With the largest companies winding down their first year of reporting under the new revenue recognition standard, evidence of the learning curve and challenges with comparability are abundant.

“Everybody’s learning,” says Chris Bolash, a partner at EY. Preparers, regulators, auditors, analysts, and investors alike are adapting to the new rules, determining how best to make sense of shifts in important financial statement metrics. “Disclosures will continue to evolve,” he says.

A recent analysis by Audit Analytics of fourth-quarter data of S&P 500 companies shows that big changes in how to compute the top-line number in financial statements produced big changes in reported figures for some companies, but not so much at others. Of the 500 companies, 451 had fully adopted the new rules and 28 were substantially complete. The remainder, who may have fiscal years that do not coincide with the calendar-year-end effective date, said they were still evaluating the new accounting or did not provide disclosure.

The Audit Analytics report illustrates the potential difficulty with comparability as companies navigate this seismic shift in reporting. Companies chose different adoption methods, faced different effective dates, and reported different effects on key metrics. That makes it tough to compare one year-end to another, one quarter to another, or one company to another.

Accounting Standards Codification Topic 606 on revenue recognition requires companies to follow a new, five-step method for determining when and in what amounts to recognize revenue in financial statements. The standard did away with more than 200 historic accounting pronouncements that accumulated over time, which produced a number of industry-specific differences in how to recognize revenue.

The new requirements for revenue recognition, which took effect for calendar-year companies on Jan. 1, 2018, are intended to assure all companies follow the same method. The idea was to promote comparability.

“Everybody’s learning. Disclosures will continue to evolve.”

Chris Bolash, Partner, EY

Yet through transition, comparability is the challenge. That’s because companies are coming from vastly different places in how they recognized revenue historically to arrive at the same place for how to recognize revenue going forward.

The changes were expected to be most significant for companies that sell products or services over extended periods of time. The rules would accelerate the pattern of recognition for some companies, perhaps slow it for others.

Further exacerbating comparability, some companies adopted the standard using the full retrospective approach, restating all years presented in financial statements as if the standard had always been in effect. Others elected the modified retrospective approach permitted under ASC 606, restating only the most recent year and relying on disclosures to bridge the gap to earlier years.

If the S&P 500 are any indication, most companies chose the modified method. Audit Analytics says 409 of those companies elected that route, while 74 chose the full retrospective approach.

Of those that chose the modified approach, 150 companies said the new standard affected their reported revenue through the first nine months, with an average impact of $49 million. A little more than 200 said the standard affected their retained earnings, with the average effect falling at $71.3 million. Nearly 100 reported an effect on income by an average of $26.1 million.

Among those that chose the full retrospective approach, 53 said they felt an impact on earnings, the average landing at $280.4 million. A total of 50 companies said the adoption of ASC 606 affected retained earnings by an average of $149.6 million, and 46 reported an average effect to income of $23.9 million. “The magnitude of the impact varied significantly between the companies and, in some cases, the direction of the change is not easy to determine,” Audit Analytics reported.

When the analysis breaks down the results by industry, it becomes more apparent how the new standard upended years of industry-specific accounting practices. Communications companies reported a huge slowdown in the timing of revenue recognition, with an aggregate $2.68 billion less revenue reported across 19 companies in the S&P 500.

Revenue timing also changed significantly for companies in healthcare, industrial, materials, and technology, although the aggregate effect for those sectors was the reporting of more revenue rather than less under the new standard. Of the 50 companies in healthcare, 20 reported the new standard had an effect on their revenue by an aggregate $2.61 billion.

Indeed, perhaps not surprisingly, revenue timing is the most significant accounting effect reported among the S&P 500, although only 184 of the companies reported material changes to the timing of revenue under the new rules. Generally, most of those companies are able to recognize revenue sooner under the new standard, which aligns with an overall positive impact on net income, the analysis says.

Given differences in adoption approaches, not to mention differences in companies themselves, the varying effects of the standard are not surprising, says Bolash. It will take time for investors and analysts to digest the differences and for companies to normalize them. “I’ve seen some very good efforts by management to reach out to investors and engage with them on what this means,” he says.

The Securities and Exchange Commission is also looking closely at what companies have reported in the first several quarters leading up to their first annual disclosures under the new standard. A PwC analysis of comment letters says the SEC staff is honing in on the areas of the standard where companies had to exercise some new judgments, which is an area of significant change compared with historic rules.

The staff also appears to be looking closely at companies that said the standard did not have a material effect on their financial statements. PwC notes more than half of companies receiving comment letters in the earliest days of adoption made that assertion. “We expect that disclosures related to the new revenue standard will continue to evolve as best practices emerge,” PwC says.

Bolash is expecting companies to continue to improve and refine their processes as well. “There’s going to be a lot of evolution,” he says. “We will eventually settle into a new normal with respect to revenue recognition disclosures.”