Citing an “urgent” need for audit committees to get up to speed on how management teams are preparing for major new approaches to revenue recognition, the Center for Audit Quality has issued an eight-page paper to give audit committees some pointers.
The latest poll on the implementation effort around the seismic shift in revenue recognition accounting shows less than one-fifth of public companies have launched adoption activities after making their way through assessments of how they will be affected by the new standard. Three-fourths of companies said they were still assessing, and a handful indicated they hadn’t yet started any assessment or adoption efforts.
After more than a decade of developing a new approach for how all companies should recognize revenue in financial statements, the Financial Accounting Standards Board finalized the changes in mid-2014 and gave companies until 2017 to adopt the newly required methods. The board then extended the effective date to 2018 because it heard significant outcry that companies needed more time.
Now regulators and accounting profession leaders are growing alarmed that companies are not making progress at an adequate pace. Experts say even companies that expect to see little change in the numbers after applying the new methods face significant change in their accounting processes and procedures to arrive at those numbers, not to mention significant new disclosures.
“It is urgent that audit committees understand how management is assessing the impact of the new revenue recognition standard and forging a successful path to its implementation,” wrote the CAQ in its newest alert to audit committee members.
The alert is broken into four major areas. First, it explains what the revenue recognition standard is and how it changes a company’s process for arriving at revenue numbers. Then it gives audit committees some talking points in questioning management and auditors about how the new standard affects the company. The alert explains to audit committees how they can evaluate management’s plan to implement, and then it explains issues such as transition decisions companies need to make and disclosure requirements.
The Securities and Exchange Commission is making no apologies for its stern expectations that companies will begin informing investors as early as this year-end about the big changes that are in store. At a recent accounting conference, SEC Chief Accountant Wes Bricker said disclosures are expected even if companies don’t have hard data to report.
In fact, Bricker said, even companies that haven’t accomplished much yet will be expected to say something. “Preparers, their audit committees, and auditors should discuss the reasons why (implementation may be lagging) and provide informative disclosures to investors about the status so that investors can assess the implications,” he said.