Issue 1 |January 2018

The far reaching Revenue from Contracts with Customers accounting standard was jointly issued by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) in April 2014, after years of deliberation and consultation between the two boards. Now, for public companies, the standard goes into effect for 2018, while private companies have one more year before adoption is mandatory.

As a refresher from the October, 2016 issue of the Audit & Accounting Alert, the core principle of the global standard is for companies to recognize revenues in a way that shows the transfer of goods and services to customers that reflects the payment to which the company expects to be entitled. To achieve that core principle, an entity shall apply all of the following five steps:

1. Identify the contract with a customer;
2. Identify the separate performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the separate performance obligations in the contract; and
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The standard applies broadly across all industries, with exceptions only for some leases, insurance contracts, financial instruments and guarantees (other than product or service warranties), which are specifically covered by other standards.

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Taking even longer to resolve than they did with revenue accounting, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), with the issuance of their corresponding standards in early 2016, have both agreed to the overall concept of reporting leases on the balance sheet as assets with corresponding liabilities. However, the boards differ as to the model for accomplishing that goal.

The FASB retains a two model approach for lessees. Under this approach, finance leases, which current accounting considers capital or purchase leases, will have the right-of-use balance sheet asset amortized as an expense using a straight line basis. The balance sheet lease liability will produce a separately reported interest expense. Operating leases will have the periodic lease cost amortized as a single expense using a straight-line method. Leases meeting any one of five criteria will be considered finance leases. All other leases will be considered operating leases. The criteria generally provide that the lessee receives the bulk of the value of the asset over the lease term, considering the nature and expected life of the asset, purchase options, and present value of payments. However, the old rules-based measures are replaced with principles-based determinations, so that leases cannot be cleverly structured to avoid the standard.

The IASB approach will consider all leases the same, using a one model approach. The lease costs will all be reported in a similar fashion as finance leases, with both amortization and interest expenses reported on the income statement.

Lessor lease accounting under both boards will be similar to the current standards, which already use an approach that corresponds to the finance and operating models above. Also, leases with terms of a year or less will be exempt from the standard, and groups of leases with comparable characteristics can be reported collectively as a portfolio.

According to the standards, “a lease is defined as a contract, or part of a contract, that conveys to the customer the right to use an asset for a period of time in exchange for consideration…A lease exists when the customer controls the use of the identified asset throughout the period of use. This is when the customer has the right to: 1) obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, and 2) direct the use of the identified asset throughout that period.”

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International

IASB – International Accounting Standards Board (www.ifrs.org)

1. IFRS for SMEs® Standard, Section 12, Issue 1: Accounting for financial guarantee contracts in individual or separate financial statements of issuer, issued December 14, 2017. “The guidance is in the form of a question-and-answer document (Q&A) and advises how an issuer should account for financial guarantee contracts.”
2. Annual Improvements to IFRS Standards 2015–2017 Cycle, issued December 12, 2017, includes narrow-scope amendments to the standards for IFRS 3-Business Combinations, IFRS 11-Joint Arrangements, IAS 12-Income Taxes, and IAS 23-Borrowing Costs. Effective in 2019 with early application permitted.

IFAC – International Federation of Accountants (www.ifac.org)

1. International Standards: 2017 Global Status Report, published December 13, 2017, “provides an analysis of the status of adoption of international standards and best practices, the role of IFAC member organizations in the adoption process, and their fulfillment of IFAC requirements.”
2. International Public Sector Accounting Standards Board (IPASB) - Exposure Draft 63, Social Benefits, released October 31, 2017, “addresses accounting for the delivery of social benefits, such as retirement, unemployment, and disability, aiming to improve consistency, transparency, and reporting by public sector entities of social benefit schemes, which account for a large portion of government expenditure in most jurisdictions.” The comment period ends March 31, 2018.

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com/)

1. The race for relevance - technology opportunities for the finance function, research report issued December 11, 2017, “explores the opportunities and challenges that technology presents for the future CFO function in the face of extraordinary digital change impacting businesses.”
2. Directors responsibilities for financial reporting, guide issued in conjunction with the Chartered Accountants of Australia and New Zealand on November 7, 2017, “answers five fundamental questions: 1. Who is responsible for financial reporting? 2. Why are directors responsible for financial reporting? 3. What are directors responsible for in relation to financial reporting? 4. How do directors discharge their financial reporting responsibilities? 5. When do directors discharge their financial reporting responsibilities?”
3. The Sustainable Development Goals: redefining context, risk and opportunity, research report issued on November 2, 2017, stating that “Business and finance have a critical role to play alongside in helping governments deliver the UN Sustainable Development Goals (SDGs), and accountants can be at the frontline of mobilizing collaborative action…finance professionals are well-placed to bring together business, finance and government to deliver on this important commitment.”

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