Accounting practices are a system of procedures that an accounting department uses to have a sense of order and uniformity when they create and record business transactions. Accounting practices may be very specific to a firm or an organization, or they must comply to a certain standard. Auditors look for consistency in accounting practices during the examination of a company’s financial statements.
U.S law requires that business which releases financial statements to the public as well as the companies that are publicly traded on stock exchange and indices to follow GAAP guidelines. GAAP which stands for Generally Accepted Accounting Practices are the regulations that the Financial Accounting Standards Board (FASB) uses as the foundation of its approved accounting methods and practices. These are practices that all accountants, auditors, and firms as a collective must adhere to. In effect, U.S. Certified Public Accountant needs to stay in touch with these updates and incorporate them in their practice posthaste so that they can follow the regulations and maintain a professional standard. 2 major changes have been made to the accounting rules this year.
1. Not-for-profit standard
Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities applies to a variety of organizations ranging from charities to religious and trade non-profits. The updated standard has made changes related to reporting liquidity, financial performance and cash flows. A new requirement for disclosing more information about the cash that not-for-profits can access quickly. The new standard has reduced the number of net asset classes from three to two: 1) net assets with donor restrictions and secondly 2) net assets without donor restrictions. An enhanced analysis of an organization’s expenses by nature and function is also required now. The update also requires entities to classify “underwater” endowments for an endowment’s fair value falls below the original endowed gift amount. These underwater endowments then classify as net assets with donor restrictions. Before this update, underwater endowments were being classified as unrestricted net assets.
2. Revenue recognition standard
ASU No. 2014-09, Revenue from Contracts with Customers, is impacting entities such as media companies, telecommunication providers, manufacturers, construction companies, software development companies, and distributors. The change made affects the timing for revenue recognition. The new standard has listed a five-step process when reporting revenue:
- Identify the contract with a customer
- Identify whatever the company’s performance obligations under the contract are
- Determine the agreed upon price of transaction
- Allocation of the transaction price to the performance obligations as per contract
- Recognize revenue only when performance obligations are satisfied
The tax rules, however, for recognizing revenue remain unchanged. Temporary book-to-tax differences may happen for some entities in case of a discrepancy like this. IRS is currently researching the issuer which assesses whether companies should be allowed to follow their book method of accounting for tax purposes as they implement the new accounting standard.
The updated disclosure requirements will affect all companies while some may not notice a change as significant to the top line of their income statements when they implement ASU 2014-09.
Other impacts that the government will make on accounting practices are the Lease Standard which will be effective 2019/2020 and the Credit loss standard which will be effective 2020/2021.