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FASB Accounting Year in Review

Thu, 01/11/2018 - 12:00am

Having recently completed several major long-term projects, the Financial Accounting Standards Board in 2017 shifted its attention to assisting stakeholders with implementing new standards and resolving practice issues.
Our year in review newsletter summarizes the year’s most significant changes in guidance, including:
  • Clarifying the definition of a business
  • Simplifying the goodwill impairment test
  • Targeted improvements to hedge accounting requirements
  • Simplifying the accounting for certain financial instruments with down round features

Our newsletter also discusses implementation of major new standards, previews what to expect in 2018, and summarizes the effective dates for all recently-issued accounting standards.
  View the Newsletter

2018 BDO IPO Outlook

Mon, 01/08/2018 - 12:00am

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U.S. IPO Activity to Build on Positive 2017
Bankers Projecting 30 Percent Increase in Proceeds in 2018 Initial public offering (IPO) activity on U.S. exchanges was a bit of a rollercoaster ride in 2017, beginning slowly in the first quarter of the year before building to a frenzy of offerings in the Spring. That was followed by a relatively calm summer, prior to a flurry of activity in the fall to close out the year. In the end, by any measure, 2017 was a positive year for IPOs with virtually every statistical category – offerings (+52%), proceeds (+89%) and filings (+59%) – up significantly from 2016.*

According to the 2018 BDO IPO Outlook, BDO USA’s annual survey of capital markets executives at leading investment banks, there were multiple factors for the increase in offerings. When asked to identify the primary factor behind the jump in IPOs, an increased confidence in the U.S. economy (38%) is most often cited. Other drivers identified by the bankers were positive IPO performance encouraging additional offerings (18%), pro-business climate of the Trump administration and Republican-controlled Congress (18%), continued low interest rates pushing demand for higher yielding assets (13%) and increased investor cash flow into stockfocused
mutual funds (13%).

TRUMP BUMP In last year’s BDO IPO Outlook survey, more than two-thirds (68%) of the capital markets community indicated that they felt President-elect Trump and the Republican-controlled Congress would have a positive impact on the U.S. IPO market. 

This year, looking back over 2017, a majority (58%) of the bankers feel the new President and Congress did have a positive impact on U.S. IPOs, compared to one-third (33%) who feel they had no impact on offering activity. Only nine percent indicated the President and Congress negatively impacted the market.

"In 2017, the U.S. IPO market bounced back from two consecutive years of dwindling offerings and proceeds raised. Capital markets executives clearly feel that the growth of the past year will continue in 2018 as they project significant increases in both the number of IPOs and in total proceeds raised,” said Christopher Tower, a Partner in the Capital Markets Practice of BDO USA. “Given the strong performance of last year’s offerings, the overall strength of the economy and low volatility in the greater stock market, many factors appear to be in place for a healthy IPO market in the coming year.”

2018 FORECAST Looking forward, the capital markets community is projecting significant growth in the number of initial public offerings (IPOs) on U.S. exchanges in 2018. Close to three-quarters (72%) predict an increase in the number of U.S. IPOs in the coming year, with eighteen percent describing the increase as substantial. One-fifth (20%) forecast activity as staying about the same as 2017, while just 8 percent are projecting a decrease in offerings. 

Overall, bankers predict an 11 percent increase in the number of U.S. IPOs in 2018. They anticipate these offerings will average $260 million, which projects to $46 billion in total IPO proceeds on U.S. exchanges. This would represent an increase of 30 percent from 2017 proceeds.

When asked for the most likely factor to spur increased IPO activity in 2018, 38 percent of the bankers cite continued positive returns from new offerings. Other potential drivers identified by the executives are a positive impact from meaningful tax reform (23%), the pricing of a major “name” offering (18%), continued regulatory rollbacks under the Trump administration (15%) and less favorable private valuations forcing businesses to the public markets (6%).

Dropbox, Ancestry.com, Lyft, Pinterest and Spotify are just a few of the intriguing businesses considering a potential offering in 2018.
INDUSTRIES For the fifth consecutive year, the healthcare industry was the bellwether of the U.S. IPO market – spawning 29 percent of total U.S. offerings in 2017 – and most capital markets executives are projecting even more IPOs in the healthcare sector in 2018. Overall, a majority of bankers are forecasting increases in IPOs from the technology (89%), biotech (71%) and healthcare (60%) industries. In addition, close to half of the executives also project an increase in offerings in the financial (45%) sector. (see chart below). 
  Industry Increase Stable Decrease Technology 89% 10% 1% Biotech 71% 24% 5% Healthcare 60% 29% 11% Financial 45% 36% 19% Energy/Natural Resources 38% 39% 23% Media/Telecom 38% 34% 28% Industrial/Manufacturing 36% 42% 22% Real Estate 28% 48% 24% Consumer/Retail 20% 20% 60%   “A strength of last year’s IPO market was the wide breadth of industries represented among the offerings, with six sectors achieving double digits in deals,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA. “Healthcare, biotech, technology and financial industries led the way in IPOs in 2017 and the capital markets community believes those sectors will continue to lead the way in the new year.” 

