FinREC Serving the Profession

The last Financial Reporting Executive Committee (FinREC) meeting of the year was held on November 5. The meeting covered a number of topics, including:

  • Long-duration insurance contracts
  • Current expected credit losses
  • Digital assets

I think the best way to put the proposed papers on long-duration insurance contracts is that if you are in that industry, you should pay attention; otherwise, the rest of you can take assurance that FinREC is there, so you don’t have to deal with these things. By the way, in case you are wondering, long-duration insurance contracts are things like life insurance and annuities that last many years, in some cases decades.

The current expected credit loss (CECL) topics included issues related to insurance, as well as trying to help define when information received after the balance sheet date is the result of a subsequent event or was simply a timing issue about getting information on events that occurred prior to the balance sheet date. The reason these issues matter is because the CECL standard is explicit that subsequent events are not to be considered when determining the expected losses to be included in the financial statements. By the way, you are going to have to wait for the release of the document from AICPA to find out what is a subsequent event that should be ignored and what isn’t (unless you want to dig up the SEC speech on the topic).

Finally, we continued our discussion on digital assets, which includes crypto assets like Bitcoin and Ethereum, as well as other token-based assets that represent ownership interests or other items. I’m sure you have seen by now that typical companies will need to account for crypto assets as intangible assets and not investments. But if the owning entity is an investment company following those specialized accounting rules, then crypto assets will be accounted for as investments. If that doesn’t seem fair, remember that investment companies get to treat other assets, like real estate and commodities (e.g., oil), as investments and use mark-to-market accounting on those, so unless you want to move your entire balance sheet to mark-to-market (i.e., fair value) accounting, maybe it’s not so unfair after all.

We hope you find the work of FinREC helpful. While not officially authoritative GAAP, FinREC is there to help connect the dots and provide consensus opinions about how to deal with questions that come up from new transactions or implementing new standards. We are a resource for the profession that I hope you find useful.

Better Reporting on Employees

Government “provides a tax deduction to the company that replaces a human with a robot, but offers nothing to the company that trains that worker to remain employable” – Senator Mark Warner, Virginia.

If you’re a CPA, you just cringed when you read that statement for two reasons. First, the statement is absolutely incorrect. The tax code not only allows for the deduction of the cost of training, but that cost is immediately deductible and is not required to be capitalized and recognized over a period of time like the cost of the robot. The second reason you cringed was because you realized this person’s lack of knowledge about how taxes really work is probably a good example of the majority of Congress. This is the very same Congress that is responsible for the tax law in the first place, but that is not the point of this blog.

The above quote was from an article in Harvard Business Review I recently read on “the problem of reporting employee costs as expenses instead of assets.” The writer of the article has the same misunderstanding of the difference between reporting on a cost and capitalizing something as an asset as Senator Warner has in understating how the tax code works. Simply put, slavery has been illegal in this country for over 150 years and I, for one, would like to keep it that way. That means I strongly believe employees should never be recognized as assets, but that does not mean that the goal of the article, better measurements and reporting of the most critical part of many businesses today, should not be improved.

The way to improve information on the employees is not to distort the meaning of an asset to capitalize costs. No, the way to improve information is to enhance the reporting on costs and other facts related to employees. I won’t go into all the studies about employee effects on the value of a business and business profitability. Instead, in the spirit of brevity, I will propose a few disclosures that could be combined into one simple chart. First, the disclosure should group employees based on the major employee responsibilities at the company, such as sales, customer care, retail (store) support, manufacturing, support staff (I would hate to say Finance probably goes here) and so forth. The 10% rule could be used for determining what groups need to be disclosed. Then for each group of employees, disclose the following:

  • Total number at end of period
  • Total compensation and benefits in period
  • Total improvement costs, such as training in period
  • # hired in period
  • # involuntarily terminated in period
  • # voluntarily leaving in period
  • Turnover ratio during period

Then, just like we have a whole section in the MD&A to discuss liquidity, we should have a section to discuss employees, including the value they bring to the company and how the company is working to protect and increase that value.

So what kind of reporting on employees do you think should be made by businesses?

More Revenue Reconcilliation

I recently responded to another question about revenue recognition on TXCPA Exchange that I thought everyone might benefit from seeing.

Question – I have a situation where our firm has completed all the professional services on a contract, but the client wants more work done that we have agreed to do for free and that is outside the scope of the original agreement. We have completed all the milestones in the contract and we have customer acceptance for those milestones. Would I be able to recognize the remaining milestone revenue on the contract or do I need to hold some revenue back for the free services that are outside the original scope?

Response – The situation described sounds like a potential contract modification, but, as always with the new revenue standard, the devil is in the details. The description says all of the performance obligations are done, but the client wants more work completed. Did the client approach the firm for additional work before the work was done, the day the work was done or a year after the work was done? If it was a year after, the two pieces of work are not related and we would only need to worry about the work being potentially related to a yet unsigned future contract, but I doubt that is the case given your question.

