By Richard Koch, CPA
Director of Financial Reporting
Gray, Gray & Gray, LLP
Amid chaotic market conditions, accurate and timely financial reporting is more essential than ever. While privately held companies do not have the legal reporting obligations incumbent upon a publicly-traded company, analysis of detailed financial data offers a level of insight for management that can be leveraged to make improvements in processes and operations.
It is important, therefore, to make sure your financial reporting practices are keeping up with the times. In conducting more than 200 audit, review and compilation quality control reviews in the past several months, some of the key financial reporting trends we uncovered were:
- New audit report language for audits and reviews – The new suite of audit report standards under SAS Nos. 134 – 141 resulted in both revisions of display and wording; plus, assertions added regarding independence, going concern evaluation and auditor communication to those charged with governance.
- “Risks and Uncertainties” disclosure – COVID-19 – 2021 was the second year of the pandemic, and in most instances reports included a standard “risks and uncertainties” disclosure regarding the pandemic.
- Revenue recognition (ASC 606) – Privately-held companies had a second year to fine tune their revenue recognition disclosures following the initial adoption of ASC 606 in the prior year. Resources such as comment letters issued to SEC registrants may be beneficial to private companies.
- Paycheck Protection Program loans, Employee Retention Credits and MA Pass-Through Entity Tax – Some companies recorded gains on debt extinguishment under ASC Topic 470 upon receiving forgiveness of debt from both the SBA and their PPP lender. Other companies recorded contribution income under ASC Topic 958. Still others recorded other income with an offset to other receivables for the Employee Retention Credit (ERC); together with a contingency footnote that the ERC was probable but subject to regulatory review. Some Massachusetts companies made an election to pay a pass-through entity excise tax on its qualified income at a rate of 5% with the payments included in the company’s state income tax.
- Business combinations – There has been a significant rebound in M&A activity over the past year which has resulted in numerous transactions and the associated business combination accounting and disclosure. Many of these transactions were complex and required due care with the purchase price allocation, recording of contingencies for earn-outs, while ensuring the proper interaction of the financial statements and acquisition footnote.
- Asset impairment evaluation, loan covenant compliance, subsequent events and going concern – Largely due to the pandemic, many companies evaluated whether any triggering events had occurred which might warrant an asset impairment. Companies that did not pass their loan financial covenants were required to pursue a waiver of the default from their lender. Some of these companies needed to go a step further and determine if there was a going concern issue. The subsequent events review took on increased importance with these companies. Due care was also warranted in the drafting of any going concern or financial condition footnote.
- New pronouncements – Leases (ASC 842) – In our advice on auditor communications to those charged with governance, we reminded our clients of the upcoming lease standard (ASC 842) which will be effective for 2022.
- On the horizon: Audits of 2021 employee benefit plans – This year’s audits of 2021 plan year employee benefit plans will involve the adoption of SAS No. 136, “Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA.” One of the key provisions of SAS No. 136 is the requirement that plan management must meet specified conditions for electing an ERISA Section 103(a)(3)(C) audit.
Information that is relevant, accurate and delivered promptly is the basis on which effective business decisions will be made. Please contact me to learn about techniques and processes to make financial reporting more efficient and impactful.
Richard Koch, CPA is the Director of Quality Control and heads the Financial Reporting Services team at Gray, Gray & Gray, LLP in Canton, MA. He can be reached at (781) 407-0300 or via email at rkoch@gggllp.com