Three new accounting changes will impact financial statements issued by accounting firms in the upcoming years. While we continually discuss these changes with our clients, we also want their lending institutions and investors to understand the effect these changes may have on their clients’ debt covenants, revenues, earnings and other information used to make funding decisions.
Going Concern Considerations
The prior accounting standard for going concern required that a company demonstrate it had access to sufficient funding to sustain operations a year from the audited balance sheet date. The new accounting standard, which is effective for annual periods beginning after December 15, 2016, requires that a company demonstrate it has obtained or has access to sufficient funding to sustain operations a year from the issuance date of the audit report.
The new revenue recognition standard, effective for private companies for fiscal years beginning after December 15, 2018, will require companies to record revenue based on a global principles-based model and eliminates all industry-specific revenue recognition guidance. Prior year financial statements must be restated to conform to the new standard upon adoption. Because only six public companies have early implemented and the standard requires significant judgment in application, there are very few generalizations that can be made. Revenue may be accelerated, deferred or no longer exist upon restatement.
The new lease standard, effective for private companies for fiscal years beginning after December 15, 2019, will require companies to recognize lease assets and lease liabilities for all leases, including leases previously classified as operating leases.
We welcome the opportunity to discuss the implications these accounting changes will have on the financial statements of our mutual clients.