A second question is around how often these types of adjustments are made under contracts. If the firm regularly does additional work (and I do not mean more than 50% of the time, but only that it happens enough to know additional work is a possibility), then the standard would say you probably should have anticipated such a potential event and held revenue in reserve up front. Assuming that is not the case, and you determine it is a modification of a contract and not pre-work being done on a subsequent contract, we then have to deal with the contract modification section of the revenue standard. The modification is a separate contract if the scope increases; i.e., more work is being done (sounds like the case here) AND the price of the contract increases by an amount that reflects standalone selling prices of the additional work (not the case here, as the question says the work is for free). That leads us to three options under the contract modification section:

1) The new contract is a termination of the old contract and creation of a new – the key here is that the remaining services are distinct from the services previously performed. If that is the case, you take any remaining unrecognized revenue from the original contract + any new revenue (none in this case) and recognize the revenue over the remaining services to be performed.

2) The new contract is a modification of the existing contract if the remaining services are not distinct. In this case, you take the revenue from the entire initial contract + the modified contract (zero in this case) and respread the revenue over all the services to be performed and change the revenue recognized to date (potentially resulting in a decrease to revenue in this situation) and then recognize the remaining revenue as the services are performed.

3) A combination of 1 and 2, if the remaining services are a combination of the situations outlined above.

A big key to determining how to handle contract modification is determining if the additional services (or goods) are distinct. That determination is made using the same rules under step 2 for determining what performance obligations are distinct.

Resume Pet Peeves

I have had the opportunity to review a number of resumés recently as we are filling some vacancies at AT&T. I am amazed with what I see sometimes. But instead of talking about the standard errors (misspellings, job gaps, etc.), I want to hit a few of the things I see that make me question if I even want to interview someone.

  • Future dating a credential – I‘ve seen this a number of times. XXX credential “expected XXX, 20XX.”  That is not helpful and makes me think the only reason you put it on there is because you saw that we were giving preference to (or have a requirement of) holding such a credential to get the job. If you don’t have the credential, you don’t have the credential! I might even forgive such a faux pas if the exam had been passed and the candidate was simply working toward an experience requirement. In many cases the people ultimately admitted they had not even taken the exam yet.
  • Future dating a degree – I get it if you are in the middle of your final semester and only have one or two classes to finish, but when the expected date is a year or more out, you are not close enough to receiving your degree. Putting such information on a resumé, while not an outright lie, is tantamount to padding a resume and makes me wonder what in your actual experience and obtained degrees is insufficient.
  • Espousing non-existent leadership experience – I see all types of references to leadership, but reality is if you have not been responsible for evaluating someone’s work and/or making decisions on potential pay raises, then you really haven’t managed anybody. Don’t try to make it sound like you had experience and responsibilities that you never had.

The bottom line is your resumé should be about actual experience and accomplishments. Interviewers know we are unlikely to find someone who is a perfect match for our job. We are working to find someone who would most likely be successful based on their actual qualifications, not some made up “I might be here someday” person. Adding all those future items just leaves interviewers wondering about other instances where you may be stretching the truth or being untruthful.

FASB Seeking a Lot of Input

The Financial Accounting Standards Board (FASB) is seeking a lot of input, or is that input a lot, given the number of recently issued documents. In the past few weeks, FASB issued exposure drafts on:

  • Identifiable Intangible Assets and Subsequent Accounting for Goodwill;
  • Changing the interactions between Topic 321 (Investments – Equity Securities), Topic 323 (Investments – Equity Method and Joint Ventures) and Topic 815 (Derivatives and Hedging);
  • Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity;
  • Changing effective dates for standards on Credit Losses, Derivatives and Hedging, Leases, and Insurance;
  • Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

The AICPA Financial Reporting Executive Committee spent time last week discussing potential responses to the Goodwill invitation to comment and the Convertible Instruments exposure draft. The first question FASB asked about goodwill was “what is goodwill or in your experience, what does goodwill represent?” At first, that question seems a bit strange, but as we continued our discussion, it became very clear that thoughts about potential amortization and how to handle impairment testing were significantly influenced by what each member perceived goodwill to be. I would venture to guess that grouping responses based on the answer to the first question will result in responses with similar answers to the remainder of the questions. Therefore, I am very interested in what the members of FASB think goodwill is, because ultimately that will most likely drive any changes to accounting for goodwill.

As we continued our discussions on convertible debt, I think we were getting a little punchy near the end when we started to ask questions like how to determine if it was more likely than not that it was probable something remote would not happen. If you laughed at that, you must be a CPA.

Preparers and auditors for private companies should be very interested in the proposals around changing effective dates. Not only does the proposal delay the implementation of four specific standards, the exposure draft also contains a revised framework that would place a two-year delay between the effective dates for public and private companies implementing significant new standards.