SOURCES & ATTRIBUTES OF 2018 IPOs Private equity (40%) and venture capital (37%) portfolios are the most often mentioned sources of IPOs in the coming year. Spinoffs/divestitures (14%) and owner-managed, privately-held businesses (9%) are the other sources identified by the bankers. 

When asked what offering attribute will be most valued by the investment community in 2018, three-quarters of the bankers cite either long-term growth potential (43%) or innovative businesses offerings/products (32%). Profitability (12%) Stable cash flow (11%), and low debt (2%) are mentioned by smaller proportions of participants.

THREATS TO 2018 IPO MARKET There isn’t one obvious answer when I-bankers are asked to identify the greatest threat to a healthy U.S. IPO market in 2018. Almost one-third (33%) cite global political and economic instability, while just over one-fifth (22%) identify inflated private valuations that will not be supported in public markets.

Smaller percentages of capital markets executives focused on domestic political instability (18%), a failure of the Trump administration to deliver on deregulation (14%) and Federal Reserve rate hikes (13%).​

EXCESSIVE SEC REGs? Despite the increase in IPOs on U.S. exchanges in 2017, offerings remain well below the all-time highs of the late 1990s. Some blame excessive SEC disclosure requirements for the drop-off in offerings. In contrast, others contend that there have been numerous changes to ease SEC regulations in recent years - such as the JOBS Act, allowing confidential filings and reducing disclosure requirements - to make it easier to navigate the IPO process.

When asked whether they view SEC regulations as the reason for the historical drop in IPOs from the 1990s, just 24 percent of the capital markets community agreed. A clear majority (76%) were more likely to attribute the reduction in offerings to the wide availability of private financing, high M&A activity, more discerning investors or other factors.
  “With an unprecedented level of private capital in the marketplace, the number of private businesses that have conducted numerous financing rounds has increased considerably in recent years,” said Lee Duran, Partner in the Private Equity Practice of BDO USA. “With companies staying private longer, they can mature, become more profitable and more stable prior to going public. Although that slows the timeline to an IPO, in the end, it is a good thing for investors and the economy.”

IPO ALTERNATIVES? Despite numerous detractors who question its value, Bitcoin, the world’s most prominent cryptocurrency soared in value in 2017. Given this rapid increase, many businesses have begun to use the craze for cryptocurrencies as an opportunity to raise financing through initial coin offerings (ICOs). 

Unlike traditional IPOs that give buyers shares or stock options in exchange for purchase, ICOs don’t give buyers any ownership rights in the company. Instead, startups raise money in exchange for a new digital coin that may be traded or grow in value. According to data provider Autonomous Research, companies raised more than $4 billion via ICO fundraising in 2017.

Despite ICOs becoming increasingly common in 2017, with some start-ups raising hundreds of millions in capital, less than one-fifth (19%) of capital markets executives view ICOs as a future threat to traditional IPOs. 

A majority (64%) of bankers expect to see increased interest in Regulation A+ offerings which can raise up to $50 million in a 12-month period under scaled down regulations, but are not listed on exchanges. A slightly smaller majority (55%) view Regulation A+ offerings as an attractive alternative to a traditional IPO for smaller businesses.
  “Given the pioneering nature of ICOs and the inherent volatility of cryptocurrency, there is a wide range of sharply divided opinions on this fundraising practice. Supporters view it as a legitimate disruptive threat that can transform the way companies capitalize themselves, while detractors consider ICOs nothing more than a passing fad,” said Paula Hamric, Partner in BDO USA’s National SEC Practice. “A strong majority of the investment banking community clearly sides with skeptics. As the SEC has recently issued a strong warning on ICOs, investors should proceed with extreme caution” 
For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
  Jeff Jaramillo
Washington, D.C.   Christopher Tower
Orange County   Lee Duran
San Diego   Ted Vaughan
Dallas   Paula Hamric
About the Survey
These findings are from The 2018 BDO IPO Outlook survey, a national telephone survey conducted by Market Measurement, Inc. on behalf of the Capital Markets Practice of BDO USA. Executive interviewers spoke directly to 100 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States in the coming year. The survey, which took place in December of 2017, was conducted within a scientifically developed, pure random sample of the nation’s leading investment banks.

* Renaissance Capital is the source for all historical data related to the number, size and returns
of U.S. IPOs.

