Can I elect a GAAP exception for new revenue recognition and lease standards?

By Laura Hay, CPA, CAE, OSCPA executive vice president

The OSCPA Accounting and Auditing Committee received a question from a member, “Several attest clients have asked if they can elect a GAAP exception rather than apply the new revenue recognition and lease standards. Can they do so, and if they do, what is the obligation of the external CPA to do the calculations anyway to quantify the materiality of the departure?”

Some observations from the committee:

• Does management truly understand the implications of having the GAAP exception in the report, and what it might mean to future users of the financial statements? (More typically, it is the users, such as future lenders, requiring GAAP.)
• Is GAAP required by any loan covenants, outside regulators, etc.?
• Unless it can be readily determined that the departure is immaterial, yes, the external CPA would need to do the work to quantify the materiality of the departure. Or, if management does not sufficiently cooperate or is unable to provide the information to perform that calculation, that limitation would need to be disclosed in the report (AU-C 705.18)
• There can be some situations where the departure would be so significant to the financial statements, or where the election is made with the intention to mislead, that the CPA could not be associated with the financial statements and would be obligated to withdraw.
• Depending on the needs of any third-party users, there may be other alternatives, such as tax-basis financial statements.