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Newsletter – May 2017

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Insurance Company Credit Rating Advisory Practice

CFO Consulting Partners has begun to work with insurance companies to help maximize a company’s rating potential. This article is the first of a two-part series which will discuss the credit rating process for insurance companies. Here we discuss how ratings firms look at capital levels, and how management can demonstrate effective capital management strategies. A subsequent article will review the roles of: operating results, market profile, and additional analytic considerations in the ratings process.

Marc Liebowitz, CFO Consulting Partners LLC

There are generally five Security and Exchange Commission (SEC) registered Nationally Recognized Statistical Rating Organizations (NRSRO), otherwise known as rating agencies, which follow the U.S. insurance industry: A.M. Best Company (AMB) and Kroll Bond Rating Agency (KBRA) are the primary providers of credit ratings to the mid-market segment of the industry. The three larger NRSROs: Fitch, Moody’s and Standard & Poor’s (S&P), tend to focus on the industry’s larger companies.

AMB and KRBA provide two types of ratings on insurance companies, debt and policy issuer strength ratings. Debt ratings are an indication of the insurer ability to meet their interest and principal obligations on specific bonds, a policy issuer strength rating considers the likelihood of a failure to honor a company’s insurance policy liabilities. For policy liability ratings AMB issues Financial Strength Ratings (FSR), and KBRA issues Insurance Financial Strength (IFSR) ratings. Insurance companies seek policy issuer strength ratings for several reasons, for example, ratings are required by insurance agents, by reinsurance brokers and companies, and to insure bonded construction projects. Also, ratings are utilized by boards and other stakeholders as a third-party evaluation of operations and capital adequacy.

There are three primary drivers of insurance credit ratings: risk adjusted capital levels, operating results, and market profile (the overall mix of products, underwriting strength, and risk diversification). These factors form the foundation of the rating and are quantified and evaluated relative to rated peer groups and to industry averages. Enterprise Risk Management (ERM) practices, management quality, and other qualitative factors are also considered and may raise or lower the rating.

AMB uses a proprietary capital model, Best Capital Adequacy Ratio (BCAR), details of AMB’s methodology can be reviewed here: Best’s Credit Rating. AMB is in the process of updating its BCAR model – the most significant change will be the incorporation of scenario modeling of an insurance company’s loss factors at various confidence levels. The revised BCAR model is currently open to public comment before it goes into production, likely prior to year-end 2017.

KRBA’s capital strength assessment uses the National Association of Insurance Commissioners (NAIC) Risk Based Capital (RBC) model.  KRBA details their capital adequacy approach within their rating methodology here: Global Insurer & Insurance Holding Company Rating Methodology

Rating agencies look at companies differently than management and other stakeholders – investors, employees, etc. Therefore, as part of any rating review or update management must be able speak to the agency’s perspective and clearly demonstrate management’s understanding of the company’s capital position, how it is managed through existing risk management programs, and how and why it will change going forward. Analysts expect management’s knowledge to extend beyond the results of the agencies capital modeling. Accordingly, management should present a forecast which considers the unique and proprietary aspects of the company’s strategy and operations. The ratings team will also want to discuss the programs in place to manage the company’s long-term solvency. All information presented by management will be distilled and compared to peer groups composed of comparable firms. Also, rating agency analysts cannot, due to SEC rules, provide guidance to companies on how to improve ratings.

To achieve rating upgrades, or to maintain a rating, management should plan to continuously improve risk management programs and strategies, create clear and achievable forecasts, and effectively communicate the various actions taken to maintain capital adequacy and manage the company’s risk profile. It’s critical for management to understand the agencies expectations prior to engaging discussions presenting material at an annual review.

Newsletter – March 2017

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The New CECL Approach

Tom Van Lenten, CPA, CFO Consulting Partners LLC

In mid-2016 the FASB issued its long-awaited standard on accounting for credit losses (ASU 2016-13). The new standard adds to US GAAP an impairment model known as the current expected credit loss model or CECL. In a shift from current practice the CECL model is based on expected losses rather than incurred losses. Under the new CECL model an entity recognizes its forward looking estimate of the expected credit losses in the Allowance for Loan and Lease Losses, or ALL when an asset is booked.

