What Do I Need For Technical Accounting?

If you’re reading this article, you may have realized that you and your company are subject to US GAAP reporting requirements, and possibly some audit/review requirements as well. But what needs to be done to get your books compliant with US GAAP?

This article walks you through common topics of Technical Accounting and US GAAP, and how you can start to scope Technical Accounting topics that may be applicable to your company.

What Technical Accounting Topics Apply to My Company?

Once you realize that financial reporting under US GAAP may be applicable to you, the next step of the process is understanding how to navigate where to start. Knowing the scope of your technical accounting needs can help lead the way:

• Is this your first year of accounting under US GAAP, or a first-year financial statement audit? Then chances are you need help with multiple areas/topics, including some that you may not even be aware of. 

• Or maybe this isn’t your first rodeo, but you just need help with a specific transaction (e.g. business acquisition or new debt/equity financing) or new accounting standard (e.g. revenue recognition under Accounting Standards Codification (“ASC”) 606, or leasing under ASC 842). Then the scope of the project can be more focused.

While the related technical accounting topics for a given company will vary based on the company’s industry and operations, the following areas tend to be most common:

• Revenue Recognition: US GAAP requires a company to follow a specific 5-Step Framework on how to account for all its contracts with customers. This is commonly referred to as ASC 606 under US GAAP.

• Leases: Recent US GAAP guidance under ASC 842, has led to more complex accounting for a company and its leases, including whether certain contracts are considered a lease when they were not before.

• Business Combinations: Any time a company acquires another business, or even a significant purchase of certain assets, US GAAP requires specific “purchase price accounting” that must be followed.

• Complex Debt/Equity: Most complex equity instruments (e.g., preferred stock, stock warrants, SAFE’s) and debt instruments (e.g., term loans, lines of credit, convertible debt) must be evaluated for US GAAP accounting based on their specific key terms and conditions.

• Stock Compensation: When a company issues equity-based awards (e.g., stock options, restricted stock, profit interests) to its employees and/or vendors, each type of award must be reviewed for specific US GAAP accounting based on their specific key terms and conditions.

How Can I Scope Technical Accounting Topics For My Company?

To help you know where to start with scoping your high-risk areas for US GAAP and technical accounting, a great place to start is in reviewing certain key information about your company. Some of the most helpful information to obtain and review includes the following:

• Recent Financial Statements. You can gain a wealth of knowledge just by looking at a set of your most recent annual financial statements. Ideally this may be any audited/reviewed financial statements, which include key statements like a Balance Sheet, P&L, Cash Flow Statement, and Statement of Equity, as well as related footnote disclosures on the company’s existing accounting policies and specific transactions. However, if your company has never been audited or reviewed before, the most relevant internal financial statements are a good alternative.

• Detailed Balance Sheet / P&L / Trial Balance. A full set of financial statements, like those mentioned in the previous bullet, provide a full picture of the company and its operations. However, just as important is understanding the detail behind what makes up those financial statements. You can perform a great deal of scoping by understanding what general ledger (GL) accounts are being used and their related balances. Most accounting systems have canned reports that provide this information within a few clicks! Any significant transactions that show up in the account details should be considered for whether they require specific attention.

• Inquiries with Leadership. While financial statements are helpful for the balances that show up in normal accounting, they don’t paint the full picture. Many key US GAAP topics, like stock-based compensation or equity warrants, involve transactions where no cash is involved and, therefore, may not show up in transaction details. Another great scoping exercise is to sit down with your leadership team with an overall understanding of the company, (e.g., Founders, CEO, COO, CFO), and make a list of any major activities or transactions that have occurred over the past few years. Chances are that those significant transactions may need technical accounting evaluation.

• Key Documents. While the above items are helpful for high-level scoping of potential accounting areas, much of the detailed information is in key documents. This generally consists of key agreements or contracts, such as a purchase agreement for a business or asset acquisition, customer contracts, or lease agreements. The type of key docs varies by each accounting topic. Check out our separate articles on each type of major technical accounting topic, including the above topics in this article, for more detail on those areas as well as a list of relevant key documents.

It’s CRITICAL to lead with caution and understand that the above technical accounting topics, while the most common and impactful, are not an all-inclusive list.

In fact, a good rule of thumb to consider is that, for any significant transaction or financial statement line item, there’s a specific US GAAP topic with its own rules and guidelines on its related accounting.

The highest risk in technical accounting is not being aware of a certain topic or transaction. This can lead to last-minute fire drills in an audit, significant audit adjustments and deficiencies, as well as costly audit overrun fees.

To mitigate this risk, we highly recommend that you reach out to a technical accounting expert who can help you better understand the scope of your technical accounting needs. If interested, you can reach out to us for a discovery call.