SEC Year In Review

Tue, 01/02/2018 - 12:00am
Commission and staff activities focused on several key themes and topics in 2017.  These themes and topics were recently emphasized at the annual AICPA Conference on Current SEC and PCAOB Developments held on December 4 - 6, 2017, where representatives of the SEC and PCAOB shared their views on various accounting, reporting, and auditing issues. They include the following:  
  • Consistent with Chairman Clayton’s views on SEC policy-making, the SEC and staff are particularly focused on activities intended to facilitate capital formation.   
  • The SEC staff is “open for business” and encourages registrants to contact them about questions and potential relief from reporting requirements that call for information that isn’t considered material to investors.
  • The SEC’s work continues on its Disclosure Effectiveness Initiative and we should expect further rulemaking and activities related to the initiative in 2018.   
  • Keep going/get going. Successfully implementing the significant new accounting standards (revenue, leases, and CECL) is top of mind for the SEC staff and should be for registrants as well. 
  • Cybersecurity. Cyber threats and breaches are increasing at a rapid pace and registrants are highly encouraged to focus on their cybersecurity controls, procedures and disclosures. 
  • The most significant tax reform since 1986 is upon us.  A new tax code with different corporate tax rates will have substantial consequences on financial reporting and disclosures.
Our SEC Year in Review publication provides additional insight into these issues.  It also summarizes other Commission rulemaking, staff activities and practice issues from the conference that affect financial reporting.  

BDO Knows Tax Reform: SEC and Tax Reform, SAB 118

Tue, 01/02/2018 - 12:00am
Summary The enactment of the most significant U.S. income tax legislation in 30 years is now final. 
On Friday, December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” legislation or the “Act.”

For U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS), the enactment date is December 22, 2017.

Under ASC 740, Income Taxes, reporting entities are required to recognize the effect(s) of the Act on current and deferred income taxes in the enactment period’s financial statements.

For calendar year reporting entities, the enactment period is the fourth quarter of the 2017 annual reporting period. For fiscal year reporting entities, the enactment period is the fiscal quarter within which the December 22 enactment date falls, e.g., second quarter for a June 30 fiscal year reporting entity.
  Details On the same date as the president signed the Act into law, the SEC staff issued guidance in the form of Staff Accounting Bulletin (SAB) No. 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effect(s) of the Act in the period of enactment.   

1. SAB 118 outlines the approach companies may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effect(s) of the Act by the time the financial statements are required to be filed. Companies may use this approach when the timely determination of some or all of the income tax effect(s) from the Act is incomplete by the due date of the financial statements.   

SAB 118 also prescribes disclosures that reporting entities must provide in these circumstances.   
The guidance in SAB 118 is strictly limited to the financial reporting consequences from the Act and cannot be applied by analogy, nor used to comply with financial reporting of other tax legislation, e.g., a tax law change in a foreign country.

2. The framework provided in SAB 118 necessitates making a determination whether the assessment and quantification of a particular income tax effect(s) is “incomplete” by the due date of the financial statements.   
Income tax effect(s) that are considered “complete” by the due date of the financial statements must be reported in the enactment period financial statements.
If the assessment and quantification of some or all of the income tax effect(s) are incomplete by the due date of the financial statements, a reporting entity should determine whether a “reasonable estimate” can be made.
A reporting entity must record a reasonable estimate in the first period in which it is possible to determine a reasonable estimate.  Under SAB 118, reasonable estimates are considered “provisional amounts” that have to be updated when additional information becomes available and the evaluation and computation of the additional information is complete. 
A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed one year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined. 
Any income tax effect(s) that are unrelated to the Act cannot be treated nor reported as measurement period adjustments. 
If a reasonable estimate (with respect to one or more items) cannot be made by the due date of the enactment period financial statements, a reporting entity should apply the provisions of ASC 740 to the item(s) by applying the tax law in effect prior to the enactment of the new tax law.            

3. There are two illustrative examples in SAB 118.

Under Example 1, a reporting entity has historically asserted an indefinite reinvestment of foreign earnings and thus not provided in the financial statements a deferred tax liability for the latent U.S. tax effect. The passage of the Act now causes the entity to owe a U.S. tax at different rates on the undistributed accumulated earnings and profits. The entity concludes, based on its facts and circumstances, that it is unable to develop a reasonable estimate of the tax on accumulated foreign income by the due date of the financial statements which include the enactment period. In this fact pattern, the reporting entity does not recognize the effect of the final tax on accumulated foreign earnings in the financial statements which include the enactment period. Instead, the entity would recognize a reasonable estimate in a subsequent period if one can be determined and continue to revise it until final determination of the tax liability is complete. However, the measurement period cannot exceed 12 months from the enactment period. 

Under a modified Example 1(a), the entity is able to determine and recognize a reasonable estimate of the tax liability in the financial statements which include the enactment period. In a subsequent period (within the measurement period), the entity obtains, analyzes and prepares the necessary information to complete the determination of the final tax and the accounting, resulting in an adjustment to the provisional amount.       

Under Example 2, a reporting entity with deferred tax assets as of the enactment date is able determine the income tax rate remeasurement effect by the financial statements’ filing due date. However, the entity cannot determine a reasonable estimate of the valuation allowance impact that could arise due to certain provisions of the Act. In a subsequent period, the entity is able to obtain, analyze and prepare information that is necessary to complete the valuation allowance assessment, and thus is able to conclude the accounting and determine that no change in valuation allowance is required due to provisions of the Act.

