! We can help you go through the model step by step and identify provisions that really matter when it comes to revenue recognition. Contact us at:

E-mail: [email protected]

Phone: 813-508-5846

New Lease Accounting Standard – Why Should You Care?
By CFOconnections

New Lease Accounting Standard – Why Should You Care?

This new lease accounting standard was issued right around the same time the new revenue recognition standard was issued; it is another accounting change that will demand a tremendous amount of effort from companies to implement both standards within a relatively short period of time of each other.

You said, another standard for leases – what’s the big deal? Here is why you should care.

  1. Current GAAP provides bright line guidance around leases whereas the new lease standard moves to a more principle based approach and requires companies to make certain judgments that they haven’t previously made before. This is going to change how companies think about their leases, processes and controls.
  2. Since the new lease accounting standard calls for virtually all leases to go on the balance sheet, there is going to be an increased need for data, as supposed to the current standard where only lease commitments are required to be disclosed. This accounting change will prompt companies to evaluate their processes in order to ensure that they have identified all relevant data they will need to put the leases on the balance sheet.
  3. The new lease accounting standard is effective for calendar year 2019. For public and closely-held companies that present comparative financial statements, the standard should be applied to the earliest period presented.

Lease accounting standard – it’ll be here before you know it! We can help take the stress off your team by evaluating your current processes and helping you gather the data and implementing the standard with plenty of time to spare. Contact us at:

E-mail: [email protected]

Phone: 813-508-5846