The FASB believes that the new standard will result in more timely recognition of credit losses. There is a long transition timeline and implementation is required at January 1, 2020 for calendar-year reporters that are SEC filers, and January 1. 2021 for other entities.

The CECL approach is to be applied to most debt instruments that are not measured at fair value. This includes loan commitments, financial guarantees, lease receivables, trade receivables and held-to-maturity securities. Available for sale debt securities are specifically excluded and will continue to be evaluated for impairment under the AFS securities impairment model.

The Standard does not require use of any one method to compute expected credit losses. Management is expected to maintain complete data sets, documentation, and analysis to support how the selected method fits with the standard and produces realistic estimates of future losses. Examples of some of the acceptable methodologies are:

  • Loss rate: Historical loss rates can still be used as a starting point for determining expected credit losses. When using historical loss rates, the Bank would have to consider how conditions that existed during the historical charge-off period differ from current projections and adjust the future loss rates accordingly.
  • Discounted cash flow: Projections of principal and interest flows over the life of the asset.
  • Probability of default method estimates the probability loans in certain risk-stratified segments will default. This approach computes the percentage of loans that have defaulted in a pool over a look-back period.
  • Roll-rate method. The roll-rate method is often referred to as “migration analysis”. It is based on determining a prediction of credit losses based on segmentation (by delinquency or risk rating, for example) of a portfolio of financial assets. No standard roll-rate model is used throughout the financial institutions industry, but most of the models used are based on similar underlying principles.
  • Aging analysis: Banks use aging analysis in determining the effectiveness of their credit and collections functions and for estimating potential loan losses. The information from this analysis is used by Banks as a component of their estimate the allowance for loan & lease losses.
  • Collateral-value: For loans that are collateral dependent, evaluation of collateral and costs of disposal can be used to estimate expected credit losses.

Institutions with multiple loan types will likely need several methodologies to properly analyze the loss content of each portfolio segment and then aggregate the results to understand the expected losses for entire loan portfolio.

Expected credit impairment will be recognized as an allowance, instead of as a direct write-down of the amortized cost of the financial asset. Changes to the ALLL are recorded immediately through credit loss expense. The carrying amount of a financial asset that is considered to be uncollectible will be written-off in a manner similar to current US GAAP.

While there is significant time until required implementation, it is imperative that management begin the implementation process as soon as possible. The most problematic aspects of CECL implementation will likely be: a) developing the support systems and processes, b) gathering and organizing the historical data to support new methodologies, and c) developing going forward data capture and analysis processes.

  • With respect to a) above, existing modeling approaches currently used for Basel, and stress testing may be leveraged and adapted for CECL. However, new credit loss models will likely need to be implemented. It is anticipated that the development or purchase of credit models that estimate future credit losses may be the most time consuming phase of CECL implementation.
  • For b) the historical data requirements for the new models will often not be resident in current financial and credit systems. This data will have to be developed from the bank’s core operating system and organized into databases which the models can access.
  • For data capture and analysis c) the starting point for developing a future loss credit loss data base is current loan and credit loss data. Companies implementing CECL should undertake a robust review and analysis of its current loan and credit data so that the process of developing a future credit loss data base starts with historic data that has a high level of accuracy and integrity.

Many of the disclosures required under the new standard are similar to those required under current GAAP. For example disclosures on credit quality, ALLL roll-forward, policies tor determining credit losses, past due and non-accrual status, and collateral dependent assets are the same. There are, however, significant additional disclosures of credit quality indicators, disaggregated by year of origination for a five-year period.

Newsletter – February 2017

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Quality Assurance – Important?

What is the Problem?

Many firms, particularly smaller ones, have problems with controls or Quality Assurance (“QA”) over the “downstream” preparation of financial statements, footnotes and MD&A. Typically, “upstream” processes like AP, Cash, Journal Entries, etc. are strictly controlled, but limited staff and insufficient planning can lead to downstream QA issues. The complexities and ever-evolving accounting standards (e.g. Revenue Recognition., etc.) create challenges for any firm, while managements and boards have potential individual liability for errors and misleading reporting. The new administration’s focus on deregulation is unlikely to give relief from getting the reporting right, while senior SEC personnel have publicly stated their concerns about firms’ controls over implementing the new accounting standards.

