Revenue recognition and independence: Something to consider
It’s a challenge. It has to be addressed since the standard is effective for private companies and many not-for-profits in calendar year 2019. It can be tedious to make sure systems are updated appropriately and staff is trained.
Sometimes your clients may get breathless through this exercise and feel discouraged, so they turn to you. As your clients’ management and accountants climb “Mount 606,” as I like to call it (named after the FASB ASC 606), they look to their CPA firms — you — for help up the summit.
When your CPA firm provides such implementation help to attest clients, you must maintain independence. That task can be especially challenging with FASB ASC 606, given the complexity and scope of implementing the standard.
The AICPA Code of Professional Conduct addresses how nonattest services can be provided to an attest client while maintaining independence. Those rules appear in “Nonattest Services” subtopic (ET 1.295) of the Code. They only apply when performed for an attest client. If the client is a financial statement attest client, the rules also apply (with certain exceptions) to that client’s affiliates.
When nonattest services are performed for an attest client, threats to compliance with the “Independence Rule” (ET 1.200.001) may exist. When significant independence threats exist, independence will be impaired unless the threats are reduced to an acceptable level. Reducing those threats includes making sure to meet the requirements included in the interpretations of the “Nonattest Services” subtopic under the “Independence Rule.”
We know independence rules can be overwhelming, and we’re here to help.
The Center for Plain English Accounting, AICPA’s national A&A resource center, recently issued a report to our members that covers the application of the AICPA independence rules to engagements to assist attest clients with FASB ASC 606 implementation. That report is now available to everyone, regardless of Center for Plain English Accounting membership.
Using a case study approach, it covers various requests that a client may make of a CPA firm, such as:
- Getting involved with the client’s FASB ASC 606 project team — Practitioners need to be careful here and avoid performing management responsibilities.
- Assessing how FASB ASC 606 will affect the client — Practitioners could identify current process flows for revenue recognition.
- Identifying gaps between the current state and the requirements of FASB ASC 606 — Practitioners may perform a gap analysis and present the results to the board of directors.
- Developing a plan for implementing FASB ASC 606 — Practitioners can provide advice and recommendations.
- Revising processes, internal controls and accounting policies — Practitioners can provide some assistance, but not all services are permissible.
- Helping the client identify and evaluate customer contracts — Practitioners may help but should not perform these activities on behalf of the client.
- Identifying performance obligations — Practitioners may serve in a support role, but the client needs to perform these activities.
In addition, the report discusses the CPA firm’s evaluation of threats to independence and other matters.
Practitioners need answers to their difficult A&A questions. The Center for Plain English Accounting is here to help. Ensure your firm has access to top-notch A&A advice by joining the Center for Plain English Accounting.
Also be sure to check out episode 9 of Ethically Speaking, the podcast of the AICPA Professional Ethics Division. This video addresses helping clients without crossing the independence line and how to apply safeguards as well as services you may provide and understanding a client’s documentation of compliance with the standard.
Bob Durak, Director — Audit & Accounting — Technical Services — Public Accounting, Association of International Certified Professional Accountants
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