Of course, you're relieved and exhausted – in addition to the traditional tax and accounting services you perform for your clients as their accountant and trusted adviser, you've helped them address the new tax law, consulted on a variety of issues, and assisted them with understanding and implementing the new revenue recognition standard.
Knowing that the comprehensive new standard supersedes nearly all extant revenue recognition guidance, you entered the fray early to help your clients navigate the complex maze that is Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606).
Most of your clients will have completed or taken substantial steps necessary to implement the new standard; their checks are cashed, and their ‘thank you’ cards decorate your credenza …
Reality check …Many clients are unaware of the new standard's existence, oblivious to its impact, and no, the Financial Accounting Standards Board (FASB) didn't issue a reprieve. Public companies had to present their financial statements using the new standard in 2018, and all other GAAP-basis financial statement clients must conform this year (2019).
What should you do?This article doesn't offer a condensed how–to guide for implementing Topic 606. Instead, it offers tips to avoid malpractice allegations stemming from clients or the public claiming to have been harmed by the accounting treatment and blaming you.
Tips on how to avoid being "Revenue Wrecked"
- Be sure you’re up to speed on Topic 606
- Take courses. The AICPA and your state society offer several. Visit the Revenue Recognition Center within the AICPA's Financial Reporting Center
- Seek guidance from the FASB and the AICPA.
FASB Revenue Recognition Educational Resources
AICPA Technical Hotline (Phone: 877.242.7212)
- Read articles. A "summary" of the ASC by RSM can be found here.
- Alert your clients to the new standard's implications – Adopting Topic 606 is time-consuming, costly, and requires a group effort
- Offer a seminar
- Add content in your newsletter
- Include an education material disclaimer in all communications. Sample education material disclaimer language is available via a link found in the IMPACT 115 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 115.
- A special purpose framework won’t be appropriate if the company’s future plans include going public.
- Would a new framework be acceptable to lenders/investors?
- Assuming your client requires/desires GAAP financial statements, confirm your client understands Topic 606’s 5-step process 3.
- Consider whether you are required to maintain your independence. (Is this an attest client?)
- Follow the mantra … Inform, Advise, Consent.
Is GAAP Preferable?Typically, the impacts of the new revenue recognition and lease standards would be so pervasive that it would be inappropriate for entities to elect to take GAAP reporting exceptions for either standard. Also, the evaluation of the potential impact of the exceptions would likely be inefficient and cost prohibitive.
The additional GAAP complexities and the frequency of GAAP changes have made other frameworks more attractive. Many entities will desire to continue reporting their financial results under GAAP, as they have always done; but, GAAP isn’t ideal for everyone. Factors that could make GAAP more attractive than other reporting frameworks include:
- Being a public company, or considering going public (it’s required for public companies)
- Foreign operations or markets
- Complicated financial instruments
- Industry operations involving specialized accounting guidance
- Loan covenants or other contractual arrangements often require it
- When fair value accounting is desired by financial statement users
Can you name two "standard setters" for special purpose frameworks? The most recognized special purpose framework standard setters are the Internal Revenue Service (income tax bases of accounting) and the American Institute of Certified Public Accountants (Financial Reporting Framework for Small- and Medium-Size Entities (FRF for SMEsTM).
GAAP (FASB) and tax law (IRS) changes are common. Tax law changes can make financial results less comparable. The AICPA's FRF for SMEs is more stable as it hasn’t been modified since its release in June 2013. However, the income tax basis of accounting is attractive because “book to tax” adjustments aren’t necessary.
Consider the FRF for SMEs or income tax basis of accounting if your client doesn’t require GAAP financial statements.
Topic 606 Implementation Traps
- Determining when to recognize revenue: It may be difficult to decide whether to recognize revenue as of a specific point in time or over time. The client should document their determination, and you should document having assessed the reasonableness of the client’s management’s determination.
- Topic 606 is intended to remove revenue recognition inconsistencies, improve comparability, and improve the usefulness of financial statement disclosures. However, industry and entity-specific implementation variances are likely, since the new standard is principles-based (vs. rules-based), and more judgment and estimates are required than under “legacy” GAAP. Be wary and alert so that you can recognize inappropriate adoption inconsistencies.
- Document work performed and advice given; obtain defensive documentation of your client’s implementation decisions.
Client AcceptanceBefore accepting an engagement involving decisions regarding the adoption or implementation of Topic 606 (or another framework preferred by your client):
- Satisfy yourself that the team selected to perform the services possesses the appropriate competence and capabilities to perform the engagement.
- Satisfy yourself that there is ample time to perform the engagement and to meet any client- or contract-imposed financial reporting commitments.
- Obtain your client’s management’s written acknowledgment that it is their responsibility to select the financial reporting framework they want to use to prepare their financial statements.
- Obtain and retain defensive documentation of the foregoing.
CAMICO encourages accountants to add language to their Topic 606 implementation assistance consulting engagement letters specifying that the services are time-consuming and will require considerable access to their contracts, personnel, and financial records. A sample letter template is available via a link found in the IMPACT 115 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 115.
Judgment and EstimatesJudgments and estimates are anticipated. Avoid substituting your judgment or your estimates for your clients’. You may (and should) offer your suggestions, but any decisions regarding applying the principles-based standard should be your clients’. If not, anyone who relies upon those decisions could allege they were harmed by the misapplication of the standard and attempt to hold you responsible. CAMICO recommends accountants obtain written representations from their clients acknowledging they are ultimately responsible for decisions related to Topic 606 implementation.
