The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

International Accounting Convergence Will Affect Renewable Companies

Companies in emerging industries such as renewable energy probably believe they have enough to worry about without dealing with the convergence of U.S. and international accounting standards. However, as the financial system struggles to keep up with world events and technology, renewable firms need to keep up as well.

The simple reasons behind convergence are to get the players in the world economy on the same page and avoid another financial meltdown akin to 2007-08. Because U.S. GAAP (Generally Accepted Accounting Principles) is significantly different than European accounting, the Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board (IASB) to converge. The SEC is seen as the governor who will force the issue.

If you are a small company, you could always ignore what’s happening with world accounting. But if your long-term plan is to obtain financing or investors, sell to or buy another company, or go public, it will benefit you to pay attention.

You may have already heard of some of the concerns; for example, that convergence may cost the average company $1 million or more to implement or that rigorous and expensive “mark-to-market” asset valuations may result in a serious write down of asset values. The sophisticated business person may also be familiar with the more subjective system used by Europe versus the rule-based U.S. system that is filled with bright line standards. Yet there are also some breaks being contemplated by both U.S. and international rule makers that exempt smaller firms from some of the most costly accounting policies.

Will we ever have total convergence of financial systems? That’s very unclear right now as there still is a lot of disagreement, but the eight major areas that they are working on have either already been implemented or will be within a couple years in the United States.

Much of the discussion is currently in the public company realm, including when the SEC will mandate adoption of International Financial Reporting Standards (IFRS) for U.S. issuers.  In May of this year, the SEC issued a staff paper in which it outlined a work plan to incorporate IFRS into the financial reporting system for U.S. issuers, and proposed a “condorsement” approach (the SEC created this new terminology to define the approach).

However, IFRS is not only affecting public companies.  Because of the FASB’s approach to convergence of international standards, private companies are being affected as well.  For renewable energy companies in the United States, the extent to which this transition affects you will be largely driven by the size and complexity of your operations and financings, but regardless, it will affect them. So the question then becomes what is the gist of the changes that are most likely to affect renewable energy companies?

Leases

In a joint project with the IASB, the FASB has proposed ? through an exposure draft ? a significant change to the accounting for leases. Under the proposed standard, all leases will be accounted for on the balance sheet, and the concept of an operating lease will go away. As a result, leases for items such as office space will be presented as non-current assets and as liabilities, similar to a note payable with the current portion in current liabilities and the long-term portion in long-term liabilities. This presentation will generally negatively affect a company’s working capital and, potentially, bank covenants. 

On the other hand, the change will likely have a positive effect on a company’s income statement due to the classification of the related expenses. The asset will be depreciated and presented in operating expenses. Lease expense, which is generally classified in operations, will go away, and additional interest expense will be recognized on the lease liability. While a company’s net income or loss will likely remain unchanged, the operating income will improve and EBITDA, an important measure for many users of financial statements and analysts, will also improve. 

While we expect this standard to have significant effects on all companies, consider a manufacturer of wind turbines or solar panels that leases their manufacturing facilities and the effect that this rule will have on their financial statements.

Revenue recognition

While U.S. GAAP has many industry-specific revenue recognition rules, the boards are trying to work toward one that would apply basic principles across all industries and also apply to services. This would include a company selling smart grid software and service packages over the Internet or a researcher being paid under contract to develop solar technology for the government. It would also apply to solar installers who likely currently utilize percentage of completion accounting.

The boards are considering using a six-step model:  (1) Identify the contract; (2) identify performance obligations; (3) determine transaction price; (4) allocate the transaction price; (5) recognize revenue when performance obligations are satisfied; and (6) account for certain contract costs.

LIFO inventory accounting

Another area of difference between U.S. GAAP and International standards is that International standards do not allow the LIFO (last-in-first-out) method of inventory pricing. While the advantages of this method of inventory pricing are largely tax driven, a significant number of companies in the United States price their inventory using LIFO.

Conclusion

Potential relief is in sight for private companies. Earlier this year, a Blue Ribbon Panel on Standard Setting for Private Companies — which was established by the American Institute of CPAs, the Financial Accounting Foundation, and the National Association of State Board of Accountancy ? submitted a report recommending the establishment of a separate board to set private company accounting standards. The panel has recommended that the new board would focus on making exceptions and modifications to U.S. GAAP for private companies.

Canadian companies were required to switch from Canadian GAAP to IFRS this year, and the results were alarming. Some of the costs were similar to the U.S. adoption of the Sarbanes Oxley Act of 2002. So whether your renewable energy company conducts business internationally or only domestically, is public or private, you should pay attention to and weigh in on the debate related to IFRS adoption.

Untitled Document

RELATED ARTICLES

Sunrise in Pakistan as the Country Delves into Solar PV

Robert Harker Pakistan has joined the list of countries that are exploring solar power as a means to bridge critical energy generat...

Global Renewable Energy Roundup: China, Kenya, Turkey, India Seeking More Renewables

Bloomberg News Editors China is being encouraged by three industry groups to double the nation’s solar-power goal for 2020 to make up for sh...

Why Smarter Grids Demand Smarter Communications Networks

Mark Madden

Historically, utility networks and communications networks have had little in common.

The Importance of “Switching Costs” to the US Residential Solar Industry

Paula Mints The DoE and numerous organizations and governments globally are focused on driving down the cost of solar convinced t...

PRESS RELEASES

Array Technologies’ DuraTrack HZ v3 Continues to (R)evolutionize at SPI

Array Technologies, Inc. (ATI) prepares to showcase its recently launched tracking syst...

Appalachian's Energy Center assists counties with landfill gas to energy projects

The Appalachian Energy Center at Appalachian State University recently completed a proj...

Early Bird Registration Deadline for GRC Annual Meeting is This Week

The deadline for early-bird rates for registration for the biggest annual geothermal ev...

Redesigned HydroWorld.com Video Gallery

Hydropower news and information, and interesting promotional announcements are now avai...

FEATURED BLOGS

Transitioning to Net-Zero Living

Judith and Jeffrey adore living in Belfast, Maine – a quaint harbor town of Belfast, Maine. They previously res...

The True Cost of Electric Vehicles in Australia

In order to avoid increased congestion, further greenhouse warming and lessen Australia’s reliance on imported ...

The Coming Multi-trillion Dollar Energy Investment Drive

In coming years, a multi-trillion dollar low-emission energy investment drive will get underway. Three catalysts wil...

The Perfect Elevator Pitch

The elevator pitch is a concise statement that grabs attention and communicates value, ideally leading to a next step...

FINANCIAL NEWS

Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Southern California. He also serves as a local leader for the alt...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @jennrunyon

FEATURED PARTNERS



EVENTS

Doing Business in South Africa – in partnership with GWEC, the Glob...

Wind Energy in South Africa has been expanding dramatically, growing fro...

Intersolar South America 2015

Exhibition and Conference: September 1-3, 2015 Intersolar South America ...

Intersolar Europe 2016

Exhibition: June 22-24, 2016; Conference: June 21-22, 2016 Intersolar Eu...

COMPANY BLOGS

Less Is More

When you’re giving a presentation, one of the easiest things to do...

Captivology

One of the biggest challenges we face as efficiency sales professionals ...

How To Optimize Your Meeting Schedule

Do you spend more time in meetings than you do actually working? While m...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS