The good news: Companies are almost certain to win an extra year to implement the massive new revenue recognition accounting standard. The bad news: You’re going to need every bit of it.
The Financial Accounting Standards Board is proposing to extend for one year the effective date of the new accounting standard, which establishes a new way to determine when and how to recognize revenue in financial statements. The U.S. Generally Accepted Accounting Principles standard, issued last year in tandem with a new rule for International Financial Reporting Standards, is slated to take effect Jan. 1, 2017.
At least, it was. Now, after extensive outreach to assess corporate readiness to meet the new requirements, FASB is considering deferring that effective date to Jan. 1, 2018, while also allowing companies ready to meet the 2017 date to do so if they wish. The board will consider public input before making a final decision later this spring.
Accounting experts say companies would be wise to use that extra year to keep working through an adoption plan rather than deferring preparations. “The deferral is telling companies, ‘Don’t delay in assessing the impact across the organization and executing an adoption roadmap,’ ” says Amy Hover, managing director at consulting firm MorganFranklin. “Don’t take your foot off the gas.”
With a one-year extension on a standard that came out almost one year ago, it’s as if the countdown clock has been reset, says Dusty Stallings, a partner with PwC. “Even with the deferral, you’re pretty much in the same position as you were last year when the standard came out,” she says. “So there’s still not a lot of time that can afford to be wasted. This is not a good time to just stop and continue waiting.”
Waiting might sound tempting to some companies not only because of the likelihood of a deferral, but also because of other uncertainties that still loom over adoption efforts. For one, FASB is still weighing changes to the standard based on issues vetted by FASB’s and the International Accounting Standards Board’s Joint Transition Resource Group, says Lynne Triplett, a partner with Grant Thornton.
The board is working on clarifications or revisions to the existing standard for licensing of intellectual property, identifying performance obligations, shipping costs, and other issues. “Some companies might be reluctant to just assume FASB is going to go forward as portrayed,” Triplett says. “Nothing is final until it’s final.”
“View it as a sign that the implementation effort might take more time rather than as a sign that you can stop or halt efforts that are already under way.”
Ken Gee, National Assurance Partner, BDO USA
Availability of software solutions that facilitate compliance with the new standard is another issue, says Mark Grover, senior managing director at FTI Consulting. Major vendors like Oracle and SAP are just starting to release their solutions and will likely need to provide updates as aspects of the standard are eventually finished. “That’s a big challenge,” he says. “There’s not much you can do, except do everything else you can around your implementation effort and just wait until the software is available.”
And there’s plenty still to be done, even with some guidance pending and software solutions evolving, the experts say. “This gives companies a chance really to sit down and get it right,” says Joel Osnoss, a partner with Deloitte & Touche. “Under the previous scenario, it was quite a challenge.”
Global companies in particular should continue with implementation since so far IASB is not entertaining any discussion of delaying the effective date, Osnoss says. “For companies with foreign operations, they’re still going to have to adopt on 1/1/17.”
Getting Ahead of It
At a minimum, companies by now should have already assessed how the new standard will affect their revenue numbers and should understand how it will affect the income statement, Osnoss says. “They should already be thinking about: What are the new data elements that we are going to have to bring in from overseas or from subsidiaries?” he says. “What information do we need to gather for disclosure?” Answers to those questions will form the basis for determining what processes and systems are needed to comply.
Below, FASB explains when the new standard on revenue recognition will become effective.
On April 1, 2015, FASB voted to propose to defer the effective date of the new revenue recognition standard by one year.
Based on the board’s proposed decision, public organizations* would apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2017. Non-public organizations would apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2018.
Public organizations would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after Dec. 15, 2017 (that is, a public organization would be required to apply the new revenue standard beginning in the first interim period within the year of adoption). Non-public organizations would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after Dec. 15, 2019 (that is, a non-public organization would not be required to apply the new revenue standard in interim periods within the year of adoption).
Additionally, the board decided to permit both public and non-public organizations to adopt the new revenue standard early, but not before the original public organization effective date (that is, annual periods beginning after Dec. 15, 2016). A public organization would apply the new revenue standard to all interim reporting periods within the year of adoption. A non-public organization would not be required to apply the new revenue standard in interim periods within the year of adoption.
FASB plans to expose its decisions for a thirty-day public comment period in a proposed Accounting Standards Update, which is expected to be issued sometime during the second quarter of 2015.
*A public organization is an organization that is any one of the following:
A public business organization
A not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
An employee benefit plan that files or furnishes financial statements to the U.S. Securities and Exchange Commission.
Stephen Thompson, KPMG’s lead partner on preparing for the new revenue standard, says even with any uncertainties around pending guidance or software solutions, companies can do plenty to move forward. On FASB’s initiatives to revise its guidance, “Most of the standard is fully baked and has stopped moving,” he says. And FASB has indicated enough about its intended direction on pending guidance that companies can see where it is headed.
As to software availability, Thompson says: “Clearly there is a big piece of work to be done before a company says it’s going to implement a system. I’ve not seen a lot of companies—even those that are actively moving along—that have gotten to a point where they have completely defined the business requirements of a new system. That’s the process companies need to continue to push forward on.”
The level of readiness for the new standard varies dramatically, experts say, largely related to how large or small a company is, how well-resourced its accounting function is, and how significantly the new standard will affect the company’s revenue recognition. “Many of the largest, well-staffed companies who have experience with contracts and have well-established procedures to get information they need are in pretty good shape,” says Joe Howell, executive vice president at outsource data services provider Workiva. “Many of the smaller companies, with difficulty getting sufficient staff time or whose time is consumed with a lot of manual efforts to gather information—they’re struggling. It’s very uneven.”
Scott Lehman, a partner at Crowe Horwath, says the effort for smaller companies may be more straightforward. “If I’m a small company and the number of contracts we enter into are limited, I may have only a handful of large contracts,” he says. “That’s certainly different than a big company that could have a million or even hundreds of thousands of contracts.”
Ken Gee, a national assurance partner at BDO USA, says that regardless of size, companies would be wise to keep moving. “View it as a sign that the implementation effort might take more time rather than as a sign that you can stop or halt efforts that are already under way,” he says.