A weak downstream QA process that results in errors in work papers, statements etc. being passed on to the firm’s independent auditors will cause more audit checking and testing, raising the cost and potentially leading to a material weakness being declared. Worse still, a weak QA process may result in the need for an embarrassing restatement.

Picking up wrong numbers as well as making calculation, factual and spreadsheet mistakes are common errors. “Version Confusion” also happens when nobody is sure which versions have been checked and updated. The risk of error increases with: more Excel spreadsheets; more manual hand-offs; limited available staff time; late changes; multiple, geographically dispersed operating subsidiaries, etc.

What is the Solution?

The goal of the QA process is to substantially reduce the probability of errors by ensuring that all numbers and narratives agree to back-up, all tables foot and, all calculations are correct and all disclosures are complete and make sense and the whole report is internally consistent. Best practices have the QA process built: (1) into the firm’s workflow with specific steps, defined responsibilities including a central point of control; and (2) into the firm’s timeline with sufficient time to ensure quality, with due consideration for last minute changes. All back-up support should be gathered into one location as on-line soft copy for easy access.

Preferably the QA responsibility is assigned to a person/team not involved in the day-to-day report preparation – smaller firm might consider outside support. The QA person then undertakes: checking the whole report; distributing a formal Issues Log; checking and logging changes being made; final checking of the main statements; and signing off with finance management. The QA person needs to be well skilled, not a junior, and should also be able to make a critical assessment of the back-up support.

Additional documentation should be maintained including the Issues log, work papers and a summary of the main QA steps undertaken signed off by the QA person and finance management.

All the same QA considerations apply if the firm is not a public company but is facing a major financial transaction (e.g. equity/ debt raises, PE investment, sale of firm, etc.) to avoid the loss of credibility from errors uncovered in due diligence.

There is real value in having a well-defined downstream QA process as part of robust Internal Control over Financial Reporting (“ICFR”) to ensure the firm’s financial reporting is accurate and transparent.

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Our firm is a team of senior financial executives. We provide a broad range of financial management services to public and private companies. We work for CEOs, CFOs, Controllers, as well as audit committees and boards.

Our mission is to apply our consultants’ considerable collective experience to resolve client issues in a professional and efficient manner.

Newsletter – January 2017

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Guest Article from iSiegel Consulting: Justifying the Spend on IT Security

Overview

Companies that underfund security intiatives wind up undermining a company’s ability to protect its information assets. The results can be catastrophic. IT leaders and CFOs need to understand the severity of the situation, specifically what the risks are and most importantly, how to present the business value of making the investment to upper management (CEO and board memebers). Here’s what’s to be done.

Justification

Upper management can easily come up with a hundred reasons not to properly fund security initiatives. And when they do fund they may not be investing wisely. Often the decision not to fund occurs when the executives lack adequate information to make an investment.

The best strategy is to consider Security as part of Risk Management. The strength of the argument on whether or not to fund rests on determining what the risk is to the organization, what losses can be incurred from the risk and how much it will cost to mitigate that risk. With this information upper management can decide whether it is worth the expenditure. What may shock the CFO is the degree of risk his company is facing. There is no need to exaggerate here. The risk most companies face is substantial enough to get the attention of the CFO.

Company executives will feel more comfortable investing in security when the business case and financial terms are solid and upper management is given choices of security strategies and investments to compare. Once funded, reporting strategies and regular statuses to upper management that are informative and clearly stated build credibility are necessary.

Identifying security problems

Fortunately the tools, such as intrusion detection systems and firewall logs, are readily available, and can determine where security problems already exist in your organization. These tools produce a mountain of data and can provide excellent supporting evidence for many security investment decisions.

The downside to using these tools to collect and assess network and system data is that they require a serious commitment in both time and effort. However, you will find the effort is well worth it as hard data makes the most compelling case for security investments.

