Throughout 2019, public companies worked to comply with the new lease standards to bring operating leases onto the balance sheet. It was not a straightforward process for many companies, and in the world of valuation, we saw many of them struggling with the applicable incremental borrowing rate to discount cash flows and quantify lease liabilities.
Revenue accounting has never been a simple exercise, but running the last leg of a seemingly five-year marathon to ASC 606 compliance saw some financial reporting units struggling for air near the finish line. Some public companies saw little to no financial statement impacts yet others saw extreme revenue or earnings boosts, especially software, telecom, and contract-heavy companies. While the change in accounting practices shouldn’t affect valuations, we’ve seen some impacts related to margins, comparables, growth rates, cash flow assumptions, and revenue-based multiples.
While intended as another accounting standard simplification, a wrestling match began during the second half of 2019 as the FASB, along with preparers and users: amortization vs. impairment testing vs. a hybrid approach. Stakeholders from multiple viewpoints are still throwing their hats in the ring discussing this topic, and the FASB continues to keep an open ear. We expect to stay close to this process and see the considerations continue throughout 2020 and likely beyond.
Another topic important to the context of business combinations involves the AICPA’s current best practice project on inventory valuation. Limited authoritative guidance around best practices has led to a wide divergence in interpretation and practice, it is our view that a few modifications could improve the valuation process. FASB has also stepped in to question whether book value is sufficient or if companies should conduct a fair value calculation. From all perspectives, we hope to see results develop in the coming year to provide more useful, clear information for the financial statement.
Changes to revenue recognition rules have resulted in a continuing evolution of valuation approaches and the resulting haircut to deferred revenue, which continues to be a controversial topic that can have an unexpected impact on a company’s post-transaction financial statements. The valuation challenge is found in defining the performance obligation. The FASB will continue considerations on this topic into 2020, and while we don’t believe the fair value approach will see wholesale changes, certainly the possibility to adjust which costs should be included.
More 2019 Year in Review Highlights
Crystal Ball 2020
What’s in store for the coming year? VRC talks about potential trends.
2019 By the Numbers
We are proud to share a list of our accomplishments, successes, and completed client engagements that helped define a transformative year.