Being Prepared

I write this blog after witnessing a bench player lead Villanova to the NCAA Basketball National Championship last night. I realize Donte DiVincenzo was the third leading scorer for Villanova during the past season, but he still had to come off the bench, which meant being mentally ready to provide whatever his team needed when he came into the game. Professionals could learn a lot by thinking about DiVincenzo’s attitude and work ethic he displayed during the game. You never know when the moment to shine will come, but if you are prepared you can show the world your best. If you are not; if you are pouting because you weren’t given the top project or the starting role, you’ll never be ready when the moment hits.

If you watched the game, the 31 points that DiVincenzo scored wasn’t the only feature of his game that was impressive. He also made several key defensive plays. As professionals, we need to be prepared to do the hard, sometimes dull work that makes our companies successful. There may not be much glory in the scorebook for such work, but it is noticed by those around you. Your co-workers then want to get you more involved, and just as Villanova fed off Donte’s energy, your coworkers can feed off yours.

Finally, when Michigan realized he was going to make those three-point shots, he changed his game and drove to the basket. As professionals we must be prepared to change our game. The needs of our company are constantly changing, and the expectations they have of you are constantly changing as well. It’s up to you to change to help yourself and your company continue to be successful.

While DiVincenzo’s performance cost me winning our office bracket, he was still a wonder to watch. Do your co-workers think you are a wonder to watch?


SEC on Cybersecurity

Many people may have missed a big release by the SEC on cybersecurity reporting. It’s easy to understand why. First off, many people are getting ready for the initial quarter of reporting under the new revenue standard. Second, others probably thought the SEC made some statements on reporting about cybersecurity several years ago and nothing was said about new disclosure requirements, so the news must not be a big deal. That would be a mistake.

The new interpretive guidance came from the Commission, not the SEC staff as was the case in 2011. With the Commission adding its weight behind the new guidance, companies need to pay attention because ignoring the advice can come with much more serious consequences to registrants.

Much of the guidance is like the guidance the staff provided back in 2011, but there are some key additions. The first is around controls being in place to adequately and timely report about cyber-attacks. Legal and accounting groups with SEC reporting responsibility need to start talking to whatever group in the company is responsible for monitoring and managing threats from cyber-attacks. Sox compliance organizations also need to seriously consider adding a new disclosure control specifically about such incidents.

The second addition is around discussion of trading in the company’s stock with knowledge of cyber breaches. The SEC provided specific warnings about trading by Directors, Officers or other corporate insiders in advance of disclosures about a breach. If those disclosures prove to be material, then such trading would be deemed illegal. Given that materiality is in the eye of the beholder, or in this case regulators, judges, and juries of your non-peers, anyone with such knowledge should probably refrain from any trading until 24 hours after the disclosure is made by the company.

The Commission has graciously provided examples of potential disclosures, so there is no excuse for not knowing what the SEC expects to see in 8-Ks, 10-Qs and 10-Ks. The release was made after calendar year 10-Ks were due, so the first time the new guidance will be effective for recurring reporting is in the next quarterly filing for most companies. You might want to consider taking a breather from putting together those new revenue disclosures and consider what cybersecurity disclosures are now also necessary.


What is FinREC up to?

I had the privilege of attending my first in-person Financial Reporting Executive Committee (FinREC) meeting last week in New York. FinREC is an AICPA committee that determines the AICPA’s technical policies regarding financial reporting standards with the ultimate purpose of serving the public interest by improving financial reporting. While the committee is not a standard setter and papers and guides are not considered official authoritative literature under GAAP, the committee’s guides and papers provide our profession with important guidance and insights on how others are interpreting GAAP with the hope of bringing consistency to various issues and topics beyond what the standard setters can provide.

At the March meeting the committee discussed three major topics including an addition to the Employee Benefit Plan guide on Multi-Employer Plans, additional revenue recognition papers for inclusion in the revenue recognition implementation guide, and some of the first papers on the Current Expected Credit Loss (CECL) model which we will all have to implement by 2020.

Multi-employer benefit plans can be pension, health and welfare or apprentice plans, which are collectively bargained and receive contributions from several different employers. A key feature of such plans is that the contributions are not made only for the benefit of the employer’s employees, but for the benefit of all participants in the plan no matter which employer the participant came from. While financial statements of such plans have many commonalities with single employer plans, there are several unique aspects to multi-employer plans which the proposed guidance addresses.