Summary

Including in your deliverables a status report on how well things have gone is the last major step that upper management needs. Good communication is key. Measuring success or lack of it and making clear to management how success will be measured is important. A no nonsense semi-annual report is a great way to build credibility. Executives will then know which investments are paying off and which are not and should be cut back. This report is a great way to gain the respect of C level executives and their support for future projects.

Who we are

iSiegel Consulting is a technology firm made up of senior IT executives. We provide services to CFOs and upper management who have need for immediate solutions that improve performance, reduce spend and increase operational efficiency. We commonly work with CEOs, CFOs and Board of Directors of small to medium sized companies.

We principally focus on three technology challenges: Cyber Security; Budget/Project Management; and Compliance and Governance Design. Our teams of CIOS, CTOs and senior admins find solutions to the most demanding operational and organizational challenges facing organizations. More about us at http://isiegelconsult.com

Newsletter – December 2015

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Financial Transparency – A Case Study

The following is a composite case of several organizations, and any resemblance to an actual client is clearly coincidental.

Background:
A client suffered fraud, misappropriated funds, and confused financial concepts. This caused lots of frustration at the board level. The audit report took almost a year to complete, and the auditing firm pointed out a number of material weaknesses, which went years without being adequately addressed.

What was the problem? The accounting process was opaque, bookkeeping practices were cumbersome, information was not captured at a correct reportable level, internal controls were weak; executive management did not have appropriate skills, and most importantly, the board did not understand the way information was reported (too high-level with weak explanations). This resulted in serious cash flow problems.

Here is how the board/company addressed the problem:

Quality of staff – The board insisted that the accounting and executive staff be upgraded and reorganized, and that the new CEO be very close to the numbers.

Discipline – The board insisted on a standard financial reporting package. This consisted of a balance sheet, P&L, cash flow report, variance analyses of this year versus the prior year, accounts receivable and accounts payable aging reports, and other standard reports.

Restructuring the way information was reported – It is now reported in the way that the business is run. This meant a redo of the chart of accounts to re-organize the way information was reported and to capture certain information at a more detailed level.

Policies and procedures – They were developed in bullet point form; they were kept to a few pages and reviewed and approved by the board, and are now followed by senior management. For example, capital expenditures, which could be masked by leasing equipment in which the monthly payments are in relatively small amounts, could no longer fall under the radar.

Sense of openness:
The new CEO and the board encouraged openness in reporting and telling it like it is. Any spin was discouraged. Businesses were separately reported so one could see the contribution profit. A strategic plan preceded the budgeting process and the fist year of the plan became the budget.

Result:
The organization is on its way to meeting its goals with a renewed sense of excitement, and with a financial process that tells it like it is.
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Our firm is a team of senior financial executives. We provide a broad range of financial management services to public and private companies. We work for CEOs, CFOs, Controllers, as well as audit committees and boards.

Our mission is to apply our consultants’ considerable collective experience to resolve client issues in a professional and efficient manner.

Newsletter – September 2015

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New Relief for Private Companies?

