Insights

In the coming years, public companies will be required to adopt several major Accounting Standards Updates (ASUs). Under SEC Staff Accounting Bulletin (SAB) No. 74 (codified in SAB Topic 11-M), companies must disclose the impact recently issued ASUs will have on their financial statements when adopted in a future period. Now is the time to understand these new standards and begin the process of making the appropriate disclosures.

Best practices

Three new ASUs on the horizon are expected to have a significant impact on many companies:

1. ASU 2014-09, Revenue From Contracts With Customers, effective for fiscal years beginning after December 15, 2017, including interim periods within those years,
2. ASU 2016-2, Leases, effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and
3. ASU 2016-13, Financial Instruments — Credit Losses, effective for fiscal years beginning after December 15, 2019, and interim periods within those years.

In recent public statements, SEC staff members have outlined best practices for complying with SAB 74 and reminded companies that disclosures should describe:

• The effect of any accounting policies your company expects to apply on adoption of an ASU,
• How these policies differ from your current accounting policies, and • Your company’s progress in implementing an ASU and any significant implementation matters it hasn’t yet addressed.

If you aren’t able to reasonably estimate the impact of upcoming ASUs, you should consider additional qualitative financial statement disclosures to help users assess the significance of their impact.

“We don’t know” not enough

In an October 2016 survey, the SEC found that 8% of respondents hadn’t yet begun an initial assessment of the new revenue recognition standard. Another 75% were still assessing the standard and just 17% had started the implementation process.

The SEC has emphasized the need for companies to allocate sufficient resources to the implementation process. If your company’s implementation of the standard is lagging, you should provide informative disclosures to investors so they can assess the information’s implications.

Importantly, the SEC also warned that the traditional disclosure — that “management is evaluating, and we don’t yet know the anticipated effect” — isn’t enough. You must provide qualitative information about the development of the anticipated financial effect, even if the measurement isn’t yet precise.

Don’t put it off

If you haven’t already, be sure that you include appropriate transition disclosures in your financial statements and other SEC filings. Missing or inadequate disclosures will likely elicit a comment from the SEC’s staff.