SAB 118 states that reporting entities should provide financial statement disclosures about material impact(s) from the Act for which the ASC 740 accounting is incomplete, including:  
(a) Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
(b) Disclosures of items reported as provisional amounts;
(c) Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
(d) The reason why the initial accounting is incomplete;
(e) The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
(f) The nature and amount of any measurement period adjustments recognized during the reporting period;
(g) The effect of measurement period adjustments on the effective tax rate; and
(h) When the accounting for the income tax effects of the Act has been completed.

5. A Foreign Private Issuer reporting under IFRS may apply the approach outlined in SAB 118 solely for the purpose of completing the income tax accounting for the effect(s) of the Act as required by International Accounting Standard (IAS) 12, Income Taxes.    

The staff also issued a Compliance & Disclosure Interpretation, which confirms that the remeasurement of a deferred tax asset to incorporate the effects of newly enacted tax rates or other provisions of the Act does not trigger an obligation to file under Item 2.06 of Form 8-K.
  BDO Insights The issuance of SAB 118 is a significant development intended to assist reporting entities in complying with the requirements in ASC 740. 

While SAB 118 indicates the measurement period may be up to 12-months (e.g., December 2017 to December 2018 for calendar year entities), reporting entities cannot wait to gather, assess and evaluate information and compute the necessary entries until the end of the measurement period. SAB 118 merely provides relief when the information needed to recognize some or all of the income tax effect(s) of the Act (and only this Act) is incomplete by the filing date.        

We expect that a considerable information gathering and evaluation work may be required to determine whether a reasonable estimate with respect to one or more effect can be made by the due date of the financial statements. Reporting entities must make a reasonable effort and act in good faith to determine specific income tax effect(s) and complete the ASC 740 current and deferred tax accounting. This will require exercising sound professional judgment based on the particular facts and circumstances. 

For example, a reporting entity whose accumulated foreign income has been considered permanently reinvested might be able to determine a reasonable estimate of the final tax on accumulated foreign income if it has few foreign subsidiaries, a simple legal entity reporting system, few differences between reported U.S. GAAP retained earnings and U.S. earnings and profits (a tax law measurement of income), and readily available foreign cash and cash equivalent information.  The reporting entity might update the provisional amount and complete the ASC 740 accounting in a subsequent period as it is collects, evaluates, analyzes, and computes the impacts from foreign taxes paid on the accumulated income, foreign tax credits, foreign withholding tax, and the potential foreign currency translation effect on the final tax liability.  The disclosures provided in the initial and subsequent periods would be consistent with the disclosure requirements in SAB 118.

Conversely, a reporting entity whose accumulated foreign income has been considered permanently reinvested for accounting might not initially be able to determine a reasonable estimate of the final foreign tax liability if it has many foreign subsidiaries, a very complex holding structure (e.g., divisional reporting, holding companies, etc.), significant differences between reported U.S. GAAP retained earnings and U.S. earnings and profits (e.g., material purchase price step-up and certain U.S. tax elections to amortize purchase price for earnings and profits), a complex foreign intercompany treasury structure, and a complex foreign tax reporting structure with many foreign tax returns. Under this circumstance, the reporting entity would comply with the ASC 740 requirements as if the tax law in effect prior December 22, 2017, continues to apply (i.e., it would continue to assert accumulated foreign income is permanently reinvested) until subsequent period(s) in which it is able to determine a reasonable estimate and/or the final tax liability and complete the ASC 740 accounting. The disclosures provided in the initial and subsequent periods would be consistent with the disclosure requirements in SAB 118.

Reporting entities must support and document their rationale for why some or all effects are incomplete, why reasonable estimates cannot be made, measurement period adjustments, and final determinations of provisional amounts. The level and extent of documentation will depend on the particular entity’s facts and circumstances. However, it is expected to be consistent with the level and extent of disclosures required under SAB 118.  
For questions related to matters discussed above, please contact:
  Assurance     Yosef Barbut
National Accounting Partner   Adam Brown
Partner - National Director of Accounting     Jeff Lenz
Partner - National SEC Department         Tax     Michael Williams
National Tax Partner - ASC 470
    Paul Heiselmann
National Managing Partner - Specialized Tax Services     Matt Becker
National Tax Office Managing Partner    

BDO Comment Letter - ​Modernization and Simplification of Regulation S-K

Thu, 12/21/2017 - 12:00am
FAST Act Modernization and Simplification of Regulation S-K (File No. S7-08-17)
BDO supports the Commission’s efforts to modernize and simplify certain disclosure requirements in Regulation S-K, though it does have several comments for the Commission.

ASC 606 Adoption TimeTable

Fri, 12/15/2017 - 12:00am
FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606), comes into effect for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that year. All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. BDO offers an example adoption timetable for companies to consider in planning their general approach to adopting the new standard.
For more information, please contact one of the following practice leaders:
  Bryan Martin
National Assurance Partner   Phillip Austin
National Managing Partner of Auditing   Michael Stevenson
National Assurance Partner    

BDO Knows: Revenue Recognition

Thu, 12/14/2017 - 12:00am
Topic 606, Revenue from Contracts with Customers – Tax Implementation Roadmap Download the Practice Aid

FASB ASU 2014-09, Revenue from Contracts with Customers (ASC 606), comes into effect for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that year. All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019.  BDO’s succinct practice aid will help companies navigate the tax implications of adopting ASC 606, Revenue from Contracts with Customers.
  Topic 606, Revenue from Contracts with Customers – Income Tax Implications Download the Newsletter

Companies in both the United States and abroad are racing toward the effective date of the new comprehensive revenue recognition standard, Revenue from Contracts with Customers.