Inform, Advise, ConsentRecognize that entities aren’t compelled to adopt Topic 606. The decision to do so is the choice of the entity’s management, not you. Inform the appropriate client decision-makers of their options (e.g., whether to adopt the standard and any judgments and estimates related to implementing the standard), advise them of your recommendations, and obtain defensive documentation of their informed decisions regarding implementation. This approach reduces the likelihood of being accused of having unilaterally made this decision when hindsight suggests another framework was preferable.
Independence Impairment TrapNonattest services are the life blood of most CPA firms. Such services include accounting, tax, consulting and routine financial activities. Assisting clients with implementing Topic 606 is also a nonattest consulting service. CPAs need to be careful to avoid inadvertently impairing their independence by performing management functions that would subject them to the “self-review”4 independence impairment threat.
If you contemplate performing attest services for clients requesting your assistance with implementing Topic 606, you’ll need to take steps to avoid impairing your independence. The primary threat to accountants’ independence from assisting clients with implementing Topic 606 comes from the self-review threat. Self-review threats to independence exist when you, as an accountant, are placed in a position to review your own work, or work performed by others in your firm. There is an inherent bias when anyone evaluates their own work or that of colleagues, as opposed to the work of other accountants. A self-review threat to independence would exist were the accountant to review judgments and decisions they, or others in their firm, have made regarding Topic 606 implementation.
ET section 1.295, of the "independence rule"5 , addresses nonattest services. The general requirements for performing nonattest services specify that attest clients’ management:
- assume specific management responsibilities6,
- oversee the nonattest service by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or experience to evaluate the adequacy and results of the services performed, and
- accept responsibility for the results of the nonattest services.
To further safeguard against this self-review threat, accountants will need to assess and be satisfied that the individual(s) designated by the client’s management to oversee their services understand the services to be performed.
If independence were impaired, independence would be impaired during the engagement period (e.g., period covered by the financial statements, and the period of the professional engagement). To avoid impairing your independence, any prohibited nonattest services will have to have been for a period preceding the period covered by the engagement, or will have to have been performed by another CPA firm, and management will have to have designated someone (preferably within management) who possesses the skill, knowledge and/or experience sufficient to oversee any Topic 606 implementation services you perform.
You may explain Topic 606’s 5-step model and collaborate with clients to assist them in adopting the new standard, but the client must accept responsibility for your work and perform all management responsibilities (e.g., identify customer contracts, identify contract performance obligations, determine contract transaction prices, allocate the transaction prices to the performance obligations, and recognize revenue). In this manner, getting your clients up to speed with the new standard will not impair your independence.
To comply with professional standards and before performing Topic 606 implementation services for an attest client, you must establish and document in writing management’s understanding of the engagement objectives, the services to be performed, the client’s acceptance of its responsibilities and your responsibilities, and any engagement limitations. Engagement letters are the best way to comply with this requirement. A sample letter template is available via a link found in the IMPACT 115 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 115.
Just because you’ve always performed attest services for a client doesn’t mean you should continue to do so. When entities can’t identify individuals with suitable skill, knowledge and/or experience to oversee your nonattest services, consider (1) nonengaging or disengaging from performing the attest services, or (2) referring the nonattest services to other accountants as an independence impairment safeguard7.
Additional Fees Due to Implementing New StandardsClients may believe that assisting them with complying with new standards requires minimal effort and isn’t significant. They may assume that any time you invest assisting them with implementing new standards is trivial and is contemplated and absorbed within the fee arrangement for the service(s) they’ve engaged you to perform. This assumption is typically wrong. When your objective isn’t to address adopting the new standards but to offer advice, consider addressing any billing/collection difficulties associated with this misunderstanding by including a clause such as the following in your engagement letters:
"Please be advised that additional planning and consulting related to assessing the implications of the Company’s adoption of the new revenue recognition standard pursuant to FASB ASC Topic 606, and the Company’s adoption of FASB ASC Topic 842, Leases, may require our firm to spend additional time in the performance of the services contemplated under this agreement. By your signature below, you understand and agree to accept the additional time and associated fees that may be required to address the Company’s implementation of these new standards."
CAMICO policyholders with questions regarding this article or other risk management questions should contact the Loss Prevention Department at email@example.com, or call our advice hotline at 800.652.1772 and ask to speak with a Loss Prevention Specialist.
Duncan B. Will is Loss Prevention Manager/Accounting & Auditing Specialist for CAMICO ( www.camico.com.com ). He leverages his more than 30 years of experience in accounting, including public accounting, forensic accounting, consulting, and audit and tax compliance, to deliver to policyholders the high-touch, high-quality CAMICO experience. Mr. Will works closely with the Loss Prevention Specialists to manage the department’s efforts to deliver policyholder service.
1 Formerly referred to as Other Comprehensive Bases of Accounting (“OCBOA”) [e.g., modified cash basis, income tax basis, and The AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities]
2 See the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities: Comparisons of the FRF for SMEs Reporting Framework to Other Bases of Accounting available at https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/FRF-SME/FRFforSMEs_Comparison_OCBOAs.pdf
3 5-Step Process: 1) Identify customer contracts, 2) identify performance obligations in each contract, 3) determine contract transaction prices to performance obligations, 4) allocate the transaction prices to the performance obligations, and 5) recognize revenue when (or as) each performance obligation is satisfied.
4 ET 1.290.17
5 ET 1.200.001
6 ET 1.295.030
7 CAMICO recommends referring 2 or more professionals whenever clients are referred to others. A sample referral letter template is available via a link found in the IMPACT 115 email. It is also on the CAMICO Members-Only Site under Knowledge Tree, CAMICO Publications, IMPACT, 2019, IMPACT 115.