Rule of Three

The “Rule of Three” is a principle that suggests that things that come in threes are funnier, more satisfying, or more effective than other numbers of things.  The audience is therefore more likely to remember the information.   Think “Three Amigos,” “Three Little Pigs,” “Three Musketeers,” or “Three Stooges.”  Apparently, the rule of three applies to accounting as well.   Over the next three years (Coincidence? I think not), non-public entities will have to make, on average, three significant changes to their financial statements per year. As part of its simplification efforts and technical agenda, the FASB has been rapidly issuing new ASU’s (Accounting Standard Updates) that will continue to change accounting practices for many years to come.  While these aren’t the only changes, they are (in my view) some of the more significant items that will require many companies to take action.
What are three significant changes you need to think about for 2017(*)?  I’ll give you a hint.  Two are Simple.  One is, well, Technical.  Do you know which is which?

 ·  Inventory Valuation – entities will move from accounting for inventory at the lower of cost or market to the lower of cost or net realizable value under ASU 2015-11. (^)

·  Acquisition Measurement Period Adjustments – entities will no longer  be required to reflect Measurement Period adjustments related to acquisitions on a retrospective basis under ASU 2015-16 (^)

·   Variable Interest Entity Consolidation (or Deconsolidation) – entities will need to reconsider its variable interest entities, particularly the existence of kick out rights and substantive participation rights, and either consolidate or deconsolidate under ASU 2015-02. (+)

What You Need to Know for 2018

Looking ahead to 2018 (*), non-public entities will need to update their accounting for the following significant changes.  Again, two are simple, one is technical:

·  Changes to non-current classification of deferred tax assets and liabilities under ASU 2015-17 (^)

·  Changes in the tax effects, cash flow impacts and forfeiture policies related to stock based compensation under ASU 2016-09 (^)

·  Changes in the presentation of Not for Profit Financial Statements under ASU 2016-14 (+)

 Looking Ahead to 2019

Finally, looking at 2019, this is when the simple ends, and the technical takes center stage.  Key changes this year will include:

·  Changes in Restricted Cash presentation under ASU 2016-18 (+)

·  Changes in Recognition and Measurement of Equity Instruments under ASU 2016-01 (+)

·  Changes in Revenue recognition under ASC 606 (+)

 I’d be remiss if I didn’t mention the “Plus One” in 2020, and that is Lease Accounting.  This one topic is really large enough on its own to warrant a year unto itself, which it currently has.  But history might suggest that Lease Accounting will have some “Amigos” of its own in due time.  I’m sure if you asked the FASB members, they would confirm that the Rule of Three as it relates to these changes will result in more effective financial statements, which should be more meaningful to the users of the financial statements.  The great news is that the next two years will shift us to simpler accounting models for many transactions, which gives us more time to get ready for the more complex items coming our way in 2019 (and beyond).  My advice?  Don’t procrastinate when thinking about these more significant changes! You never know what additional changes may be coming our way!

 (*) Implementation dates assume a fiscal year end of December 31.

(^) Issued as part of the FASB’s simplification initiative

(+) Recently completed as part of the FASB’s ongoing technical projects

Author: Summer Taylor
 Summer Taylor