ASC 606 is effective for public entities for annual reporting periods beginning after December 15, 2017 and one year later for private entities (i.e., 2018 and 2019, respectively). The new standard applies to all industries and all revenue transactions from contracts with customers.

The adoption of the new standard will impact pretax income and consequently taxable income of all entities. Tax departments need to understand the standard’s requirements and the impact it will have on pretax income and assets and liabilities related to revenue transactions from contracts with customers to accurately determine the current and deferred income tax impact. 

The adoption of the new revenue standard will require making income tax related adjustments under ASC Topic 740 Income Tax (ASC 740) on the date of adoption. BDO’s comprehensive newsletter addresses those adjustments in depth.
For more information, please contact one of the following practice leaders:
  Jennifer Kimmel
National Accounting Senior Manager Jonathon Geisen
Tax Senior Associate

SEC Staff Updates the Financial Reporting Manual

Wed, 12/13/2017 - 12:00am
The staff of the SEC’s Division of Corporation Finance published an update to the Division’s Financial Reporting Manual (FRM) on December 1. Like previous updates, the inside cover of the FRM lists a summary of the paragraphs that were updated. The updates include:
  • Revisions to guidance related to the impact of adopting new accounting standards on pro forma financial statements:[1]
    • If a registrant adopts a new accounting standard as of a different date or using a different transition method than a significant acquired business, the registrant should conform the adoption dates and transition methods of the acquired business to its own in the registrant’s pro forma financial statements that reflect the acquisition. The staff noted that it will consider requests for relief from this requirement.
    • If a registrant retrospectively adopts a new accounting standard at the beginning of its fiscal year, and later acquires a significant business for which pro forma financial statements are required, the pro forma income statement for the last completed fiscal year need not reflect the new accounting standard before it is reflected in the historical financial statements of the registrant.  For example, if a calendar year end registrant adopts ASC 606 on January 1, 2018 using a full retrospective approach and acquires a significant business in September 2018, the registrant’s pro forma income statement for the year ending December 31, 2017 included in the registrant’s Form 8-K need not reflect the adoption of ASC 606.[2] However, registrants should make appropriate disclosure in the notes to the pro forma financial statements if the adoption of the new standard is expected to be material.
  • Revisions to address the adoption of new accounting standards when EGC status is lost:
    • An EGC may elect to use an extended transition period for complying with any new or revised accounting standards.  If an EGC that makes this election loses its EGC status after it would have been required to adopt a new standard absent the extended transition period, the company should generally adopt the standard in its next filing after losing status.  The staff expects that EGCs should plan appropriately to adopt new accounting standards if they have taken advantage of the extended transition period provision.  However, the guidance also indicates that the staff may consider other alternatives upon the loss of EGC status depending on facts and circumstances. 
  • Conforming and non-substantive revisions to Topic 11, Reporting Issues Related to the Adoption of New Accounting Standards
    • Conforming edits were made to address the guidance above and the issuance of ASU 2017-13 (which permits certain public business entities to adopt the new revenue and leasing standards using the effective dates applicable to private entities).[3] 
  For questions related to matters discussed above, please contact Jeff Jaramillo or Paula Hamric.
  [1] The updates are consistent with previously published guidance on how to think about the adoption of the new revenue standard (ASC 606) in the context of pro forma financial statements.  However, the FRM update relocates and expands this guidance so that it now applies more broadly to all new accounting standards.  [2] This fact pattern assumes that the registrant has not already filed revised financial statements as of and for the year ending December 31, 2017 reflecting the adoption of the new accounting standard. A registrant that has already filed such financial statements reflecting the new accounting standard (e.g., on a Form 8-K or with a new or amended registration statement filed prior to the acquisition) would be required to reflect the new accounting standard in the pro forma income statement for the year ending December 31, 2017. [3] Refer to our SEC Flash Report for further information about this guidance.  

The Future of Auditor Reporting is Here

Thu, 12/07/2017 - 12:00am

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To the Point A new PCAOB auditing standard and related amendments, approved by the SEC on October 23, 2017, addresses new required disclosures relative to Critical Audit Matters (CAM), auditor tenure, and a statement on independence, among other changes to the auditor’s report.

Applies to audits of public companies – both large and small.1
The new PCAOB auditor reporting standard is the first significant change to the U.S. auditor’s report in over 70 years and follows the recent initiatives internationally to provide transparency into the audit.

