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2019-03-11 Accounting and Audit Updates - How Will They Impact Dealers?

Accounting and Audit Updates


How Will They Impact Dealers?


By Steven Carstens



Smaller dealers generally prepare their financial statements on the income tax basis of accounting so they can see how bad their tax answer is going to be.

Larger dealers especially those with bank reporting requirements follow GAAP accounting rules issued by the Financial Accounting Standards Board.

The FASB has issued several Accounting Standards Updates (ASUs), which might have an impact on dealers’ financial statements over the next few years.

While accounting rules change regularly, we have prepared a list of updates we think are particularly impactful to dealers’ financial statements.



Effective in 2020 for private companies, new lease guidance requires lessees to record all leases 12 months or longer as debt on their balance sheet.

The present value of any lease payment stream is recorded as a liability, and a “Right to Use” asset of equal amount is recorded in the fixed asset section. The liability and fixed asset are then amortized over the life of the lease.

The impact: Property and equipment leases dealers sign become debt on their books. It will require significant work to document all leases, determine the present value and maintain appropriate schedules to amortize the payments.

Additionally, there is potential for a major impact on financial statement covenants (for example, debt to equity ratio).



Effective for year end 2019 for private companies, revenue guidance has been completely overhauled, with all industry-specific guidance removed and replaced with general principles for revenue recognition.

The primary issue is when something is sold with multiple deliverables. The guidance requires the transaction price to be allocated among the various performance components and revenue only to be recognized when each of the performance components are delivered and completed.

The impact: Warranties are exempt from the new revenue recognition rules, provided the warranty is not above and beyond industry norm (10-year warranty vs. a 3-year warranty).

However, revenue recognition for other add-on products could be affected. For example, free oil changes.



Effective in 2021 for private companies, new guidance on financial instruments applies to (1) loans, accounts receivable, trade receivables and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income and (4) beneficial interests in securitized financial assets.

The new guidance requires the allowance for credit losses be future looking rather than backward looking, covering all expected future losses in the current portfolio.

The impact: This new guidance primarily affects Buy Here-Pay Here dealers and finance companies, and will require detailed historical loss measures and sophisticated future predictive loss models.

You may use historical indicators like a static pool allowance but such estimates must be adjusted to account for changes in credit quality and other factors in the portfolio that can cause future losses to differ from current losses.



Effective for year end 2019 for private companies, this new guidance eliminates the accounting distinction between investments in equity securities that are trading investments and those that are available for sale investments.

Historically, trading investments were measured at fair market value with changes in the investments being recorded on the income statement. Available for sale securities were historically adjusted through equity (other comprehensive income).

The impact: Under the new guidance, all investments in equity securities will be recorded at fair market value with changes in their values recorded through the income statement.



For entities for which some doubt exists about the entity’s ability to continue for the foreseeable future (generally one year from the date of financial statement issuance), management is now required to evaluate whether there is substantial doubt.

This new guidance went into effect in 2016 for private companies.

The impact: When appropriate, management must disclose in the notes to the financial statements the conditions or events leading to substantial doubt as well as plans to mitigate the impact of those conditions or events.

Some of those rules are rather technical, and not every dealer will understand the effect they can have on their financials.

As a result, we encourage dealers to discuss the rules with their accountants, so when the rules become effective there are no surprises.


Steven Carstens is accounting and technology partner with SGC Accounting. He has an extensive knowledge of dealership software systems and GAAP accounting. He can be reached at