The challenges posed by financial reporting requirements were keenly felt during 2004 and the year ahead looks to be no different. Financial Executives International (FEI), the US body that represents some 15,000 CFOs, treasurers and controllers, has issued the following top 10 financial reporting challenges for 2005.
1. Stock Options. Currently, the Financial Accounting Standards Board (FASB) has mandated that all stock compensation be expensed after June 30, 2005.
2. Internal Controls. Sarbanes-Oxley Section 404 reporting on internal controls was effective for fiscal year-ends after Nov. 15, 2004 for accelerated SEC filers. In 2005, it is effective for all other SEC filers, and more and more of its provisions are becoming applicable to private companies as well.
More and more lenders and states are asking private companies about the status of their internal control environment. Private companies can also expect that the audit procedures used by their external audit firm may become more "integrated" with internal controls as the audit firms change their firm procedures.
3. Revenue recognition. Monitor FASB's project on revenue recognition. The current thinking of FASB has dramatic changes to how we are used to recognizing revenue (asset/liability method vs. earnings process). While this will likely not be effective for several years, it is vital that all stakeholders get involved in the deliberation process so that we can attempt to influence the direction.