Maybe it’s a collective sense of grieving that is keeping so many companies on the sidelines as finance professionals brace for one of the biggest accounting process changes ever seen in modern business. We’re talking revenue recognition, of course. It’s a seismic shift that will occur in 2018 when public companies begin reporting for the first time following a huge new standard on how to report revenue in financial statements.
At a recent national conference of the American Institute of Certified Public Accountants, where revenue recognition leaders wrung their hands over the state of unreadiness at most companies, an onsite poll revealed results similar to those taken in other broader polls. Only 15 percent of companies are actively adopting the new standard, putting controls and processes in place to recognize revenue following the pervasive new method when it takes effect in 2018. Another 38 percent had completed their initial assessments of how they will be affected by the new standard and were deciding what to do next.
That left 37 percent who said they were just getting started with assessments or were still getting familiar with the new standard, which was published in 2014 by the Financial Accounting Standards Board and has been the subject of copious professional examination and inquiry ever since. FASB and the International Accounting Standards Board convened a Transition Resource Group that has pored over dozens of questions. FASB has taken on a handful of those issues with new standards to clarify the original intent of the standard. And more than a dozen AICPA industry-specific task forces continue to work through questions of their own to prepare even more written guidance.
“Anger, denial, bargaining, depression, acceptance. There’s no rushing of the phases. We might be accounting geniuses, but the client has to come to an answer on their own terms.”
Brian Allen, Partner, KPMG
And then there was the most disturbing 10 percent at the bottom of the poll results who said—despite the enormity of the change ahead and the significant attention it is getting from regulators and leaders in the profession—they hadn’t yet done a thing to prepare for it.
Maybe companies are in a kind of grieving process, said Brian Allen, a partner at KPMG who participated in a panel discussion at the conference. “Anger, denial, bargaining, depression, acceptance,” he said. “There’s no rushing of the phases. We might be accounting geniuses, but the client has to come to an answer on their own terms.”
Perhaps that lingering 10 percent who haven’t yet lifted a pencil are still in anger and denial that they need to assemble a cross-functional team, examine a cross-section of contracts with customers, and line it up against the new five-step method for how to recognize revenue based on how they do business. Perhaps they don’t like the fact that, even if the outcome for financial statements might be the same, they likely face significant new processes and procedures to arrive at the numbers, and they likely face a mountain of new disclosures to explain their revenue streams to investors.
Maybe that 38 percent who have done their assessments but are still deciding what to do next are in the bargaining or depression stage of grief. Perhaps they’ve figured out how they are affected but are paralyzed by the amount of work that lies ahead to transition to a new method. Maybe they’re working with auditors to be sure everyone is on the same page before moving forward.
Below is an excerpt from the AICPA’s revenue recognition primer for audit committees.
The revenue recognition standard eliminates the transaction- and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition.
The core principle of the revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services.
To apply the revenue recognition standard, an entity should take the following steps:
Identify the contract(s) with a customer.
Identify the separate performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the separate performance obligations
Recognize the revenue when (or as) the entity satisfies a performance obligation.
Revenue would be recognized when a company satisfies a performance obligation by transferring a promised good or service to a customer, which is when the customer obtains control of that good or service.
Public entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter (which equates to January 1, 2017, for public entities with a December 31 year-end). Early adoption is not permitted.
Non-public entities are requiredto apply the revenue recognition standard for annual reporting periods beginning on or after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018.
Non-public entities may elect to apply the requirements of the revenue standard earlier as of the following annual reporting periods:
An annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period (public entity effective date)
An annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning after December 15, 2017
An annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period
The revenue recognition standard should be applied retrospectively, and an entity can also use any combination of the optional practical expedients as discussed in the standard. An entity may also elect an alternative transition and recognize a cumulative adjustment to the opening balance of retained earnings for the year of adoption only for contracts open and uncompleted on the date of adoption.
The years that contracts will need to be restated and the date of the cumulative effect adjustment are dictated by how an entity chooses to apply either full retrospective adoption of the revenue recognition standard or a combination of the allowable practical expedients. If a public entity chooses full retrospective adoption, all contracts must be restated for 2015 and 2016 to show comparative financial statements with a cumulative adjustment as of January 1, 2015.
That’s what Allen and plenty of other experts are suggesting—and they’re warning that it takes time, so companies need to give plenty of runway for those consultations to occur. “This is no different than resolving any other accounting issue with an auditor except that this is very pervasive,” said Allen. “If you come to my firm or another firm and say I need this backed in full faith and credit, there’s a process.” That would even include audit procedures performed on the facts presented before the firm would provide a conclusion.
“If you want that level of assurance from a Big 4 firm, we’re going to be writing memos, and it’s going to be a rigorous, thoughtful process.” Firms might even consult with one another to assure they share similar views on similar fact patterns, and they might even suggest companies take uncertainties to FASB or the Securities and Exchange Commission for pre-clearance, he said. “We have sufficient time if you start today, but you’d better get rolling,” he said. “Respect the process.”
Polling results of late suggest only a handful of corporate folks have moved through all those grieving stages to arrive at a sense of acceptance. Lara Long, vice president of corporate accounting and reporting at farm equipment maker AGCO Corp., apparently is one of them.
The company started its preparations to adopt the new standard in the fall of 2014, she said, hardly allowing the ink on the new rules to dry. “We’re a very lean finance organization, like most manufacturing environments, so our first concern was we needed human capital,” she said at the conference. The company kicked off its first phase by training 150 finance, tax, and legal staff around the world in a three-hour session to explain the new standard.
The company set up a “robust” communications process and began a legal examination of its contracts to understand how they are written, where some vary from standard contracts, and what the implications might be for adopting the new standard. “We documented the review of contracts so we could show our auditors what we’d done in this review,” Long said.
AGCO also participated in a commercial industry group that convened and met informally to share interpretations, adoption plans, system readiness, and challenges, she said. “We’ve had some very candid, transparent conversations,” she said. “We’re not divulging trade secrets, but it’s definitely been a great sounding board to discuss the challenges. You don’t want to be an outlier in your industry.”
Josh Paul, director in technical accounting at Alphabet Inc., said he reflects on the work done so far to prepare for implementation and sees how important documentation has been. The company had a clear governance process and executive sponsorship with involvement from finance, IT, investor relations, tax, and plenty of other areas.
The company formed working groups and kept minutes of meetings, documenting not only views they’d adopted but also views they’d considered and rejected. White papers became an important way to assemble it all and articulate plans, giving management a way to understand and assess the controls. “All of that lines up and provides a clear picture of a robust implementation control framework,” said Paul.
AICPA industry working groups are developing a comprehensive guide that will be updated periodically, said Jim Dolinar, chair of the AICPA’s Financial Reporting Executive Committee that is overseeing the effort. It will not result in any guidance that will vary from or change the rules, he said. FASB has no further plans to make any additional clarifications to the revenue standard, but the TRG continues to accept questions and will reconvene as necessary.