The private companies that suffer through the same accounting procedures as large public companies are now experiencing some level of relief. That relief is due to the FASB issuing Accounting Standard Updates (ASUs) that provide simplified accounting alternatives. The FASB defines private companies as entities other than a public business entity meeting any one of these criteria:
a.) It is required by the SEC to file financial statements
b.) It has issued securities that are traded, listed or quoted on an exchange or an over-the-counter market, or
c.) Has one or more securities that are not subject to contractual restrictions on transfer, and is required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis
The accounting alternatives reflect decisions reached by the Private Company Council (PCC) and endorsed by the FASB. The following is a list of the ASUs issued thus far with private company accounting alternatives:
a.) ASU 2014-02, Intangibles-Goodwill and Other Intangibles: Accounting for Goodwill
b.) ASU 2014-03, Derivatives and Hedging; Simplified Hedge Accounting Approach
c.) ASU 2014-07, Consolidation: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
d.) ASU 2014-18, Business Combinations: Accounting for Identifiable Intangible Assets in a Business Combination
In this article we review the new simplified accounting rules for goodwill and other intangibles. In future articles, we will review the other accounting pronouncements.
On January 16, 2014, the FASB issued ASU 2014-02, Goodwill and Other Intangibles, Accounting for Goodwill. The new rule introduces an accounting alternative for private companies that simplifies and reduces the costs associated with the subsequent accounting for goodwill. The effects of a private company electing the accounting alternative as its accounting policy for goodwill include:
a.) Amortizing goodwill over a period not to exceed 10 years instead of not amortizing it
b.) Choosing to test goodwill for impairment at either the entity level or the reporting unit level instead of having to test goodwill at the reporting unit level
c.) Testing goodwill for impairment only when there is a triggering event instead of testing it every year
d.) Testing and measuring goodwill for impairment by comparing the fair value of the entity to its carrying amount instead of performing a two-step goodwill impairment test that requires hypothetical business combination accounting for purposes of measuring an impairment loss
If the accounting alternative is elected, all aspects of it must be elected.
These new private company goodwill accounting rules are not effective until annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015; early adoption is permitted. Private companies may elect the accounting alternative to account for goodwill in their 2013 financial statements as long as those statements have not yet been made available for issuance.
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Our firm is a team of senior financial executives. We provide a broad range of financial management services to public and private companies. We work for CEOs, CFOs, Controllers, as well as audit committees and boards.
Our mission is to apply our consultants’ considerable collective experience to resolve client issues in a professional and efficient manner.

Newsletter – April 2015

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Cyber Security White Paper

Cyber Security: A fundamental component of Enterprise Risk Management (ERM)

While cyberattacks have hit virtually every industry, the two industries most impacted by cyber security incursions, breaches and theft of data, are financial services and health care. Financial services and the medical world are inexorably connected to the world-wide internet.

In a recent speech OCC Head Thomas Curry said,” The financial-services industry is one of the more attractive targets of cyberattacks, and unfortunately the threat is growing.” Further, one growing area of concern is the potential for criminals to target smaller banks.

Analysts at the Gartner research group estimate that the health care industry is generally about ten years behind the financial services sector in terms of protecting consumer information.

Basic components of cyber controls framework, and ERM (Risk Management):

  • Governance: Cyber Security Companies in all industries need to establish a cybersecurity governance framework which is a central leg of the ERM infrastructure.
  • Cyber Risk Assessment: Through risk assessments, companies understand the specific risks to their organizational infrastructure and operations.
  • Technical Controls: The selection of specific controls by any company is dependent the company’s individual risks.
  • Vendor management: At every touch point vendors can introduce cyber threats (e.g. – viruses) into a company’s systems and data bases.
  • Incident Response Planning: The primary objective of an incident response plan is to provide a framework to manage a cybersecurity event in a way that limits the damage, and deals with the legitimate concerns of third parties.
  • Staff Training: Without adequate staff training and related awareness, the rest of a company’s cybersecurity program can be easily compromised.
  • Cyber Insurance: While almost unknown five years, many companies have chosen to obtain cyber risk insurance.

The above has been extracted from a White Paper by Tom Van Lenten, Director, CFO Consulting Partners. Download PDF

 

Would You Give Your Accounting Department an A?

Dear Mr. CFO, would you give your accounting department an A?

If you can answer YES to 9 out of 10 items, then you may have an “A” functioning accounting department. The following questions are addressed to the CFO, but can generally be answered by the CEO and many other senior executives?

1. Do you provide answers to requests in two hours?

2. Are you able to close the books in a maximum of 7 days?

3. Do you have written comprehensive policies and procedures for main processes, and are they followed?

4. Do all members of the senior management team have a solid understanding of the key business drivers?

5. Would your CEO and other senior executives consider you to be their partner?

6. Do you have a budget and report monthly variances against it?

7. Are you generally able to complete your tasks and goals on time?

8. Do you have a mentor?

9. Do you report bad news within 2 hours?

10. Are your receivables less than 45 from the last day of work completion (not from when you send out the invoice)?

CFO Consulting Partners unlocks the full potential of accounting and finance functions in small and midsized public and private companies.

