Adapting Accounting Practices: Economic Factors 2024
Today’s economic landscape is presenting CFOs, controllers and investors with a complicated web of challenges. Among the most pressing concerns are persistent inflation, higher interest rates, ongoing geopolitical tensions and tighter monetary policies.
Central banks, including the U.S. Federal Reserve, have maintained higher interest rates to curb inflation, with projections suggesting these rates might remain elevated into 2025. This has contributed to volatility in the financial markets and increased borrowing costs for companies and consumers. Additionally, rising borrowing costs have cooled venture capital funding, with many startups forced to accept reduced valuations in recent funding rounds. In the U.S., several companies have undergone down rounds, reflecting the ongoing challenges in private equity markets.
All of this presents a variety of tough decisions management needs to make, all of which will have downstream implications from an accounting perspective that CFOs and controllers must consider in the quarterly and annual close process and external audit.
Key year-end activities for 2025 success include:
Restructuring Activities
• Management may enact reductions in force (RIF) programs to cut costs or refocus on core operations, which should be reviewed now to align with upcoming strategic goals.
• Companies may need to modify or terminate existing contracts to reflect challenging market conditions.
• Owners may approve divestitures or asset sales as part of the year-end process, optimizing the balance sheet and improving overall liquidity as they prepare for 2025.
Equity Implications
• 409A valuations indicate that many companies are experiencing a decline in the fair market value (FMV) of their common stock for an extended period. Decreases in the FMV may impact the assumptions used for stock-based compensation expense as well as issuances of restricted stock awards (RSAs) and restricted stock units (RSUs). Evaluating these now can ensure accurate accounting for the current year and 2025.
• To incentivize option holders, consider stock option repricing or exchange programs to adjust the exercise price of options, or other modifications may need to be considered to existing equity awards. Finalizing these adjustments before year-end helps mitigate potential tax consequences.
• Businesses may approve tender offers or secondary sales for key executives, employees and/or investors to achieve liquidity, which can boost morale for the new fiscal year.
• Increasing the use of performance or market-based incentive equity units can help drive employees toward a common goal of boosting overall company performance. The tax implications of such actions should also be considered as part of year-end planning.
Revenue Recognition Considerations
• Companies may need to change pricing for their products and/or services at year-end, with potential downstream impacts on certain accounting conclusions under ASC 606, Revenue from Contracts with Customers.
• An increase in contract modifications may result from customers renegotiating the original terms of the arrangement; granting concessions now may help secure future contract renewals going into 2025.
• Companies may see changes in their go-to-market strategy, such as introducing new or bundled services offerings that have not previously analyzed under ASC 606. Now is an opportune time for companies to reassess their strategy.
Lease Considerations
• Companies may see increases in lease modifications, for example, amendments to decrease square footage under an existing lease that is no longer needed or to renegotiate lease payments to reflect market rent changes. Addressing these before year-end can reduce costs in the coming year.
• Subleases of unused space can help companies recoup costs as workforce needs shift. Finalizing these decisions now can positively impact year-end financials and asset grouping for impairment tests.
• Changes in how leased property is used may lead to a potential analysis of right-of-use asset impairment. Now is a strategic time to conduct these reviews for more accurate financial reporting.
Impairment
• Market and industry declines, significant adverse changes in how assets are used, reductions in force and declines in the entity’s value may trigger additional impairment reviews for long-lived and intangible assets. Conducting these reviews now is essential for accurate financial statements.
• Decreases in company valuations may lead to requirements for a deeper analysis of goodwill impairment while reductions in intellectual property (IP) values may present opportunities for global tax planning or IP migration.
The practical application and accounting treatment for all the above activities is often complex and, when combined with increased turnover in finance and accounting departments, can create excess work where in-house bandwidth or deep technical expertise does not exist.
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