A&A Focus recap: Quality Management FAQs and a 2024 ASU rundown

The AICPA A&A Focus Series webcast on Jan. 8 invited back experts for a discussion of several important topics, including a frequently-asked-question segment on the upcoming AICPA Quality Management standards, a review of FASB Accounting Standards Updates (ASUs) becoming effective for 2024 financial statements, and a look at areas of potential confusion when applying step 3 of the revenue recognition process prescribed in FASB ASC Topic 606, Revenue From Contracts With Customers.

Hosted by Andrew Merryman, CPA, senior manager–A&A Technical Services, and Jennifer Gum, CPA, senior manager–Small & Medium Firms Support & Advocacy, the session featured discussions with experts Tom Groskopf, Angela Newell, and Mike Brand, who provided timely insights into accounting issues for practitioners regarding their current-year financial statements. The broadcast also featured another discussion in an ongoing series about applying the revenue recognition standard and held a rapid-fire question-and-answer session discussing the pending change from firm quality control to quality management.

This broadcast marked the one-year anniversary of the A&A Focus series, demonstrating the AICPA’s commitment to keeping members informed of crucial developments in accounting, auditing, and assurance (register for future sessions here). The combination of technical updates, implementation guidance, and practical examples provided valuable insights for practitioners navigating these changes in their practices.

FASB changes effective for calendar year 2024 and 2025

The first speaker, Tom Groskopf, CPA, director, at Barnes Dennig, and the technical director of the AICPA’s Center for Plain English Accounting, began the broadcast by outlining the new FASB ASUs becoming effective for private companies in 2024 and 2025, noting that the scope of changes is considerably narrower than the significant standards implementations of recent years like revenue recognition, leases, and current expected credit losses.

For calendar year 2024, several ASUs are now effective for private companies. The most broadly applicable is ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements, which addresses common control arrangements, particularly related-party leases. ASU No. 2023-01 provides two key changes:

• An optional practical expedient allowing private companies to use written terms and conditions to identify and classify leases between entities under common control.
• A mandatory provision for all entities regarding leasehold improvement amortization in common control leases, requiring amortization over the useful life to the common control group as long as the lessee continues to use the underlying asset.

The other FASB ASUs effective in 2024 have more limited application:

• FASB ASU No. 2020-06, Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: Simplifies convertible debt and preferred stock accounting by eliminating certain models while requiring enhanced disclosures.
• FASB ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers: Modifies business combination accounting for contract assets and liabilities.
• FASB ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging — Portfolio Layer Method: Expands the portfolio layer method for certain prepayable loans.

Groskopf noted the remaining two FASB ASUs were not likely to impact the broadcasts’ listeners, and he provided a brief overview.

Looking ahead to 2025, the changes are even more narrow in scope. Many of the ASUs becoming effective primarily affect banking and investment valuation matters that aren’t prevalent among private companies. The two more broadly applicable standards are:

• FASB ASU No. 2023-05, Business Combinations — Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement: Addresses joint venture formation accounting, requiring fair value concepts for the joint venture’s stand-alone statements.
• FASB ASU No. 2023-08, Intangibles — Goodwill and Other — Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets: Updates cryptocurrency accounting, allowing fair value through net income treatment when six specific criteria are met.

Looking ahead to the planned discussions for the Feb. 5 broadcast of A&A Focus, Groskopf noted that the narrower scope of recent FASB ASUs demonstrates the importance of stakeholder participation in FASB’s agenda consultation process and underscored the value of practitioners engaging with FASB’s current invitation to comment on their technical agenda to help shape future standard-setting priorities.

Revenue recognition — Step 3: Determining the transaction price

In the broadcast’s second segment, Angela Newell, CPA, deputy managing director at BDO, continued her revenue recognition series, focusing on Step 3: Determining the transaction price. She explained that while transaction price might seem straightforward (like menu prices at a fast-food restaurant), it often involves complex components beyond fixed consideration.

A key focus was variable consideration, and Newell emphasized several important points:

• The standard requires estimation even when challenging.
• There’s no “impracticability” exception.
• The amount must be constrained to what’s probable of not reversing.
• Variable consideration can be both positive (bonuses) and negative (penalties).

Newell also discussed the concept of implicit price concessions, using health care providers as an example. Newell noted emergency rooms must treat patients regardless of their ability to pay, knowing they may have to accept less than the full amount — this expected reduction is treated as variable consideration rather than a bad debt expense.

Newell concluded with a detailed examination of consideration payable to customers, using, as an example, a warehouse store’s promotional circular as a case study. When vendors pay to be featured in the retailer’s monthly coupon book, both the placement fee and per unit discounts should be treated as reductions in revenue rather than marketing expenses. ASC Topic 606’s rationale for this treatment is based on the fact that the advertising reaches only that retailer’s customers, it is not distinct from the sale of products to that retailer, and the purpose is to drive sales specifically at the retailer.

Newell emphasized that payments to customers for marketing or advertising often get misclassified. The key test is whether the service received is truly distinct from the sales relationship. If marketing efforts only benefit sales to that customer, they should typically be treated as reductions in revenue rather than marketing expenses.

This section highlighted how ASC Topic 606’s treatment of transaction price requires significant judgment and careful analysis and demonstrated how seemingly straightforward concepts in the revenue recognition standard can have complex implications in practice, requiring careful consideration of substance over form.

Quality management — FAQ for implementation

In the last segment of the broadcast, Mike Brand, CPA, a partner with BMSS Advisors and Co., discussed the implementation timeline and key considerations for the new AICPA Quality Management (QM) standards becoming effective in 2025. His conversation emphasized that while firms still have time to implement the standards, the transition requires careful planning and ongoing attention.