If you would like a confidential, no obligation meeting with one of our partners, please email Allan Tepper at atepper@cfoconsultingpartners or call him at 646-650-2028 X701.

 

Newsletter – October 2014

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Fin Tech Case Study

CFO Consulting Partners was engaged by a start-up Fin Tech Company to assist in setting up their entire financial infrastructure, including establishing and documenting GAAP and regulatory policies, establishing and documenting internal controls and procedures, and constructing the regulatory reporting process.  CFO CP also assisted in the preparation of US GAAP financial statements for a Review and eventual audit by the company’s external audit firm. The Company is a pioneer in its industry and needed the Review report to be included in its application for regulatory approval.

CFO CP assisted in developing the workpapers and supporting documentation for the Review and eventual audit. In particular, CFO CP reviewed the trial balance, general ledger from date of inception to the Review period and all the underlying accounting records for propriety and accuracy/completeness. CFO CP ensured that the information requested by the audit firm was prepared in advance and reviewed by management, that it was accurate, and that it had a well-documented audit trail. CFO CP also prepared the relevant schedules and analyses for some account balances. Since the client is a start-up, CFO CP prepared the financial statements from date of inception to the relevant period end, including detailed footnotes. CFO CP worked closely with the auditors throughout the duration of fieldwork and assisted in resolving Review issues with the auditors.

The auditors completed the Review process and issued their Review report within five business days and, the materials required for regulatory approval were filed on time. As a result of CFO CP’s involvement, the books and records have clear Review trails and the Company has a chart of accounts that is specifically designed for its business. Also, all the significant accounting policies and internal controls were well documented. CFO CP was commended by the Company’s CFO, senior management and the CPA firm for exceptional work.

Accounting Errors

From time to time, we read about accounting errors in public companies. Often these result in restatements and may even result in a shareholder lawsuit.

From our experience, here are some of our thoughts as to why this may happen. A company may have one or more of the following factors:
  • Weak internal controls
  • Deficiencies in its management reporting practices
  • A lack of a solid understand of the industry by its board and audit committee
  • An over-reliance on excel worksheets and/or a corporate culture that lives for “quarter to quarter” earnings.
Of course, there may be many other reasons, but these are some of the key ones that we have experienced.
We also believe all companies should have well trained and experienced CFOs and accounting staff, and for sound governance reasons, the CEO should not assume the the role of CEO and CFO, even for an interim period.

Newsletter – August 2014

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Prepare Now for Revenue Recognition Implementation

In May, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, (Topic 606). The Update takes effect essentially in 2017 and establishes a comprehensive revenue recognition standard for almost all of the various industries. Prior to the promulgation of this standard, certain companies followed their industry-specific revenue recognition standards such as software and real estate.

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in US Generally Accepted Accounting Principles (GAAP) differed from those of International Financial Reporting Standards (IFRS). Hence the FASB is making these amendments to the Accounting Standards Codifications (ASC), and the International Accounting Standards Board (IASB) is issuing IFRS 15, Revenue from Contracts with Customers.

The issuance of these documents completes the joint effort by the FASB and the IASB to meet the objectives of removing inconsistencies and weaknesses in revenue requirements, provide more useful information to users of financial statements through improved disclosure requirements and generally improve financial reporting by creating common revenue recognition guidance for US GAAP and IFRS.

Summary of the New Rules

Under the new rules companies will follow a five-step approach to apply the standard:

Step 1: Identify the contract(s) with the customer.  A contract is an agreement between parties that creates enforceable rights and obligations. It can be written, oral, or implied by an entity’s customary business practice. Generally, any agreement that creates enforceable rights and obligations will meet the definition of a contract.

Step 2: Identify the separate performance obligations in the contract. A performance obligation is a promise to transfer a distinct good or service (or a series of distinct goods or services that are substantially the same and have the same pattern of transfer) to a customer. The promise can be explicit, implicit, or implied by an entity’s customary business practice. The objective of identifying distinct performance obligations is to describe the transfer of goods or services to the customer.

Step 3: Determine the transaction price. The transaction price is the amount of consideration that an the company expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of a third party. Determining the transaction price will be more complex if the contract involves variable consideration, a significant financing component, or noncash consideration.

