Defining Your Role in Implementing New Revenue Recognition
It's 2020, time for FASB’s Accounting Standards Codification 606 to kick in. Is your firm ready to handle it?
It's been written about for some time, but the bell is now tolling as new revenue recognition standards for private company and nonprofit clients go into effect. Many CPAs who work with these entities still have plenty of questions and concerns, and rightly so, which is why we are here to hopefully lend some practical guidance for you.
Moreover, Robert Durak, AICPA Director of Audit and Accounting Technical Services, has penned some words of advice and mapped out what your firm can do as the new standard kicks in. We hope you find it useful.
This year will be marked by several momentous events: Brexit, the XXXII Olympiad, and a U.S. presidential election among others. But for many CPA practitioners, 2020 will be remembered as the year their private company and nonprofit clients implemented the new revenue standard, FASB’s Accounting Standards Codification 606, “Revenue From Contracts With Customers.”
Moreover, the new revenue recognition standard is the most impactful new accounting standard in decades, and it is keeping CPA firms busy as they respond to their clients’ requests for help in adopting the guidance. When CPA firms provide attest services to clients, independence must be maintained.
A critical, overarching requirement for a practitioner’s independence is avoiding management responsibilities. Though practitioners are closely involved with their client’s financial statements by virtue of performing audits, reviews, and compilations, the ultimate responsibility for financial reporting, including the underlying books and records, rests with management.
If a practitioner assumed management responsibility for an attest client, the threat to the practitioner’s independence would be so significant that no safeguards could reduce that threat to an acceptable level and independence would be impaired. Any time a practitioner assumes management responsibilities for an attest client or exercises authority over an attest client’s operations or business affairs, independence is impaired.
What Are Management Responsibilities?
The AICPA Code of Professional Conduct describes management responsibilities as leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources. Specifically, ET 1.295.030 identifies the following types of activities (among others) as management responsibilities:
• Setting policy or strategic direction for the attest client
• Exercising authority on behalf of an attest client
• Preparing source documents that evidence a transaction’s occurrence
• Deciding which recommendations management should implement or prioritize
• Reporting to those charged with governance on behalf of management
• Accepting responsibility for managing the client’s project
• Accepting responsibility for the preparation and fair presentation of the attest client’s financial statements
• Accepting responsibility for designing, implementing, or maintaining internal control
Helping a Client with FASB ASC 606 Project Management and Project Plans
When it comes to helping an attest client implement FASB ASC 606, practitioners need to avoid performing management responsibilities, i.e., CPA firm personnel cannot lead a client’s project team. Firm personnel may assist the client’s project team by performing research and providing feedback, advice, and recommendations on priorities and other considerations. However, management must make all the decisions related to the team’s activities and direction.
Practitioners should ensure that management understands that they are responsible for developing the plan to implement FASB ASC 606. CPA firm personnel can provide advice and recommendations for the project team to consider, but all final decisions rest with management. CPA firm personnel can also help management think through alternatives, make suggestions, and provide examples of ways that similar entities have addressed the issues.
Here, the importance of having competent management fully engaged cannot be overstated. Capable management can act on the CPA firm’s advice, weighing alternatives and considering pros and cons so the firm is not placed in a position where it must make these decisions for the client, which impairs independence.
Helping with Accounting Policies, Internal Controls, and System Design
A CPA firm cannot accept responsibility for performing the following activities because they raise significant management participation and self-review threats that impair independence:
• Develop new accounting policies or procedures
• Design new internal controls over financial reporting (ICFR) or revise existing controls
• Design or develop financial information system enhancements
CPA firm personnel may provide guidance, advice, and recommendations that help management or another service provider design or develop the policies, procedures, controls or systems. However, the CPA firm and management should have a clear understanding about the applicable limitations on the scope of these services before the services are performed. Practitioners can refer to ET 1.295.030, “Management Responsibilities” and ET 1.295.145, “Information Systems Design, Implementation, or Integration”, for additional information.
Helping with FASB ASC 606 Judgments and Estimates
CPA firms recognize that management will need to make more estimates and use more judgment under FASB ASC 606. CPA firm personnel may educate, coach, and advise management on techniques and factors to consider. For example, they can help management determine:
• The estimates related to variable consideration
• Whether goods and services are distinct
• Whether material customer rights are present in a contract
• Whether the entity is acting as a principal or agent
CPA firms recognize that they will need to spend time with management to bring them up-to-speed with the new requirements and enable them to make the important decisions. CPA firm personnel may help management:
• Identify and evaluate customer contracts
• Group contracts and implement a portfolio approach
• Identify performance obligations and assist with other unit of account issues
Firm personnel may serve in a support role but should not perform these activities on the client’s behalf as these activities will provide the foundation upon which the FASB ASC 606- related changes to the financial statements will be based.
For more help with maintaining independence while helping clients with ASC 606, consider these resources:
- A recently issued report from the Center for Plain English Accounting, the AICPA’s national A&A resource center, addressing the application of the AICPA independence rules to engagements to assist attest clients. It also discusses the CPA firm’s evaluation of threats to independence and other matters
- An AICPA video webcast, “Ethically Speaking,” on independence issues related to clients’ implementation of FASB ASC 606
- The AICPA’s Center for Plain English Accounting can help practitioners with their difficult A&A questions