A&A IS NOT SOMETHING TO BE feared

I had lunch with a neurosurgeon client several weeks ago to discussion his situation (which is really simplistic – a mammoth W-2, decent investment income and a lot of charitable giving. I know, I sound like Rick Moranis from the original Ghostbusters). He is as perfect as a client can be as he requires little attention, is always positive and pays full rates! As we chatted about his thoughts of acquiring some rental properties (the dreaded passive loss rules), he stated that “he didn’t know how we (and CPAs in general) could understand the internal revenue code. My response was that “most of my work is inputs” and let the computer do the rest. I then indicated that the reverse of his comment is more accurate: “There is no Pro Series for Brain Surgery. In my world, if I mess up, most of the time I have three years to fix it or if financial statements go out wrong, I have the ability to reissue them at any time. You (and God, of course) hold life. I just crunch numbers and present them in an established manner.”

That conversation formed the basis for this article. Many practitioners fear and fight change in the rules (both GAAP and tax).

In reality, most rule changes should be embraced. They are not life or death. They actually present opportunities.

Having been a developer and presenter of CPE for the past 28 years of my 37 plus year career, I try to focus on why new standards are not necessarily the enemy of CPAs in public practice or in industry. Yet, we seem to live in a world where some folks, for a number of reasons, try to scare us about the impact of new pronouncements. I have not seen one greater example than the leasing standard which, as you probably know, went into effect for privately held businesses for annual periods beginning after December 31, 2021.

For twelve years, literally, I have discussed the leasing topic in CPE and applied it early since 2016 to a number of my clients and assisted with other firm’s clients. When it first came out as a proposal in 2010, it was indeed scary. However, a number of practitioners did manage to contain the FASB’s initial “idiocy” by cursing at them and threatening them to the point whereby the standard that was finalized in 2016 was really nothing to fear. Yet, from 2016 to the end of 2021, and in some cases into 2022, CPAs were leading the cries that this standard was the end of us! For example, the Pennsylvania Institute of CPAs (which represents 20,000 Pennsylvania CPAs and also is in charge of peer reviews for the States of New York and Delaware and the Virgin Islands) wrote a heart wrenching letter to the FASB in September 2021 stating that the adoption of the standard could lead to bankruptcies because of having to put something on the balance sheet (operating lease liabilities) that we have disclosed forever. If we have to capitalize that Ricoh copier or F-150 pickup lease, it will be the death of us!

Well, we have had a cycle now to adopt the leasing standard (December 31 yearends that have already issued) and I have responded to around 300 emails relating to the standard. Based on those emails, I have the following observations related to “why we should not fear an A&A standard…ever”.

1. Banks have seemingly no issue with it. They get that the standard is merely taking what has been in the footnotes forever (the payments due under operating leases) and putting it on the balance sheet. No banks are punishing any clients for doing that. In fact, some banks are actually pleading with their customers NOT to adopt the statement because it would cause the banker additional paperwork explaining why the standard has zero impact on the clients credit standing.

2. The standard resulted in the most qualified reports (for GAAP departures) I have come across in my career. Why? Because many saw the standard as having no usefulness to their users versus the status quo. Several did not even see the lack of application of ASC 842 (the leasing portion of the codification) as having a material impact on the statements and, thus, didn’t alter their reports at all! We typically have the ability to not apply a new standard.

3. There was some confusion as to whether or not contracts between related parties were enforceable and, thus, constituted leases. There was also some confusion over how long to amortize leasehold improvements between related parties, especially when the enforceable terms of these leases may be a year or less. FASB reacted to our concerns by issuing ASU 2023-1 which makes it possible to determine whether a contract between related parties is enforceable without having to contact an attorney and makes it possible to amortize leasehold improvements over their useful life regardless of what the enforceable term of the lease may be.

Another standard that practitioners were fearful of (at least the small practitioners who make up most of the firms in the United States) was the AICPA Quality Management Standards (the SQMSs). These standards replace quality control with quality management and target the partners of an account to do a better job. Once again, the original draft was a hellish document. However, our standard setting bodies do listen to “us” and, after a tremendous backlash, backed off the two most controversial provisions of the SQMSs. What we are left with in the SQMSs which go into effect primarily for engagements for periods ending after December 15, 2025 is much more tolerable. See you in CPE for that one!

In short, while new standards do require us to work a little harder to apply them, we have standard setting bodies that are reactive to our concerns. In addition, if we are the first in our firm to master these new standards, we can become an invaluable internal resource and that can only help our career advancement.

See you in person later this year in fun, informative, A&A or (now) tax classes!