In accounting, the methods we use to record transactions are well-defined, and in many cases, required by GAAP. However, some of these choices are left to our professional interpretation for our specific business model (e.g. FIFO vs. LIFO). In other cases, we adopt methods as required by a change in law.
However we adopt the method, it sets the framework for how all future transactions must be recorded and can have a significant impact on financial reporting. That’s why you should audit your adopted methods to confirm accuracy, reliability, and determine if a method change is needed.
This year, there are a number of large accounting changes on the horizon that are prompting companies to review their methods. Here are our top 3 changes for you to consider this year:
- New Revenue Recognition Standard – For private companies, this will take effect for years after 12/15/18. While it sounds like you have plenty of time to review this, consider that you will want 2018 data to compare to 2019 financials, so many companies will complete two sets of books in years prior to large changes such as this. That means you’ll need to complete your review, establish your new method, implement the proper tracking and reporting systems, and more – all by the end of this year. Now you see why we recommend to start looking at this sooner than later.
- Depreciation – It’s fairly common for companies to need a review of their depreciation records, and there is typically room for improvement. It’s best to complete a full analysis and ensure all records are accurate, the correct depreciation methods are applied to each category of assets, bonus depreciation and basis is properly recorded for tax purposes, and more. Depending on the number of assets placed in service, this can be a large project. However, accurate records can save you time (and money) during reporting and tax season. Try to complete the analysis on a regular basis to make sure recording systems are working properly and that depreciation is accurate.
- Rentals & Leases – Leases have complex rules (operating vs. capital leases and tenant improvement allowances, for example) and it’s easy to adopt an incorrect method. If you haven’t reviewed your contracts, it’s worth brushing up on the rules and then combing through the details to make sure you’re using the correct method. Also, pay special attention to related-party leases, as there are large changes required here as well.
Are there any other methods you’re evaluating this year? If so, contact us to let us know!