How Revenue Recognition and Lease Standards Can Affect Your Balance Sheet
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Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s host, and I’m here today with Danielle Supkis Cheek, a Director on our Entrepreneurial Advisory Services team. Welcome back to the Playbook, Danielle.
Danielle: Thanks. Thanks for having me again.
Jen: So, we’ve done a series of accounting pronouncements from several of our other directors. What’s your perspective on some things that have been released recently?
Danielle: My big concern is actually the interplay between the various pronouncements. The pronouncements that we have coming out, particularly revenue recognition and the lease standards, are going to impact every single piece of the balance sheet, fairly simultaneously, within a one to two-year period. So, you’re talking balance sheet, income statement, revenues, expense, assets, liabilities. The concern for, especially someone like a construction worker, is that even if net effect of those offset each other, you have certain requirements that are going to be covenant calculations or working capital requirements or other requirements of people that review your financial statements. I’m really concerned for some of our clients and for some companies out there, of unintended consequences that, well, the net effect is not really that big. Maybe it is, but maybe it isn’t, but the interplay between different components based on some of these ratio calculations that are required.
Jen: Up until now a lot of it’s been for public companies. The shift now is for private companies, correct?
Jen: What size private company; all or just a certain revenue?
Danielle: It’s all.
Jen: What can clients do if they’ve got concerns about these different issues?
Danielle: I think from my understanding with talking with bankers and other users of financial statements is they want to see what the impact is now. So if we take your current financial statements, pretend like the financial statement rules changes are effective now, look at what your existing numbers are and then overlay the new standards and come up with what the new numbers would have been, we have a more comparable set of financial statements to figure out what implications that has for the other ratios and what kind of debt covenant waivers or recalculations or changes to terms and contracts that need to happen.
Jen: Is there a specific order that this will need to happen in? And when do these take effect?
Danielle: The order depends a little bit.
Jen: On the industry?
Danielle: A little bit, but more so, it’s just better to get started earlier so, you know, fortune favors are prepared.
Jen: Yes, definitely. Well, we’ll get you guys to talk more about these pronouncements, you and some of the other directors, because I know it’s definitely a hot topic. Can we get you back?
Danielle: Of course.
Jen: Perfect; thank you. For more about this topic visit pkftexas.com. This has been another Thought Leader Production brought to you by PKF Texas - The Entrepreneur’s Playbook. Tune in next week for another chapter.