Work on revenue recognition is winding down with 130 papers already posted for comments. FinREC reviewed five papers at the meeting. Three papers covering health care and construction industry issues had already been exposed, and FinREC was reviewing and responding to the comments received. Two papers covering gaming and telecommunication industry are being prepared for exposure in the coming months.

FinREC reviewed the first two proposed topics in response to the implementation of the new CECL rules. One paper discussed whether the way an entity implemented the required reversion method in determining credit losses was considered an estimation technique or an accounting policy election. The other paper explored the potential for additional financial instruments beyond the U.S Treasury security example in the FASB standard to have zero expected credit losses under the CECL model.

The members of FinREC took their work very seriously, asked numerous questions, and discussed implications of the work throughout the day. We would love for you to do the same when these items are posted for public comment in the coming months.

New Revenue Standard Impacts Not-for-Profits

Many not-for-profit organizations may think the new revenue standard does not apply to them.  The thought is that while a not-for-profit university or hospital might need to deal with the standard, it doesn’t really apply to charity and membership organizations.  The thought process continues that all they get are contributions and member dues, and those aren’t really revenues are they?  While contributions are outside of the scope of the new ASC 606 revenue recognition standard, membership dues are not.

There is an AICPA task force dealing with not-for-profit issues under the new revenue standard.  You can find out more details on what they have been up to here, but I will try to cover a couple of the more important issues the task force dealt with in this blog.

First, the task force worked with the FASB staff to clarify that contributions are not in scope of ASC 606.  But as I mentioned, membership dues and receipts for service are in scope, so questions were raised about potential impacts on the method for splitting transactions between contributions and “exchange components” (dues, charges for services, etc.).  The short answer is that the methods for splitting transactions between contributions and other exchange components are still valid and do not need to change.

ASC 606 will potentially change the accounting for membership dues.  Not-for-profits will now need to evaluate if membership dues provide members other deliverables, now known as performance obligations, than simply an annual membership.  One example is if members get a reduced price on training courses which are available to non-members.  If a course is free to members, but available to non-members at a price, that means part of the annual dues is really for the training course performance obligation.  The kicker is the portion of the annual dues related to the training course cannot be recognized until the training course is delivered.

Even if the course is only offered at a reduced cost to members, there is still a potential split of annual dues for the “material right” to purchase the training course at a reduced cost.  Once again, revenue associated with the material right can’t be recognized until the course is delivered.  As long as all performance obligations are delivered within the period covered by the dues, then a not-for-profits total revenue in its annual financial statements won’t change, although individual line items might change.  If, however, the obligation, a training course in this case, is not delivered until after the annual period used for dues recognition, then revenue recognition might be delayed until a subsequent period.

This topic is covered in much greater detail in paper 11-5 which is still available on the AICPA website for a little while.  The moral of this story is that even if you don’t try to make a profit, you still have revenue, and the rules are changing under ASC 606.

Is Capitalized Interest an Asset?

If you are like most CPAs, the automatic answer to the title question of this blog is of course capitalized interest is an asset.  That is what the FASB says, and it is what I was taught in school.  The Governmental Accounting Standards Board (GASB), which is also run under the same parent organization as the FASB, has recently come to a different conclusion.  In a November 20, 2017 exposure draft, the GASB proposed eliminating the capitalization of interest related to assets being prepared for use.  Many of you might have an immediate reaction that the proposal is for governmental accounting; and governmental accounting has nothing to do with financial accounting for business, so why does it matter?  My response to such a question is that the GASB revision specifically applies to capital assets reported in a “business-type activity or enterprise fund.”  These are the governmental “entities” that most closely resemble a business that is subject to the FASB standards, so it is closer to business reporting than you might first think.

The GASB supported their decision to stop capitalizing interest based on two primary considerations.  The first is that if capitalized interest was considered discretely, it would not meet the conceptual definition of an asset.  Per GASB Concepts Statement No. 4, paragraph 8, an asset is defined as “resources with present service capacity that the government presently controls.”   Capitalized interest by itself does not provide any “service capacity.”  The GASB further determined that interest cost “does not enhance the present service capacity of an asset because, regardless of whether interest cost is incurred during the period of construction, the asset will have the same ability to provide services.”

