The Securities and Exchange Commission is extending some early relief on the adoption of the comprehensive new accounting standard on revenue recognition: companies electing full retrospective adoption will not be expected to restate five years worth of numbers under the new approach.
Shelley Luisi, a senior associate in the SEC’s Office of the Chief Accountant, said at a recent meeting the Financial Accounting Standards Advisory Council that the Division of Corporation Finance recently determined it will not hold retrospective adopters to a five-year presentation of restated revenue figures. “They will not object if the retrospective application only applies in selected financial data to the years that are included in the audited financial statements,” she said. “So any additional years included in selected financial data will not need to be retrospectively restated.” Disclosure, however will be paramount, she said, so investors understand the inconsistency.
The new standard on revenue recognition takes effect for calendar-year companies in 2017. If companies choose retrospective adoption, they will be required to present all three years of data in their financial statements as if the standard had been in effect from the beginning, so they will have to apply the new standard to their 2016 and 2015 results as well. Under SEC rules, the selected financial data required in SEC filings must provide five years worth of figures, all following the same basis of accounting. Luisi said the staff heard significant questions about whether companies adopting the standard retrospectively would be required to present all five years under the new standard. The staff gave it due consideration, she said, and determined “that’s a little unreasonable; they’ll accept three years.”
If companies elect the cumulative effect adoption method that is also permissible under the new accounting rules, the exception will not apply, Luisi said. Under the cumulative method, companies would not present periods earlier than the effective date under the new standard, but would provide disclosures to explain how they would have looked under the new standard. If companies choose choose the cumulative approach, “then we would expect that their five-year table will be consistent with their audited financials,” she said.
Luisi said the SEC staff is taking a more proactive approach than usual with the implementation of a new accounting standard. “We are trying to be helpful,” she said. Normally, “we assume practice will figure it out and bring us their questions.” SEC staff is observing the activity of the Transition Resource Group that was formed to work through implementation concerns, and is reviewing drafts of industry guidance being prepared by the American Institute of Certified Public Accountants. Plus, “we have reached out to the firms and talked to many of them about their process for implementing,” she said. “We’ve made offers and have been taken up on our offers to review draft firm guidance.”
The goal, she said, is to help identify implementation issues early to steer practice toward consistent interpretations. The staff also is considering whether the SEC should make any changes to its own regulations on revenue recognition or whether it might be necessary to rescind or revise any staff guidance on revenue recognition. “We expect our efforts in monitoring implementation as issues come to light will inform us on that,” she said.