Phasing In Requirements / For fiscal years ending on or after:  
  • 12/15/2017: Report format, tenure, and other information
  • 6/30/2019: Communication of CAMs for audits of large accelerated filers
  • 12/15/2020: Communication of CAMs for audits of all other filers1
Early adoption permitted after SEC approval of final standard on October 23, 2017.
The Auditor’s Report: Similar But Different The PCAOB has spent seven years and addressed close to 500 comment letters from companies, audit firms, and investors in developing the new standard that provides additional information investors have been requesting without otherwise modifying the auditor’s opinion on the financial statements as a whole. The pass/ fail opinion, which investors value, is retained in the new standard.
Through comment letters and other forums - users of financial statements have emphasized the importance of retaining the pass fail opinion as essential to their decision making about a company. The result is now an auditor’s report that requires the opinion to be the first paragraph followed directly by the basis for opinion. The communication of Critical Audit Matters (CAM), when applicable, would follow those sections.

Reporting Raises the Bar
While the “pass/fail” model is retained, the new report includes a revised format and enhanced disclosures, specifically audit tenure and required communication of CAM.

Auditor’s Report as a Focus for Discussion with Audit Committees

While CAM will result from the nature of communications that are already occurring with the audit committee, the auditor is now required to provide to and discuss with the audit committee a draft of the auditor’s report prior to release.

With the introduction of CAM, the audit report will provide information that had not previously been provided to investors and its form and content remains the responsibility of the auditor. While the new standard requires the auditor to discuss the report, which would include the treatment of any sensitive information, with the audit committee prior to release, it is anticipated that communication with the audit committee regarding potential CAM will occur throughout the audit.

Original Information – To Disclose or Not Disclose

When describing CAM in the auditor’s report, the auditor is not expected to provide original information unless it is necessary to describe the principle considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit.

The expectation is that auditors will generally be able to adequately convey the principal considerations and how the auditor addressed them in describing a CAM without including information that has not already been disclosed by management. However, in the rare instance where this is not the case, auditor reporting of original information would be limited to areas within the perspective of the auditor.


What May CAM Look Like?

Companies following the International Standards on Auditing (ISAs) implemented changes similar to CAM for years ended 12/15/2016. Early review of these, along with illustrative examples in the PCAOB’s initial proposal, may be helpful as companies and their auditors begin to assess reporting changes.

CAM are expected to be unique to each company’s circumstance and as such should not reflect a boiler plate approach. Monitoring examples from earlier adoption of similar standards in the U.K. and Europe may be helpful in developing an approach for selecting those matters that rise to the level of a CAM and how best to describe those matters.


Providing a More Tailored Approach

New auditor’s reporting may encourage…INNOVATION…in style, format and design.

Evolving Resources

Next Steps? Ensure AS 3101 and CAMs, in particular for large accelerated filers, are part of your current audit planning and wrap up discussions to raise awareness and assess potential impacts.

BDO will continue to monitor the evolution of AS 3101, along with similar ISAs, to provide timely insight and learning opportunities to our professionals, clients, and contacts.

Educating Yourselves / BDO helps you stay up to speed as new regulations are released.  
1 AS 3101 excludes the communication of CAMs for audits of brokers and dealers; investment companies other than business development companies; employee stock purchase, savings, and similar plans; and emerging growth companies.

BDO Comment Letter - ​Codification Improvements

Wed, 12/06/2017 - 12:00am
Codification Improvements (File Reference No. 2017-320)

The comment letter relates to the proposed Accounting Standards Update (ASU), Codification Improvements. We generally agree with, and support finalizing, the ASU but have concerns about certain amendments as well as suggestions for improving them. We also identified additional technical corrections that we believe the Board should deliberate and expose for public comment as part of its ongoing Codification improvements project.

BDO Comment Letter - ​Proposed Accounting Standards Update

Mon, 12/04/2017 - 12:00am
Proposed Accounting Standards Update, Reorganization (File Reference No. 2017-280)

BDO supports reorganizing the consolidation literature, as well as a longer-term project to adopt a more plain-English approach.

Evolution of Voluntary Audit Committee Disclosures

Wed, 11/29/2017 - 12:00am
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As evidenced in the fourth annual Audit Committee Transparency Barometer, public companies – small through large – continue to expand voluntary disclosures within their proxy statements to provide stakeholders with further insight into oversight responsibilities, particularly with regard to the external auditor.
Audit Committee Transparency Barometer and Key Findings
In November 2017, the Center for Audit Quality and Audit Analytics released their fourth annual Audit Committee Transparency Barometer, examining the robustness of audit committee proxy disclosures among the Standard & Poor’s (S&P) Composite 1500 companies. Unlike similar reports that focus on the largest public companies, this report looks at the most recent proxy statements through June 30, 2017 across small- mid-, and large-cap companies that compose the S&P 1500. The authors note that they continue to see encouraging trends with respect to voluntary, enhanced disclosure around external auditor oversight.

The 2017 Audit Committee Transparency Barometer provides valuable data points for audit committee consideration. Areas of disclosure reviewed in the report include:
  • audit firm selection;
  • audit firm compensation;
  • audit firm revaluation and supervision;
  • selection of engagement partner.
Within each of the above noted areas, the report provides several illustrative disclosures deemed as best practices for audit committee consideration.

