Good Example Of Essay On Acct 450-A Accounting Theory & Practice (Non-Technical)

“Week in Review Memo” Assignment

March 12
Spring 2015
Banking Solutions Corporation
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http://www.wsj.com/articles/sec-gets-busy-with-accounting-investigations-1421797895
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164076069&acceptedDisclaimer=true
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The publication of Eaglesham and Rappoport in the Wall Street Journal on January 20, 2015 outlines the recent SEC activities on accounting fraud investigations. Though previously SEC attention was focused predominantly on flawed mortgage securities, the current accounting-fraud enforcement actions demonstrate both increase in number (46% growth vs.2014) and expanded variety of areas which attract investigators attention as potential sources of fraud. Among the aspects which can lead to material misstatements in financial reporting due to fraud, SEC is keen not on any particular type of misconduct but tends to explore a broad range of risks such as presentation, disclosure, and recognition of assets, liabilities, and revenues. The latter is a separate focus of SEC investigations, and the biggest sanctions imposed on the corporations in 2015, were related to their failure to have recorded certain costs (Diamond Foods, $5 million paid to settle charges) or to have made appropriate earnings post-acquisition adjustments (CVS Caremark Corp., $20 million paid to settle allegations of misconduct). Moreover, SEC is going to explore every issue which can be indicative of a risk of improper accounting adjustments or failure to make proper adjustments which has affected revenue measurement. Such focus on the process of revenue booking by the companies is due not only to revenue being one of the highest fraud risk areas, but to the new criteria for revenue recognition.
In May 2014, FASB\IASB issued a new joint standard (Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers) which imposes new and stricter requirements for revenue recognition. The standard requires from the companies to estimate the impact of different items such as discounts, incentives, warranties, contingencies and significant financial component in the contracts. The presence of the latter may have a material effect on revenue measurement and will require more careful analysis to see if the substance of financial arrangement is finance. Though the standard is scheduled to enter into force for reporting periods beginning after December 15, 2016, the steps necessary to track the financial element of the arrangement will require restructuring of internal control procedures and informational technology processes to comply with new requirements.
This restructuring will be essential for our corporation as one of the core providers of informational technology solutions to the banking sector. The corporation has a wide portfolio of long-term (2-5 years) contracts with customers (software upgrades, technical support, mobile banking applications updates etc). The terms of the contracts vary greatly depending on the relationship with customers, traditional payment models used, discount schemes, complexity of assignments and many other factors. As the majority of our long-term projects contain financial element (either borrowing funds from the customer to ensure the availability of working capital necessary to finish this assignment, or granting credit to customer in terms of multi-yeared loyalty program which allows the bank to effect payments only after the works’ completion), the corporation revenues will fall within the scope of new revenue standard which will account for time value of money.
In accordance with current US GAAP requirement, revenue is measured and recorded in our accounting system based on the contract fair value at the date of its signing, irrespective of the difference between the date of payment and the day of contract obligation performance. New standard will require 3- step approach: 1) assessing if the significant financial component (i.e. financing) is a substance of the contract 2) seggregating the contract value between the operational revenues and the identified finance income or expense 3) properly recording it in the accounting system. If the payment is received long afterwards the obligation is performed, the consideration received will have to be discounted using our incremental borrowing rate (current rate is 3.25%), and will be split between the revenue from the customer (discounted value of cash received), and the interest income for granting finance to customer (the remaining part). On the contrary, if the cash is received in advance, we’ll have to recognize the portion of the revenue as interest expense in the same manner, as we borrow funds from the customer.
The 3-step procedure imposed by the new revenue recognition standard will require initiating changes in both internal control policies and revenue module in our accounting system. Approval of such changes on the corporation headquarters level will take time and thus should be initiated in advance, as it is associated with additional costs in terms of human and technical resources. The risks for not establishing procedures necessary for proper revenue recognition and measurement, in compliance with ASU 2014-09, are associated with future potential SEC investigations and fraud allegations. Eaglesham and Rappoport article clearly states that in cases of doubt whether the executives just failed to exercise reasonable judgement (which is also a requirement of ASU 2014-09) or falsified the numbers, SEC is going to impose harder investigations on the corporations. Such investigations can affect the corporation image and financial results, so the proposed changes should be initiated now to resolve any challenges relating to future tracking the interest element of our contract arrangements. It can be done in terms of a separate project, and we propose to create a project committee to initiate discussion, approval, implementation and testing of new program controls and internal control policies.

Works Cited

Eaglesham, Jean, and Rappoport, Michael. “SEC gets busy with accounting investigations.” The Wall Street Journal, 20 Jan 2015. Web. 12 March 2015. ‹http://www.wsj.com/articles/sec-gets-busy-with-accounting-investigations-1421797895›.
Financial Accounting Standards Board (FASB). “Accounting Standards Update. No 2014-09. Revenue from Contracts with Customers (Topic 606).” FASB, May 2014. Web. 12 March 2015. ‹http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164076069&acceptedDisclaimer=true ›.