2016 AICPA National Conference on Current SEC & PCAOB Developments
By Ted Rothchild, Supervisor, Assurance Services
The AICPA annual conference was held from December 5-7, 2016, in Washington, D.C. The conference focused on a discussion of recent U.S. Securities and Exchange Commission (“SEC”) and Public Company Accounting Oversight Board (“PCAOB”) developments in accounting, auditing and financial reporting, with representatives from the SEC, PCAOB, Financial Accounting Standards Board (“FASB”), and International Accounting Standards Board (“IASB”) participating. The following is a summary of some of the conference highlights that are of particular interest to registrants and audit committee members. However, the SEC and PCAOB cautioned that these discussions should not be used as authoritative guidance; the following is for informational purposes only.
The proposed accounting standards update (“PASU”), Revenue from Contracts with Customers (ASC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is not yet effective, has led to several discussions by the Office of the Chief Accountant (“OCA”).
Ruth Uejio and Sylvia E. Alicea, staff members of the OCA, discussed the following matters related to ASC 606, (1) New revenue standard – Definition of a “Contract,” and (2) Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
New Revenue Standard – Definition of a “Contract”
The OCA defines a contract as an agreement based on enforceable rights and obligations.
Ms. Alicea discussed companies using a loss leader pricing strategy, in which a good is sold at a price that is intended to “lead” to the subsequent sale of other goods or services, in turn resulting in higher sales volumes and/or greater profits. A future contact might appear likely or even compelled by economics or regulation of sales. In Ms. Alicea’s view, it would be inappropriate to account for a contract before the contract exists with both enforceable rights and obligations.
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
The objective of ASC 606 is to provide guidance to an entity, when another party is involved in providing goods or services to a customer, for determining whether the entity is acting (1) as a principal by providing the promised goods or services itself to a customer, or (2) as an agent when the entity arranges for another party to provide the promised goods or services to a customer. The purpose of this amendment is to clarify that if a contract includes more than one specified good or service, an entity could be acting as a principal for some goods or services and as an agent for other goods or services under the same contract. An entity acting as a principal would record revenue under the gross basis, and an entity acting as an agent would record revenue under the net basis.
Ms. Uejio noted that the accounting determination of whether a company is a principal or an agent under the new revenue standard could be different from a company’s conclusion under current GAAP.
She discussed the fact that over the past few years, revenue recognition has been the number one topic of consultation with OCA. Among revenue consultations, over 30% relate to gross versus net revenue presentation matters, and the presentation determination is important to investors. This determination informs investors with respect to (1) who the company believes is its customer, (2) which specified good or service the company is selling to the identified customer, and (3) the amount of revenue earned and profit margins reported by the company on sales transactions. Additionally, the disclosures required by the standard should help investors understand both the accounting judgments utilized in the gross or net revenue presentation in the primary financial statement and the transaction cash flows in the context of the relevant underlying contracts.
Internal Control over Financial Reporting (“ICFR”)
The remarks of various speakers emphasized the importance of ICFR based on a belief that regular dialogue between management, audit committees, and auditors regarding ICFR assessments will lead to more accurate assessments and more reliable financial reporting to investors.
Wesley R. Bricker, Deputy Chief Accountant for OCA’s Professional Practice Group, said, “We are routinely reminded through our interactions with investors that they continue to believe that strong and effective internal controls and audits are important components of the ability of companies to communicate credible financial reporting information in order to raise the capital needed to operate, grow and compete.”
As in prior years, throughout the conference, the panels and SEC staff discussed the topic of non-GAAP reporting, including improvements seen in disclosures by registrants over the past 12 months, since the newly released Compliance and Disclosure Interpretations (“C&DIs”) developed by Division of Corporation Finance and OCA to provide additional guidance on non-GAAP disclosures.
Mr. Bricker cautioned: “However, there is more progress for companies to make, for example, in the evaluation of the appropriateness of the measure and its prominence, as well as the effectiveness of disclosure controls and procedures.”
It is important to maintain a line of communication between registrants and their auditors regarding the topics discussed above, as users of financial statements continue to consider these topics important in determining the usefulness, including transparency of registrant financial reporting.