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Posted: April 14, 2014

Financial reporting: What happened, what’s ahead

Dodd-Frank rulemaking, slow progress toward convergence

Jim Brendel

In financial reporting, 2013 was a year of slow progress in overhauling accounting for revenue and leases, updating internal control standards, shining light on the use of conflict materials, heightened focus on financial statement fraud and a call for more accountability and transparency by auditors.

The year also saw a lack of progress in the movement towards combining world accounting standards under one umbrella as the powerful U.S. Securities and Exchange Commission sent mixed messages to the financial world on the issue. As ever, at least it seems, every effort to make life simpler for companies makes it more complex and expensive. Here’s my annual recap of what happened in 2013 and what companies should look for in 2014.

Update on international convergence - The U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board continued their work on two joint projects to converge accounting rules for revenue recognition and leases. Among many proposed changes, the new revenue standard will change the way contract modifications are treated. This could cause difficulties for companies with contracts that have been in place for many years when they attempt to apply the new rules retrospectively. GE technical controller Russell Hodge said applying the standard would be "overwhelming" for a company with $150 billion in revenue (Journal of Accountancy). The new standard will require a greater use of judgment in estimating selling prices, as well as using a cost-to-cost approach for long term contracts, which may currently use the units of delivery method.

The revenue recognition standard is expected to be finalized in early 2014, to be effective for public companies in 2017 and for private companies the following year.  Adoption will be retrospective, however, which means that public companies will need to look back to at least 2015 to adopt the standard. 

The leases standard, which essentially causes companies to capitalize lease obligations, has met more resistance and the boards have gone back to the drawing table to address concerns over cost and complexity. 

Meanwhile, the SEC staff, which have been relatively silent on the topic of incorporating international judgment-based standards into U.S. financial statements since the July 2012 issuance of a work plan for IFRS adoption, put the issue back on the table with a public statement that while the SEC still considers convergence to be an important issue, the time devoted to rule-making required by the JOBS Act and the Dodd-Frank Act had prevented the Commission from devoting attention to convergence.

New framework for reporting on internal control – The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated internal control framework in May 2013. COSO’s original framework was issued in 1992 and is the most commonly used framework used by public companies to design and implement their internal control systems and evaluate their effectiveness.  Management’s evaluation of the effectiveness of internal control – basically a personal sign-off on control evaluation by company officers - was mandated by the Sarbanes-Oxley Act.

During the 20 years since the original COSO framework was released, business and operating environments have changed dramatically, becoming more complex, technologically driven and global in scale. For example, the explosion of use of the Internet and mobile devices for business created a new security control environment. The new framework represents a more principles based approach to internal control.

For companies that already have effective internal control systems, the transition to the new framework might be primarily aligning the documentation and evaluation of the control system to the new guidance. However, companies with less robust internal control systems may have more work to do. The 1992 framework will be considered superseded as of December 15, 2014.

While the SEC has not mandated a specific date for companies to adopt the new framework, the staff indicated that the transition should occur as soon as feasible, and that the longer companies continue to use the 1992 framework, the more likely it will become that they will raise questions.

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James Brendel, CPA, CFE, is the national director of audit quality for Hein & Associates LLP, a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas and Southern California. He specializes in SEC reporting and assists companies with public offerings and complex accounting issues. Brendel can be reached at or 303.298.9600.

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