Key Disclosure Findings:

Within the debrief of the above findings, the CAQ and Audit Analytics highlight the belief that many audit committees who annually perform assessments of the external auditor and provide constructive feedback to the audit team may not be disclosing such activity. The CAQ points to this as a potential opportunity for audit committees to not only enhance transparency but also to underscore improvements being made to audit quality and audit quality indicators.
Mounting Pressure for Increased Disclosures?
In an era marked with increasing demand for information and complexities surrounding such, there is noted significant regulatory emphasis around disclosure coupled with rising demands by shareholders and others for more transparency around corporate governance. With the exception of the Sarbanes-Oxley Act of 2002, however, significant regulatory requirements for audit committee disclosures have not changed. In 2015, the SEC put feelers out on possible revisions to audit committee disclosures. Since that time, the SEC has taken a monitoring approach of developments in practice but disclosure effectiveness remains a continual theme in publicly expressed statements by SEC leadership and staff.[1]

In 2017, new Chairman of the SEC Jay Clayton emphasized his desire to spur capital formation and review the accessibility and meaningfulness of increasing disclosure requirements of public companies. Many have suggested that the public company audit, designed to provide investor confidence that management is accurately portraying the financial reporting for their organizations, remains somewhat of a mystery. Further, with the recent SEC approval of the PCAOB’s new auditing standard to significantly enhance the auditor’s report, audit committees are pondering whether and how this may impact company disclosures in the public filings – particularly those disclosed by the audit committee.

BDO Insights
Given complexities in transactions, increasing access to information, rapid pace of change – technology, economic, information, etc. - public demand for more transparency and understanding continues to rise. Regulators, while potentially trying to reduce an already overwhelming disclosure burden, remain focused on the balance for meaningful investor information and consideration of whether such should be mandated.

Those charged with governance can get ahead of the curve now and voluntarily incorporate more insightful disclosures in their public filings. This is a significant opportunity to provide timely and relevant information about the audit process and the related decision-making around this particular area of oversight. It further represents a means for a company to perhaps further differentiate itself from its peers and demonstrate focus on driving audit quality. The increasing illustrations highlighted in the Transparency Barometers may be a good starting point in determining where your organization currently may be positioned and how to further strengthen their disclosures in this area.    

Where to Learn More?
BDO will continue to monitor developments in this area to provide timely guidance and references to our clients and contacts through our Center for Corporate Governance and Financial Reporting.
For more information on matters discussed above, please contact Amy Rojik.
  [1] For more on SEC Disclosure Effectiveness, refer to the SEC’s website.

BDO Comment Letter - ​Technical Corrections and Improvements to Recently Issued Standards - Part I

Tue, 11/14/2017 - 12:00am
Technical Corrections and Improvements to Recently Issued Standards - Part I: Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; Part II: Accounting Standards Update No. 2016-02, Leases (Topic 842) (File Reference No. 2017-310)

BDO generally supports the FASB's proposed improvements to the recently issued standards on recognition and measurement of financial assets and liabilities (ASU 2016-01) and leases (ASU 2016-02).  We believe that the proposal, together with our recommendations, would improve the standards.

SEC Approves the New PCAOB Auditor Reporting Model

Thu, 11/02/2017 - 12:00am
The SEC has approved the PCAOB’s final auditor reporting standard which will have staggered implementation that effects audits for fiscal years ending on or after December 15, 2017.  While the pass/fail opinion has been retained, several significant changes to both format and required disclosures will necessitate increased attention by audit committees and management along with their auditors during the coming audit cycles.

What’s Changing?
On October 23, 2017 the SEC) approved the PCAOB’s new auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, as adopted by the PCAOB in June 2017. The SEC also approved related amendments to certain other PCAOB standards.
As noted in BDO’s prior Alert, the new standard and related amendments, which will replace portions of AS 3101, Reports on Audited Financial Statements, retain the pass/fail opinion in the existing auditor’s report, but significantly change the existing auditor’s report to include a discussion of “critical audit matters” (CAMs) that have been communicated to the audit committee, particularly those that involve especially challenging, subjective or complex auditor judgment. The new standard also requires disclosure of the auditor’s tenure (i.e., the year in which the auditor began serving consecutively as the company’s auditor) within the auditor’s report, and requires other formatting changes to the auditor’s report.

Which Audits Are Impacted and When?
The standard and amendments generally apply to audits conducted under PCAOB standards; however, communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans. Auditors of these entities may choose to voluntarily include CAMs in the audit report.
The final standard and amendments will take effect as follows:
  New Auditor Reporting Provisions Effective Date Report format, tenure, and other information Audits for fiscal years ending on or after December 15, 2017 Communication of CAMs for audits of large accelerated filers Audits for fiscal years ending on or after June 30, 2019 Communication of CAMs for audits of all other companies Audits for fiscal years ending on or after December 15, 2020  
The PCAOB plans to do a post-implementation review of the new standard to make sure it is working as intended and does not lead to any unintended consequences. Consistent with the views set out in BDO’s comment letter to the SEC, the SEC Chairman Jay Clayton emphasized that, “The phased effective dates for CAMs should facilitate some early-stage analysis through the PCAOB’s Post-Implementation Review process, based on the experiences of large accelerated filers. Depending on the findings of this analysis, including an evaluation of unintended consequences, the board should be open to making changes, if necessary, to the revised auditing standards, including to the effective date for companies other than large accelerated filers.”