First, Brand highlighted key implementation dates for the standards:

• Systems must be in place by Dec. 15, 2025.
• First annual evaluations are due by Dec. 15, 2026.
• New engagement quality review requirements begin with 2026 financial statements.
• Early adoption remains possible and might be beneficial for some firms.

Co-host Jen Gum then asked a series of rapid-fire questions of Brand:

Q: Does a firm need to start from scratch when designing a system of quality management and creating the QM document?

A: No, there’s no need to reinvent the wheel. Firms should take their current quality control documentation, perform a gap analysis, and tailor it to the new QM standards.

Q: Can the AICPA practice aid (sole practitioner and small- and medium-firm versions available), including the templates and tables, form the core of a firm’s QM documentation?

A: Yes, these free downloadable resources are an excellent starting point, especially for smaller firms. However, they may not serve as the final comprehensive document.

Q: Should a firm have more quality objectives, risks, and responses than the ones provided in the QM standards and related AICPA practice aids?

A: Quality objectives in the standards are likely sufficient, but quality risks and responses should be tailored to each firm’s unique circumstances.

Q: If a firm only performs preparation engagements (e.g., preparation of financial statements), is it subject to the QM standards?

A: Yes, all firms, regardless of the complexity of their services, must comply with the QM standards, but the implementation can be scaled appropriately.

Q: Is it acceptable for a firm to define criteria such that no engagements require an Engagement Quality (EQ) review?

A: While permissible, this approach should be carefully evaluated to ensure it aligns with the firm’s risks and quality management policies.

Q: Can an individual performing an inspection as part of the QM monitoring activities be a member of the engagement team or the EQ reviewer?

A: Yes, but independence and objectivity must be maintained, and external reviewers may provide additional assurance.

Q: Can the managing partner delegate responsibility for the QM system if they are not involved in attest work?

A: The managing partner retains ultimate responsibility for the QM system but can delegate operational tasks to qualified personnel.

Q: Is a peer review required upon implementing the QM standards or for evaluating a firm’s QM system?

A: A peer review is not immediately required after implementing QM standards. Peer reviews remain on a triennial basis, but firms must conduct internal annual evaluations of their QM systems.

Q: Can the Excel risk-response document, a companion to the AICPA QM practice aid, serve as a complete QM system?

A: No, while the Excel document is a good starting point, it cannot fully document the evolving and comprehensive nature of a firm’s QM system.

Brand stressed that this new system requires more ongoing maintenance than the previous quality control standards. Unlike the current approach where some firms might review their system primarily during peer review years, the new standards demand continuous monitoring and updating as risks and responses evolve.

Brand encouraged firms to consult with their peer reviewers during implementation, as they should be well versed in the new standards and can provide valuable insights. He also emphasized the importance of understanding that while the standards allow for scalability, they don’t compromise on the fundamental requirement for a robust quality management system.

In other matters

In addition to the featured topical segments, the A&A Focus Series webcast provided updates across several timely emerging issues: 

• FASB released several documents during December and early January, including:
  • FASB ASU No. 2025-01, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, intended to clear up confusion on the interim effective date of FASB ASU No. 2024-03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40), for public companies that don’t have an annual reporting period ending on Dec. 31.
  • The Invitation to Comment, Recognition of Intangibles, intended to explore ways to improve the accounting for acquired and internally developed intangibles. Public comments should be submitted by May 30, 2025.
  • The Invitation to Comment, Agenda Consultation, seeking feedback from stakeholders to help shape its future standard-setting agenda. Public comments should be submitted by June 30, 2025. The JofA article “FASB Seeks Input on Standard-Setting Priorities” has more details.
• The Financial Accounting Foundation (FAF) recommended in a report released Dec. 18, 2024, that the Private Company Council (PCC) should maintain its current mission, remit, and structure. The report noted that the PCC’s current mission, remit, and structure remain valid and appropriate, the PCC has been successful in fulfilling its two primary responsibilities, and the PCC has been responsive to the needs of private company stakeholders.
• The AICPA Professional Ethics Executive Committee (PEEC) released two documents during December and early January, including:
  • A revised interpretation, “Executive or Employee Recruiting” (ET §1.295.135), that will affect independence for members in public practice and includes new prohibitions when a member is performing recruiting services for a key position for an attest client. The guidance is effective Jan. 1, 2026, and early implementation is allowed.
  • An exposure draft including proposed changes to “Simultaneous Employment or Association With an Attest Client” (ET §1.275.005) that aims to balance the prohibition of simultaneous employment and association, while allowing firms to evaluate threats to independence using the conceptual framework in other instances. Comments are welcome through March 16, 2025. The JofA article “PEEC Issues Recruiting Guidance, Exposure Draft on Simultaneous Employment” has more details on both PEEC releases.

• The AICPA has released an update to the Accounting and Valuation Guide, Business Combinations. The guide provides practical guidance and illustrations and describes best practices for accounting and valuations for business combinations and addresses many accounting and valuation issues that have emerged over time. The guide is designed to help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC Topic 805, Business Combinations, and FASB ASC Topic 820, Fair Value Measurement. The JofA article “New Guide Clarifies Accounting and Valuation of Business Combinations” has more details.

The webcast concluded with a preview of next month’s A&A Focus, live on Feb. 5, including a planned visit by FASB Chair Rich Jones to dig deeper into the recently released FASB agenda consultation.

AICPA members are encouraged to attend these monthly events and review the accompanying newsletters for more in-depth coverage of these critical topics. Members can access archives of past sessions at the A&A Focus Series webpage.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.