The justification is that for a private company to be able to garner learnings on implementing the standards at public companies, then a one-year delay is simply not enough. With only a one-year delay, the private companies already need to be accounting for transactions under new standards before public companies ever issue a complete set of annual financials under such standards. A two-year delay would provide at least several months between initial public company reporting and requiring a private company to follow a significant new standard.

While none of these proposals are as significant a change as revenue, leasing or credit losses, the number of changes do add up. If you work at or with public companies, it is no time to let up, and if you are focused on private companies, here are a few more changes to focus on in addition to everything else on your plate. Good luck to all!

Lessons on the Time Value of Money

A recent article by CNBC really brought home the time value of money and the impacts of rate of return on saving for retirement. Assuming an 8% rate of return, the monthly amount a person needed to save to have $1 million at age 65 changed dramatically with age:

  • Starting at 25 $284.55/month
  • Starting at 30 $433.06/month
  • Starting at 40 $1,044.53/month

I know some people will think those amounts are not obtainable, but $284.55 represents 10% of the monthly salary of someone making only $34,146 per year and that is before any employer match. If the employer matches contributions to a retirement plan, the required salary is even lower.

The amount also changed dramatically depending on the rate of return expected:

  • 8% return (starting at 25) $284.55/month
  • 6% return (starting at 25) $499.64/month
  • 4% return (starting at 25) $843.23/month

Some people tend to freak out when the stock market takes a downturn and we haven’t seen a sustained downturn since the last decade, but the numbers above show that you can’t put your money only in safe investments like bonds and treasuries. The return is not enough to get you where you need to go. And the younger you are, the more ability you will have to recover any losses because you are so long from retirement.

So, what does all this mean? While I agree with Dave Ramsey that doing smart things with money is 80% about behavior and only 20% about the math, and it is generally more important to change behavior through focusing on paying down debt first, if the debt can’t be paid off in a couple of years, the math can start to work against you in the worst way. Here are some very simple tips.

  • Start putting money away for retirement early; shoot for 10% of your salary. If you can’t get there right away, put in as much as you can and raise it every time you get a pay raise – you won’t miss what you never had.
  • Try hard to get your employer match, if available. You can count the employer match in getting to that magic 10% level (to get to that $1 million by age 65) and you won’t have 10% coming out of your check. Not getting the match is like telling your employer you really don’t want all your salary. Would any sane person really do that?
  • Don’t be too conservative in your investments – especially if you are young. Being too conservative is much more likely to reduce your chance of getting that $1 million than a periodic (and they will occur) market downturn.

As crazy as it sounds, there is no reason we could not have millions of millionaire millennials by the time they retire if they would just take notice of the time value of money. Talk about being able to change the world – wow!

Let’s Go To The Movies

Looking at my past few blogs, I realized I got into a rut of focusing on accounting standards. It’s time for a switch to something a little less heavy and what better time of the year than the end of the summer movie season to talk about some fun movies that included an accounting bent.

“Look Who’s Talking” – Do you remember Mollie’s (played by Kirstie Alley) job – yup, she was a CPA. And how many of us have wanted to wipe a dirty diaper on a client’s desk who was being ridiculous in their demands? Well, Mollie did it! Ahhh! The satisfaction.

“Schindler’s List” – While a movie about the Holocaust can hardly be inspiring, at least the accountant (played by Ben Kingsley) found a way to use the system to overcome the worst of the evil and save over 1,100 Jews by helping get them deemed as “workers essential for production.”

“The Untouchables” – All of the shooting and action couldn’t hide the fact that it was the accountants putting together a case on tax evasion that finally put Al Capone (played by Robert Di Niro) away. As the saying goes, nothing is certain but death and taxes.

“Catch Me If You Can” – Bank fraud anyone? Frank Abagnale (played by Leonardo DiCaprio) outsmarts everybody until he finally goes too far and gets caught. Two points. Somehow Frank studies like crazy for two weeks and passes the bar exam. I’d like to see someone do that on the CPA exam. And in the end, Frank turns good and develops many of the anti-fraud mechanisms banks used for decades to thwart fraudsters. As I’ve told people for years, in order to audit for fraud, we all have to think like a fraudster. Frank absolutely proves that.

“Shawshank Redemption” – While Andy Dufresne (played by Tim Robbins) was technically a banker and not an accountant, it was his skills as an accountant that made him indispensable to the warden in cleaning up that river of dirty money. Not only does he help get the bad guys in the end, he helps a lot of other people along the way – just like many of my colleagues in the profession.

There are many more movies with accountants – “Ghostbusters,” “Midnight Run” and “The Accountant” to name a few. One common theme is that the accountant rarely, if ever, is the bad guy. Lawyers, businessmen, politicians and everyone else are star bad guys in movies, but never the accountants. We just do our job and, in the end, help the public. At least Hollywood got that one thing right!