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It was high time the FASB eliminated ‘extraordinary items,’ and they finally did

Companies will no longer have to call out extraordinary items on the income statement following the Financial Accounting Standards Board’s recent issuance of an accounting standards update. This change, which affects transactions that are considered both unusual and infrequent, goes into effect for fiscal periods beginning after December 15, 2015.

As someone who has been on all sides of the fence having to decide how to account for these items (I have been an auditor, CFO and investor) I must admit I am not sad to see the separate accounting of them, located after Income from Continuing Operations, and net of tax, go away. I have always felt that accounting for extraordinary items the way we’ve had to is, well, kind of extraordinary!

My reasonings for thinking this way are twofold. First, I am a strong believer in simplified accounting, and this change definitely simplifies the accounting. Second, in my view anything to do with your continuing business should be accounted for as an integrated part of your continuing business, and just because a transaction is unusual and infrequent does not give it the right to be accounted for separately.

My definition of unusual and infrequent may be different to yours, and that’s the problem—the rules that have been in place have a significant element of subjectivity to them. To me, accounting for extraordinary items has been very similar to applying soccer’s offside rule. Under that rule, you are not offside if you are not interfering with play. That’s a very subjective judgment, and your view of interfering in a situation may be different than mine. I acknowledge that I am a little extreme on this—to me if you are on the pitch, you are by definition interfering with play. That’s probably a big reason why I never became a referee!

I once had a very long debate (you could also call it an argument), with a Big 4 audit partner over whether a transaction was an extraordinary item while I was the CFO of a public company. The discussion lasted a week, and in the end the partner punted it to another partner who ended up agreeing with me. I’d like to say it was a win for me, but we had both wasted hours discussing this issue.

Adding insult to injury, I couldn’t believe it when the partner subsequently tried to bill me for the time we spent discussing it. As you can imagine, that created another discussion. I finally got the billing eliminated, but what a waste of time and effort. I am sure many others have had the same experience as me. The good news is that no one will have to again when the new rule changes come in to play, so hopefully a side benefit will be that audit costs will come down a little as well.

By the way, when this rule change goes into effect—making extraordinary items no longer necessary—US GAAP will match IFRS rules. Yes, the continuing operations section of an income statement will look more lumpy, but it will reflect better what is going on in the business, and that is what accounting should do and all we can ask it to do.

Stephen Ambler is a director at RoseRyan, where he manages the development of the firm’s “dream team” of consultants. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at Nasdaq-listed companies.

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Hot topics for finance departments in 2015

There’s a tension for finance organizations that go public. Throughout the year, they are faced with new rules from accounting standard-setters, new guidance from accounting firms and new direction by regulators that could affect them directly.

Last year was no different as the Financial Accounting Standards Board issued 17 Accounting Standards Updates (ASUs), up from 12 in 2013, including a real biggie (the new revenue recognition standard), and the regulators continued to be active and forceful. On top of this, privately held companies are getting more rules sent their way, and an increasing number are considering whether they too should get involved in the public markets.

No matter where your organization lies in its cycle—whether you’re in a startup or a fully fledged publicly traded company past the early, shaky days of trading—you have many issues to face in the coming year as your team puts together its financial reports and communicates with investors. Here are recent changes you should keep in mind, depending on your situation:

Taking on the new revenue recognition rule: By now companies should be past the evaluation stage and their plan to implement should be nearing completion. They should start tracking their transactions to see how they’ll play out under the new guidance.

Until formal adoption in 2017, companies must disclose the anticipated effect the new standard will have on their financials, so knowing the magnitude of the change is a critical initial step. It could lead to adjustments in processes and affect how contracts are drafted. Moreover, companies need to have this type of data around now to decide whether to adopt the standard retrospectively (which will include 2015 financials) or prospectively (beginning January 2017).

The entire endeavor will go beyond the finance department. As we saw with the implementation of the previous revenue recognition standard, possibly business practices and certainly revenue accounting processes and systems will need to adapt to record revenue transactions correctly.

Simplifying matters for private companies: The good news for private companies is FASB’s Private Company Council (PCC), now a year into its Decision-Making Framework for determining the situations when private companies can use an accounting alternative, issued four PCC-consensus ASUs in 2014. With the goal of simplifying accounting and reporting for private companies, these new ASUs should reduce private companies’ cost of compliance.

