Companies at the leading edge of implementing the new revenue recognition standard are wrapping up their assessments, calculating the financial effect, and deciding how they will explain it to investors.
Johnson & Johnson, for example, took a great deal of time reviewing contracts to understand how the new five-step method required under the standard will change the timing or pattern of revenue recognition, said Steve Rivera, worldwide senior director, financial compliance and procedures group for the company. “The next leg of the journey is to figure out what the impact will be and how to reflect it in financial statements,” he said at Financial Executives Internationals’ recent conference on financial reporting issues.
Intel is at a similar stage, said Kevin McBride, vice president of finance and corporate controller. “We have a rough estimate of what we think the impact will be, but that has to go through senior management for review,” he said at the same conference. The company is in the process of performing mock closes following the new accounting to help determine the policies, procedures, and system changes that will be necessary to do the new accounting on a live basis.
Michael Cleary, vice president of accounting and financial reporting at Boeing, told a similar story to his fellow preparers. “We’ve gone through and looked at contracts, we’ve gotten auditors to sign off on the process, and now we’re starting the quantification phase,” he said.
At Boeing, the implementation team found the assessment phase to involve a lot of work, with their needs evolving as their understanding of the effect grew, said Cleary. “We started with a need for deep accounting policy people,” he said. “Then we got to a need for folks who understand the ins and outs of contracts, then system design. One of the things we learned is there were a lot of interdependencies.”
The latest survey data on implementation from PwC and Financial Executives Research Foundation suggests companies like J&J, Intel, and Boeing are in the minority in transitioning from assessing the effect of the new standard to considering implementation. Among public companies, that poll showed 75 percent of public companies say they are still studying the effect the new standard will have on their financial statements and accounting processes. Only 17 percent described themselves as being in the implementation phase.
“If you haven’t prioritized the implementation in an appropriate way or haven’t allocated the appropriate resources, that dialogue can be escalated to the board level. Get audit committee members engaged. That’s the expectation we’re reinforcing.”
Wes Bricker, Interim Chief Accountant, Securities and Exchange Commission
At the other end of the spectrum, 8 percent said they hadn’t yet started any effort to prepare for the new standard, which takes effect in 2018. Preparers and regulators at the FEI conference had some stern words of caution for those companies to consider the financial reporting risk of further delay.
“If you haven’t prioritized the implementation in an appropriate way or haven’t allocated the appropriate resources, that dialogue can be escalated to the board level,” said Wes Bricker, interim chief accountant at the Securities and Exchange Commission. Get audit committee members engaged, he said. “That’s the expectation we’re reinforcing.”
Companies like Boeing, Intel, and J&J have experienced significantly different journeys through the assessment and into the implementation phases at least in part because their businesses and their revenue recognition approaches under current rules are different. Under existing Generally Accepted Accounting Principles, companies follow different standards depending on the industry sector in which they operate. That goes away under the new standard, requiring one method that all companies will follow.
At J&J, for example, Rivera said the business model is not terribly complicated, so the change in how they will recognize revenue under the new standard also is not terribly complicated. “I’m not seeing a big change in systems in what I’m doing today, particularly when looking at the timing of revenue,” he said. “We’re not looking at revenue that will be split in different ways.”
Below is an excerpt from FASB’s Emerging Issues Task Force meeting on Sept. 22.
This announcement applies to Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
SAB Topic 11.M provides the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.
It won’t be that simple for Boeing, said Cleary. “There is a very significant impact for us,” he said. The company is developing a parallel system to track revenue under the new method because the change is so dramatic. “Today we recognize a lot of revenue when we deliver the product,” he said. “In the new system we’ll recognize revenue over time, so it’s pretty extensive for us.”
At Intel, the assessment and implementation effort is revealing just how much work needs to go into creating a new control environment for revenue recognition and getting buy-in from auditors, said McBride. The company is leaning toward a modified retrospective adoption method as permitted under the new standard, he said, so work is under way to convert the historic data that will be presented when the company adopts the new rules in 2018. The company found it important to keep auditors apprised throughout the process. “We’re not there yet, but when you go through conversion of the data, that data is subject to quality control so you can get auditors through it,” he said.
The SEC also signaled recently, as it did in late 2015, it will be looking for more detailed disclosures at this year-end based on an expectation that companies should have made some progress over the past year. The announcement applied even more broadly, in fact, to not just new rules for revenue recognition but also major accounting changes on the horizon for leases and financial instruments as well.
The announcement at a recent meeting of a Financial Accounting Standards Board task force said even if companies can’t provide hard numbers yet on what effect the new standards will have, the SEC will be looking for qualitative disclosures that at least characterize where the company stands.
“The SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies,” the staff says. “Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.”
Bricker emphasized at the FEI conference that the typical year-end disclosures of “we don’t know yet” won’t be enough this year. “You need to push further and provide qualitative information about the status of your,” he said. That might mean pointing to the expected effect, even if not explicitly stating it, or explaining expected accounting policy changes. “Now is the time to educate investors about the anticipated effect.”