The second consideration was that capitalized interest could not be considered similar to an ancillary charge that is considered capitalizable costs.  Ancillary charges include items like freight charges, site preparation costs and certain professional fees, without which the asset could not be placed into service. The GASB took this position a step further in pointing out that unlike ancillary charges where the entity has no choice to incur them in order to get the asset into service, how or whether to finance the construction of an asset is a discrete choice of the entity.

I haven’t had the time to line up the GASB conceptual position against the FASB’s conceptual framework, but I do wonder how different they could be when it comes to defining an asset and what it takes to get the asset ready for its intended use?

Dodd-Frank Does Not Protect Internal Whistleblowers

Last week the Supreme Court of the United States decided a case in favor of a company that fired a whistleblower who only reported their concerns about a potential fraud internally.  The Dodd-Frank Act was built upon the Sarbanes-Oxley Act and required the SEC to set up a process for whistleblowers to report potential fraudulent activity to the SEC. It provided that the SEC will pay a portion of any fines or other monies recovered to the whistleblower.  In addition, the Dodd-Frank Act had explicit language preventing whistleblowing targets from taking retaliatory measures against the whistleblower.

The Supreme Court ruled that the Dodd-Frank protections only apply if the whistleblower reports the potential fraud to the SEC.  The legal protections against retaliation do not apply if the whistleblower only reported their concerns internally within the company.  Many companies have internal policies against retaliation for reporting potential fraud, but the Dodd-Frank Act created an incentive to go to the SEC not just for the potential pay-off, but for the better legal protection afforded by the Act.

The Supreme Court decision should be a big concern for companies.  The case makes it more likely a whistleblower will go around an internal reporting process and go straight to the SEC.  The impact and repercussions of the fraud can be greater when an external regulator is doing the investigation rather than an internal party doing the work and then self-reporting to any regulators.  It also puts potential whistleblowers in an even more dangerous position in trying to decide what to do.

The reality is that whistleblowers’ careers are often derailed even if no one overtly retaliates against the whistleblower.  Opportunities for promotion just seem to disappear and often whistleblowers find the only way to keep their career moving is to change to a different employer.  Even changing employers can be difficult if the word gets out in an industry or a geographic area about a “troublemaking” employee.

The Supreme Court stated that the wording of the Act was unambiguous that protections only applied to those reporting information to the SEC.  In a strange twist, companies might want to consider asking Congress to address this issue by creating a more stringent standard on the companies themselves in order to avoid the possibility that internal whistleblower programs will be made impotent by their lack of legal protection.


Was the Individual Mandate Eliminated?

One of the more controversial aspects of the Affordable Care Act was the individual mandate.  The law required everyone to buy health insurance or pay a penalty to the government come tax time.  Some thought it was wrong for the government to force people to buy something they might not want; and others said if people weren’t required to buy health insurance then only sick people would buy insurance and health insurance would quickly become unaffordable.  The Tax Cuts and Jobs Act was said to have eliminated the individual mandate.  Some people are very happy about the mandate going away while others think it is a terrible idea.  This blog is not here to debate that point.  The question this blog is focused on is, was the individual mandate actually eliminated?

Because the Supreme Court determined that the individual mandate was a tax, Congress could address the amount of that tax in a piece of tax legislation even without touching any other aspects of the Affordable Care Act; and that is exactly what congress did in the Tax Cuts and Jobs Acts.  The law did not eliminate the individual mandate, instead it set the tax rate for not having insurance to zero.  What is the difference between eliminating the individual mandate and setting the amount to zero?  To someone not having insurance, the answer is not much, but to any other organization having to comply with the Affordable Care Act the answer is a lot.

For example, large employers must still provide insurance to their employees or face fines and penalties even though the employees no longer face a payment for not having insurance.  In fact, employers must still provide all the reporting to employees they were required to provide before the individual mandate rate was set to zero.  For example, the 1095-C form is still required to be sent to all employees.  That means everyone will still be getting their documentation that they have insurance through their employer even though there is no payment due for not having such documentation.  This means business and organizations will still be incurring a lot of cost to comply with reporting requirements around the individual mandate even though everyone is reporting that that individual mandate has been “repealed.”

So they next time you hear someone say the individual mandate has been eliminated, maybe you can have a little fun with them by pointing out it hasn’t been eliminated, only set to zero.