      • 2014-02: allows private companies to evaluate goodwill impairment when a triggering event occurs rather than annually.
      • 2014-03: provides a simpler method of accounting for derivatives.
      • 2014-07: provides a simpler alternative than the variable interest entity (VIE) model for accounting for leases under common control.
      • 2014-18: hot off the FASB presses in time for Christmas, this ASU simplifies private company accounting for intangible assets acquired through a business combination.

Preparing for public-company life: Depending on your viewpoint, there has been a positive effect of the reduced reporting and SOX compliance provisions from the JOBS Act in the increased number of IPOs in 2014 (a 44% increase over the number of 2013 filings). And IPO and follow-on public market financing activity don’t seem to be tailing off so far as we start 2015, particularly in the Bay Area.

But before private companies rush to Wall Street, they need to remember that despite a one-year exemption from the requirement to have their auditors sign off on SOX, management must still include their own assertion regarding internal controls in SEC reports beginning with the second 10-K and will want to have effective internal controls way before then. The auditors will still want to get comfortable in knowing management is doing what they say they’re doing. (For more about braving the new world as a post-IPO business, see our recent intelligence report, Ensuring a smooth ride as a newly public company.)

Getting ready for the audit: Finally, the auditors also received their own flurry of new rules and warnings from the Public Company Accounting Oversight Board in 2014. Companies will end up feeling the effect as those changes trickle down, leading auditors to deepen their focus as they review certain accounting methods. The PCAOB has stated the new audit requirements and alerts were issued in response to insufficient audit procedures in areas that have a higher risk for misstatements and the incidence of deficiencies.

There is a new audit requirement surrounding transactions and financial relationships with related parties, including executive officers, as well as requirements that strengthen the auditing of significant unusual transactions.

Two new practice alerts were issued in the fourth quarter of 2014. One dealt with auditing revenue, specifically testing recognition and timing, evaluating the presentation (gross vs. net), internal controls, and the risk of fraud. Additionally, the alert addresses the application of audit sampling and analytic testing procedures.

The second alert reminds auditors about PCAOB standards related to auditing “going concern” with regard to the application of updated accounting and reporting guidance. The PCAOB’s agenda for 2015 includes a project to consider updating the auditing standard.

Companies will still need to be ready for the increased scrutiny by the auditors of their 2014 results as a result of the alert issued late in 2013 that seemed to sneak up on them as they went through audits last year. Be ready for testing of review controls, controls over system-generated data and reports, and management’s evaluation of identified control deficiencies.

We all recognize that the pace of change keeps accelerating and isn’t likely to slow down in 2015. Staying on top of what’s new and what applies to our specific situation requires quite a bit of focus. It is part of what makes your finance and accounting folks such valuable members of the team.

Julie Gilson is a senior consultant with RoseRyan and a CPA (inactive) with over 15 years working in finance and accounting with fast-moving public and private technology companies.

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Jacqueline Bray receives RoseRyan’s highest honor: The 2014 TrEAT Award

We are excited to share the news that Jackie Bray has received the 2014 TrEAT Award, a coveted recognition within RoseRyan. She is the fourth annual recipient of this award, which honors a guru who has best exemplified our firm’s values (Trustworthy, Excel, Advocate and Team) throughout the year.

The RoseRyan management had the tough task of deciding who out of 40 nominees made the biggest standout contribution in 2014. “Being able to juggle various deadlines and clients while always being responsive and keeping cool under pressure is a real art,” says RoseRyan CEO Kathy Ryan. “Jackie does this with reliability and grace.”

Because of the stiff competition, Jackie, who specializes in general accounting, was surprised to hear her name called at the RoseRyan holiday party when the winner was announced. “It was a nice feeling—it was humbling — that the nomination can come from anyone at the company, not just a manager,” she says. “That makes it special for me.”

When deciding whether to join RoseRyan in 2013, she was won over by the firm’s values, which the firm’s managers and consultants not only talk about but truly follow. They matched her own, and she knew RoseRyan would be a good fit.

A sweet TrEAT
The RoseRyan TrEAT award was established to acknowledge the importance of the our cornerstone values as the foundation of our business, and honor the individual who exemplifies those values. It is the highest honor we can award an individual. This year, we awarded Jackie with a beautiful, one-of-a-kind bowl. It’s perfect for displaying some treats or for admiring as is.

