Be Prepared for Major Changes in Key GAAP Standards
Get ready to tackle some major revisions in accounting standards. After years of consideration, the Financial Accounting Standards Board is finalizing its approaches on three major issues: revenue recognition, leases and financial instruments. Each of these accounting areas affects virtually all companies in the United States no matter what their size or whether they are public or nonpublic. And that means virtually all CPA firms are affected too.
From an advocacy standpoint, the AICPA continues to monitor the progress of these important standards and to comment on the exposure drafts on members’ behalf. Our goal is to help make sure the standards are effective and can be implemented with as much ease as possible. Moreover, the AICPA will help members understand and implement the new standards so they can continue to provide high-quality services and comply appropriately with the rules.
- Revenue recognition. The new standard is expected to be released this summer. In a significant departure from the current standard, the new revenue recognition standard will not contain industry-specific guidance. The Institute understands that CPAs will be looking for support and is developing tools and resources to help fill the void.
- Leases. A revised exposure draft could be released as early as this month. The proposal is expected to require all leases to be on the balance sheet and require that lessees use separate expense recognition for longer-term leases.
- Financial instruments. This standard is being handled in three parts: credit losses, classification and measurement, and hedging. The first two parts are in exposure into May. Having issued its proposals on hedging in a 2010 exposure draft, deliberations on hedging will resume in the second half of this year, according to the FASB.
All three standards are part of a broader joint project with the International Accounting Standards Board to converge U.S. GAAP with International Financial Reporting Standards, as well as improve the standards in the process. While the current GAAP standards are rule-based, the converged standards will be principle-based. That means more professional judgment and interpretation will be required.
Effective dates for the standards generally will not be earlier than reporting periods beginning after Dec. 15, 2016, which would seem to provide reasonable lead time since it’s much longer than usual. However, it’s important for members to begin getting ready now. The three revised standards, plus a new standard on insurance contracts, represent the most significant changes to GAAP we’ve seen in decades.
In preparation, the AICPA is creating a wealth of resources to help members understand the changes and to implement the standards on Day 1 when they become effective. I encourage you to take advantage of member benefits, such as the free A&A Technical Hotline and the Financial Reporting Center on aicpa.org. Webcasts, practice guides, CPE courses and more will become available in the near future.
GAAP is changing and soon. It doesn’t matter that the Securities and Exchange Commission has not decided whether to incorporate IFRS into the financial reporting system for public companies. Regardless of that outcome, GAAP as we know it will be very different in just a few short years. Let’s be prepared.
Richard J. Caturano, CPA, CGMA, Chairman of the Board of Directors, American Institute of CPAs.