Our Financial Reporting Update highlights key developments and issues that are relevant to finance and accounting personnel.
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simplify revenue recognition for private company franchisors. The ASU allows franchisors to recognize certain expenses for pre-opening activities separately from the franchise license expense. The guidance has a list of these activities. Separating these expenses will help clarify franchisor performance obligations in the franchise agreement.
Securities and Exchange Commission
The Securities and Exchange Commission (SEC) requested public comments on potential reforms to improve the resilience of money market funds. The request comes after a December report of the President’s Working Group on Financial Markets called out the stress that money market funds experienced in March 2020. Public comments are due within 60 days of the request in the Federal Register.
The SEC charged the former CEO and CFO of WageWorks Inc. with multiple accounting violations relating to false and misleading statements resulting in the improper recognition of contract revenue. The two settled with the SEC, and WageWorks had to restate three 2016 financial statements to reverse the revenue recognized.
The SEC published a sample comment letter to address companies that offer securities in an environment of extreme price volatility. The SEC would send this type of comment letter to any company that does not properly disclose volatility risks to potential investors. The SEC recommends that companies use the sample letter as guidance to improve their disclosures.
American Institute of Certified Public Accountants
The American Institute of Certified Public Accountants (AICPA) issued an exposure draft entitled “Proposed Quality Management Standards.” The draft proposes three new interrelated standards to address how CPA firms should handle quality control. The standards are: Proposed Statement on Quality Management Standards (SQMS) A Firm’s System of Quality Management, Proposed SQMS Engagement Quality Reviews, and Proposed Statement on Auditing Standards (SAS) Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards. Stakeholder feedback is encouraged and must be submitted by June 11, 2021.
Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board (PCAOB) issued a report that outlines audit committee chair feedback on various accounting topics. The report focuses on the strengths and weaknesses of audit communication, the implementation of new standards for accounting and audits, the benefits and challenges of new technology, and the impact that COVID-19 has had on 2020 audits.
Other
The National Defense Authorization Act for Fiscal Year 2021 (2021 NDAA) is now in effect. One topic covered in the 2021 NDAA is a change to the definition of business system deficiencies for contractor business systems. The 2021 NDAA will change the terminology from “significant deficiency” to “material weakness.” This change helps align contractor requirements to financial reporting standards.