Jackie fulfills the trustworthy criteria by always meeting her deadlines and deliverables, even when (inevitably) something unpredictable creeps up or hot issues hit more than one client at once. She excels by meeting her performance metrics and being willing to go beyond her comfort zone to expand her skills. And she is an advocate for the firm by providing valuable feedback and recommendations to the RoseRyan client management group.

And last but not least, Jackie is a strong team player for her ability to build good relationships with clients and her colleagues as well as for the fact that she can be consistently relied upon to provide excellent work.

Indeed, Jackie manages a four-client workload with finesse, and she has the full force of the collective intelligence of RoseRyan’s seasoned pros at her fingertips. If a client has an unusual question, Jackie knows she can get the answer—she just needs to turn to her colleagues to see who has encountered a similar situation (since our dream team members have been on a wide range of assignments, usually several chime in to help).

RoseRyan has given her access to a diverse and flexible workload with the support of knowledgeable colleagues she can turn to anytime. “When one of us is with a client, we are never alone,” Jackie says. “You truly do have a whole team behind you.”

Congratulations to Jackie Bray!

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Full steam ahead for 2015 and beyond

Halfway through the decade, with the Great Recession slipping farther and farther into the rearview mirror, corporate leaders are pushing onward and upward. Nowhere is this more evident than in the San Francisco Bay Area where a lot of attention has shone on activities within the tech and life science sectors. In business, there is never enough time to waste and anyone who lingers at a standstill for too long will get left behind.

In the Bay Area, we’ve seen a higher eagerness for forward movement over the past year as well as more forward-thinking actions. Small companies that had held a tight grip on lean finance teams are expanding. Larger companies are soul searching and making positive strategic changes. And to top it off, the IPO market is incredibly active (2014 saw the highest number of companies going public since 2000, according to Renaissance Capital).

We are not quite returning to a heyday and I don’t think we’re in a bubble, but it’s much easier to find bright spots than when this decade first began. As for RoseRyan, we are enjoying much forward momentum too, having made investments even during the turbulent times. The outlook for RoseRyan is a positive one for the year ahead as we continue to see opportunities for growth within our own client base as well as with potential clients.

A memorable year
One of our proudest moments in 2014 was the introduction of our RoseRyan Day 2 service, created for companies struggling to get everything done properly after their IPO. The early days of working at a publicly listed company is an exciting time, but it’s also a shaky time, as the organization has to adjust to new processes, new requirements and the constant prying eyes of investors and regulators. They need to be more careful and watch out for inconsistencies in the information they share and how they share it. This puts the onus on the finance department.

We enjoy helping finance teams power through the challenges of what we call “Day 2,” that one- to two-year stretch of time between the IPO and and when the company is actually comfortable acting like a public company. There is a lot to do.

Some companies are taking on a transition of another sort altogether, as they look under the hood and consider whether something within their infrastructure is holding them back. We expect the trend of spinoffs and splits to continue following on the heels of big changes at Hewlett-Packard, eBay (which is spinning off PayPal) and Symantec. When done with great care, such divestitures can position a business for greater mobility, innovation and growth.

Another signifier of an increased focus on the future — rather than a stuck-in-the-mud feeling wrought by the recession — shows up in the job market. People are more confident about switching jobs, and there are more opportunities for them to make the change. This development is a good sign for our local economy (as well as for our own interim finance services pipeline), but it does make the life of hiring managers more difficult. In the finance and accounting world in particular, we continue to face a tight market and we all need to rethink how we attract and keep top talent. It’s certainly a job seekers’ market out there.

At RoseRyan, our standards for seasoned finance pros continue to remain high, and we have the kind of reputation that continues to attract the talent we need. In the fall, I was honored to be recognized as one of 10 elite managing partners from around the country by Accounting Today for having the kind of “employee-friendly firm that so many leaders are struggling to build now that engaged, enthusiastic staff are at a premium.”

Over 20 years, we have set up a culture of fun-loving folks who have a passion for what they do and the means to collaborate and learn from each other. And we do it without the round-the-clock pressure that some larger firms run on. Our work shines because of our experience and our enthusiasm, and I share my inclusion on the Accounting Today Managing Partner Elite list with my RoseRyan colleagues.

Successful businesses will persevere by keeping their focus on the future, rather than lamenting on what they see in that rearview mirror. We have our eyes on the future. Will you be joining us?

Kathy Ryan is the CEO and CFO of RoseRyan. Since co-founding the firm in 1993, she has served as interim CFO at more than 50 companies.

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