Where to Learn More?
The new standard and amendments have not yet been posted to the Auditing Standards section of the PCAOB website, but can currently be found at https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf (see page A1-1 for AS 3101).

BDO will be providing updated guidance to our clients and contacts on evolving developments with respect to the new auditor’s reporting model in the form of thought leadership, infographics, examples, and educational opportunities through our Center for Corporate Governance and Financial Reporting.
We encourage audit committees and management to be engaging in robust dialogue about the changes required by AS 3101 and how this will impact current and subsequent years’ audits.
For more information, please contact one of the following practice leaders: 
  Jan Herringer
National Assurance Partner Amy Rojik
National Assurance Partner

BDO Comment Letter - Exposure Draft: Not-for-Profit Entities (Topic 958)

Tue, 10/31/2017 - 12:00am
Exposure Draft: Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (File Reference No. 2017-270)

BDO supports the proposed enhancements to account for non-profit contributions.


Special Edition of EBP Commentator - 2017 COLA Update

Thu, 10/26/2017 - 12:00am
The Internal Revenue Service has announced the cost-of-living adjustment (COLA) for 2018. The dollar limitations for pension plans and selected other items are included in this Special Edition of the EBP Commentator. Certain annual compensation amounts were increased, including the limit for elective deferrals, which have not been updated since 2015. The Social Security Administration separately announced an increase to the taxable wage base.
  View the Newsletter

BDO Comment Letter - Land Easement Practical Expedient for Transition to Topic 842 (File Reference No. 2017-290)

Tue, 10/24/2017 - 12:00am
BDO supports the FASB's proposed transition practical expedient in ASC 842 related to easements which have not previously been assessed under ASC 840 as leases.  While we acknowledge that the proposal will not resolve the diversity in current practice, we believe this guidance is a practical and reasonable approach to reducing some of the cost and complexity of adopting ASC 842.

SEC Proposes Amendments to Regulation S-K

Wed, 10/18/2017 - 12:00am
Summary On October 11th, the SEC proposed amendments to modernize and simplify certain disclosure requirements in Regulation S-K. The proposal would not make major changes to Regulation S-K. Rather, in Commissioner Piwowar’s words, the proposed amendments respond to the SEC’s mandate under the Fixing America’s Surface Transportation Act to “prune the regulatory orchard” – i.e., clear away the unnecessary or inconsequential to allow enhanced focus and attention on what is material to a filing.  The amendments are based primarily on recommendations made in the staff’s November 2016 Report on Modernization and Simplification of Regulation S-K and are intended to update or streamline the disclosure framework while still providing investors with all material information required to make informed decisions.
  Details Among other things, the proposed amendments would revise:
  • S-K Item 303, Management’s Discussion and Analysis, to emphasize that the registrant focus its discussion of comparative periods on changes that are material to its financial condition and operations. The proposed amendments emphasize concepts in the SEC’s 2003 MD&A Interpretive Release, which encourages registrants to take a “fresh look” at previous periods.  The proposal would permit registrants to omit the discussion of the earliest period presented if it is no longer material or of continuing relevance to an investor.
  • S-K Item 102, Description of Property, to replace references to “major” encumbrances and “materially important” physical properties with a materiality threshold. The proposal would require a description of property only if it is material to the registrant or its business. However, the proposed amendments would not apply to registrants in the mining, real estate, and oil and gas industries.
  • S-K Item 601, Exhibits, to permit registrants to redact confidential information from material contracts without first submitting a confidential treatment request to the SEC staff where such information is both not material and competitively harmful if publicly disclosed. 
The proposal would also make changes to use technology to improve access to information.
Comments on the proposal are due within 60 days of being published within the Federal Register.
For questions related to matters discussed above, please contact:
  Jeff Jamarillo
National Partner of SEC Services Practice Paula Hamric
National Assurance Partner

Topic 606, Revenue From Contracts With Customers - Exploring Transition Methods

Tue, 10/17/2017 - 12:00am
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
  View the Newsletter

Topic 606, Revenue From Contracts With Customers - Presentation And Disclosure

Tue, 10/17/2017 - 12:00am
In 2014, the Financial Accounting Standards Board (FASB) issued its landmark standard, Revenue from Contracts with Customers. 1 It is generally converged with equivalent new IFRS guidance and sets out a single and comprehensive framework for revenue recognition. It takes effect in 2018 for public companies and in 2019 for all other companies, and addresses virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. For many entities, the timing and pattern of revenue recognition will change. In some areas, the changes will be very significant and will require careful planning.
  View the Newsletter