Recently issued FASB standards for revenue recognition, lease accounting, and the private company variable-interest entity (VIE) consolidation have led to companies’ and practitioners’ asking a host of questions about the preparation and auditing of financial statements.
During the AICPA’s ENGAGE 2020 virtual conference Tuesday, some of these frequent questions were addressed by Center for Plain English Accounting (CPEA) technical manager Mike Austin, CPA, and Kristy Illuzzi, CPA, CGMA, the AICPA staff liaison to the AICPA Technical Issues Committee.
The following is a sampling of the questions that were answered.
Q: Is an emphasis-of-matter paragraph required when an entity adopts the private company alternative for VIEs in Accounting Standards Update No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities?
A: An emphasis-of-matter paragraph is required only if the change is material, Illuzzi said. She cautioned, though, that many times this adoption may be material to the financial statements and that the VIE guidance and consolidation rules in general can be confusing, which is part of the reason FASB issued the alternative for private companies to begin with.
“So an EOM paragraph may be helpful, especially in that initial year [of adoption], letting the users know that the company elected this alternative, and pointing to the note to the financial statements that has the additional required disclosures,” Illuzzi said.
Q: If a client requests the entity’s name be changed on financial statements that were previously issued, would they need to recall all of the previously issued financial statements and add a disclosure to the financial statements of the change? The change is literally just adding “Inc.” to the end of their name. They didn’t change their name; they just want their full legal name to be used and changed on previously issued statements. It just seems more typographical in nature.
A: FASB and the AICPA Auditing Standards Board have no authoritative guidance on situations that essentially are minor wording changes, such as spelling corrections, grammatical corrections, or corrections of omitted words, Austin said. So firms have to make their own decision on how to handle these modifications. They can advise the client to:
- Just make a quick revision to the financial statements without going through a formal restatement process; or
- Go through a more formal process of recalling and reissuing the financial statements.
“In practice, we see that [the quick revision] is the approach that most firms will do in a situation like this, as opposed to going through a formal revision process,” Austin said. “That said, it is entirely a risk management decision that your firm would have to be comfortable with handling any of these kind of minor correction situations.”
Q: Can a firm still issue a compilation, review, or audit opinion for a company that elects to make a U.S. GAAP departure related to adopting FASB’s new revenue recognition standard (ASC Topic 606)? Essentially, can a firm issue an “except for” opinion in this situation?
A: In this scenario, the CPEA takes the position that revenue is such an important part of the financial statements and so material to users that it would typically not be appropriate to issue an “except for” opinion in most cases.
“Let me just stress, that is just our opinion, and we’re not saying that it is the case for every single scenario, as there very well could be companies where the impact of adopting ASC [Topic] 606 is not material or it’s only material to one [financial] statement,” Austin said. “But the position we suggest you start from is that that type of [qualified] opinion would not be appropriate. So make sure you’re really thinking about it carefully before you decide to go down that path.”
Austin understands that many private companies are reluctant to adopt ASC Topic 606 because it’s a difficult implementation. He suggested advising clients who are struggling with this to consider if they need to issue financial statements under U.S. GAAP, or if they could potentially issue their statements under an other comprehensive basis of accounting such as the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), cash-basis, or tax-basis financial statements.
Q: Are related-party leases accounted for differently under ASC Topic 842 (FASB’s new lease accounting standard)? What about if the lease we are looking at is an oral lease that is effectively a month-to-month lease? What should the term be?
A: Under ASC Topic 842, legally enforceable terms and conditions are the basis for the recognition and measurement requirements for lessees and lessors that are related parties, which are the same criteria for leases that are not between related parties, Austin said. The classification and accounting for leases between related parties should be the same as that for unrelated parties, he said, and the disclosure requirements of ASC Topic 850, Related Party Disclosures, should also be applied.
But in many related-party arrangements, little documentation exists, so it may be necessary to consult legal counsel to determine whether enforceable rights and obligations exist.
“For something like an oral lease that’s month to month, it probably is a month-to-month lease, but you would still need to consider if there are implied terms and conditions that may impact the term,” Austin said.
The Center for Plain English Accounting (CPEA) is the AICPA’s national A&A resource center and assists members with accounting, auditing, attest, review, and compilation needs by sharing technical advice and guidance in a straightforward manner. For more information on the benefits of membership, visit the CPEA webpage.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.