Step 4: Allocate the transaction price to separate performance obligations. The transaction price is allocated to the separate performance obligations in a contract based on the relative standalone selling prices of the goods or services in the contract. The allocation is made at contract inception and not adjusted to reflect subsequent changes in the standalone selling prices of those goods or services.   The best source of standalone selling price is the observable price of a good or service when the entity sells that good or service separately.

Step 5: Recognize revenue when (or as) each performance obligation is satisfied.  The new revenue recognition model culmination is recognizing revenue. A company will recognize revenue when (or as) a good or service is transferred to the customer and the customer obtains control of that good or service. Control of an asset refers to a company’s ability to direct the use of and obtain substantially all of the remaining benefits (that is, the potential cash inflows or savings in outflows) from the asset. Directing use of an asset refers to a customer’s right to deploy that asset, to allow another entity to deploy that asset in its activities, or to restrict another entity from deploying that asset.

Implementation/Effective Date

  • For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
  • For all other entities (non-public entities), the amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted under certain circumstances.
  • An entity should apply these amendments using one of the following two methods:
    • Retrospectively to each prior reporting period presented
    • Retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application.

Even though implementation seems far away, it is highly recommended that companies begin to prepare now for implementation

The new standard will likely affect the measurement, recognition and disclosure of revenue, which is often the most important financial performance indicator.  Since an entity’s objective is to generate revenue, it is not surprising that changes to the accounting for revenue could affect multiple business functions.  To prepare for implementation companies should:

  • adjust or add controls to address increased judgments and estimates in revenue amounts, including documentation and testing of those new controls
  • update policies and procedures to conform to the new standard,
  • consider internal controls optimization for all revenue-related controls.

Newsletter – May 2014

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It Pays to Do It Right the First Time

By Art Finnel, Head of Life Sciences Practice

Prior to joining CFO Consulting Partners, I held a CFO position with a company that was planning to go public and hired a new accounting firm for the audit. The company had planned for this possibility five years before my arrival. Everything seemed in order.  I was going to have great fun, so I thought.

Shortly after joining, we began to prepare for the next audit. During my review, I found that a series of shortcuts had been taken in certain critical accounts during the year.  This turned out to be totally unsatisfactory in satisfying a proper audit and preparing for a set of filings with the SEC.

Further, the documentation supporting the entries on the company’s books was very thin and in certain cases non-existent, which then required exhaustive research of the issues and relevant accounting rules. In many instances, an entire redo of the calculations and a determination of the proper entries had to be made.  Besides the significant investment of my time and energy to correct the deficiencies, it cost the company dearly to comply with the auditing standards of the new accounting firm.

My takeaway from this experience is pretty simple.  Do it right the first time around!  Don’t shortcut.  Make sure you and your accountants understand the accounting rules.  If there is ambiguity, then find the right expertise to provide the necessary advice and support.  And finally, Document!  Document!  Document!   By following these simple rules, you should feel confident that your company can present its accounts properly and handle any questions or due diligence that might be undertaken in the future.

Is Your Company Getting Ready for an Exit?

By Allan Tepper, Co-Founder and Managing Director

Since the Great Recession, 2014 may be the best year yet for an exit. This is true for sales of companies as well as IPOs. For private equity transactions, average hold periods are at an all-time high of nearly six years. These companies must be sold at some point. See BB&T Capital Markets video for macro developments over the past decade here.

For IPOs, 2013 proved to be one of the best years for the IPO market since the tech boom of the early 2000s, and PWC reports that 2013 has been the most active IPO environment since 2007. See PWC’s article, “Being Prepared in a Hot IPO Market” for references and additional information here.

In preparing for your exit, we suggest the gathering of both historical and projected numbers. Historical data should include all your key numbers and should present a clear picture of your business. Your forecast data should be driven by the key drivers of your business, and all forecast numbers should be supported by sound assumptions.

Unfortunately, some of the information required in producing historical and forecasted numbers may not be available in your accounting system. We recommend that companies would be wise to develop processes to capture those “non-accounting system numbers” on an ongoing and consistent basis.

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