As if 2017 doesn’t promise enough drama and change already, the accounting profession is poised for a year brimming with expected regulatory issues and scrutiny.
Bloomberg BNA recently released its 2017 Tax & Accounting Outlook report that covers the gamut of legislative, state, international, and tax administration issues. But it also highlights the following four key accounting issues that could impact practitioners and companies in the new year.
- Banks and credit losses. New rules on the reporting of loans and other credit losses are potentially some of the most significant changes the financial accounting of banks and other companies have seen.
Under Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was issued by the Financial Accounting Standards Board (FASB) last June, banks and other lending institutions will be required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The “current expected credit loss model,” the core of the new standard, replaces the long-standing accounting model shaped around incurred losses.
This year “promises to be a period of preparing for the sweeping modifications in accounting for credit impairments,” the report states. “Companies have to assess what information must be assembled to shift to the new standard.”
Companies that file reports with the US Securities and Exchange Commission (SEC) will apply the new rules beginning in January 2020. Smaller and private companies have until 2021.
“Work that led to the credit losses rules of FASB and the International Accounting Standards Board was spurred by the 2008-09 financial crisis,” the report states. “Working in tandem for several years, the two boards sought to remedy the widely seen problem of recording loan losses ‘too little, too late.’”
- Insurance. Life insurance and annuities are inherently complex, and a FASB proposal to change insurance accounting rules “brings hurdles because of challenges inherent in the sector as a whole,” the report states.
Overall, the proposed ASU, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, seeks to modernize an accounting model dating back more than 35 years that doesn’t address the newest insurance products, Bloomberg BNA says. FASB contends that better and more consistent information will result.
Companies will need more data, which means more IT, internal controls, and more people in an industry that’s already faced cutbacks.
The proposal, which was issued last September, is expected to affect traditional life insurance companies that issue long-term care policies and disability income; also affected are companies selling participating contracts and products that contain market risk benefits, such as variable universal life and annuities.
Trouble spots include financial reporting projecting 30 years outward; how companies account for market risk benefits, like variable annuities; and disclosures.
Look for a FASB public roundtable early this year on the proposal and at least some changes to be made final later in the year.
- Non-GAAP financial reporting. Will the SEC’s intense scrutiny of non-GAAP financial reporting continue this year? That’s the big question, according to Bloomberg BNA. One SEC staffer in the report says to expect a “flurry” of cautionary letters.
Proponents of non-GAAP reporting indicate that its use can tell a better corporate story than GAAP, particularly in earnings reports. Whether the FASB will get involved isn’t clear, but at least one industry source in the report indicates that the board might want to begin by considering what issues lead to non-GAAP reporting.
Bloomberg BNA recently asked SEC Chief Accountant Wesley Bricker whether the commission would continue to aggressively address non-GAAP reporting in 2017. Bricker replied, “I am confident that the commission will remain focused, as it always has, on the appropriate administration of the securities laws.”
- Auditor disclosure rules. New requirements in audit transparency and a revamp of the auditor’s report are coming, courtesy of the Public Company Accounting Oversight Board (PCAOB).
Beginning on Jan. 31, audit firms must disclose the name of the audit engagement partner in the new PCAOB Form AP, Auditor Reporting of Certain Audit Participants. The form also will disclose other accounting firms that participated if they did at least 5 percent of the total audit hours. Foreign countries already require this.
“US auditors have vehemently opposed this requirement for liability reasons,” the report states.
Audit firms will have until June 30 to disclose these firms’ participation.
A proposed revision to the auditor’s report will require auditors to explain “critical audit matters,” which PCAOB members initially described as “those matters that kept the auditor awake at night,” the Bloomberg BNA report states.
The board also wants experienced or “lead” auditors to supervise inexperienced auditors instead of merely signing off on their work.
The report cites an email from Larry Shover, a member of the PCAOB’s Investor Advisory Group, in which he states that the supervision of other auditors is the most significant of all the board’s projects to investors.