2016 Audit Committee Agenda Webinar Q & A (Part 4)

We are wrapping up our series of blog posts based on our popular January 7 webinar on the 2016 Audit Committee Agenda. This series answers some of the questions we were unable to address during the webinar.

In our first installment, we touched on the relationship between the audit committee and independent auditors, new rules on lease accounting and board-level engagement with cybersecurity. Part 2 of the series continued the cybersecurity discussion and focused on the opportunity for many organizations to add data analytics capabilities to their internal audit functions. Part 3 addressed fraud and clarified the role of internal control in the three-lines-of-defense model.

The questions Jim DeLoach addresses in this final installment pertain to new FASB rules on revenue recognition and lease accounting.

Q: The Financial Accounting Standards Board (FASB) has announced two major changes in Generally Accepted Accounting Principles (GAAP) – revenue recognition and lease accounting. How can companies make both of these changes concurrently?

Jim: The good news is, these changes are not concurrent. FASB and the International Accounting Standards Board (IASB) published the new revenue recognition standards in May 2014. The new rules apply for reporting periods beginning after December 15, 2017, but companies should be taking steps now to determine how the rules will affect their business. It is expected that the new lease accounting standards would apply to reporting for periods beginning after December 15, 2018. Companies have ample time to prepare for both of these changes, if they act now. We strongly advise against waiting until the last minute.

Q: What value do you think internal audit can add to the revenue recognition transition process?

Jim: Internal audit can play an important role in ensuring that the organization is making sufficient progress in transitioning to the new revenue standard by evaluating management’s progress. During the webinar, we suggested seven steps for management to take to get on top of and size the transition process:

  1. Educate executives and their teams with their overall responsibility for the transition
  2. Assess the current revenue recognition policy against the standard and identify expected changes
  3. Depending on the significance of the identified accounting policy gaps, consider the need for involving others
  4. Perform a high-level analysis of any data gaps
  5. Develop a high-level approach to the transition method
  6. Identify and assess additional resource needs
  7. Educate the decision makers

These steps provide guidance to internal auditors on what to look for when evaluating whether their companies are gaining traction. In assessing the efficacy of preparations, it would be helpful to ask: Does management understand what is expected? Do they have a plan to comply? Is the plan resourced? Has it been budgeted? Iss the organization making progress against the plan? As various components of the plan are implemented, internal audit can do testing to ensure the new processes and procedures are operating effectively in the new environment.

Not to sound like a broken record, but we’ve seen enough procrastination out there to warrant concern, particularly with the revenue recognition rules. By now, companies should be well along in the process of determining how the new standards apply to them, and preparing for the implementation of the needed changes.

This four-part blog series covers most of the questions asked by our webinar attendees that we were unable to address live. Thanks, again, to those of you who attended the live webinar broadcast. The archived version can be accessed here.

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