Only weeks away from the ideal “go live” date for companies to implement a massive new rule on how to recognize revenue, accounting experts in the field say few are prepared to meet that target date.
The Financial Accounting Standards Board has said it is contemplating deferring the effective date for Accounting Standards Update No. 2014-09, which maps out an entirely new process that companies will be required to follow to determine when and in what amounts to recognize revenue. FASB Vice-Chairman James Kroeker says the board is performing field visits to assess readiness and any difficulties companies may be encountering. For public companies, which will be required to present three years worth of results in financial statements, the new rule takes effect for interim and annual periods beginning after Dec. 15, 2016.
Companies that elect a full retrospective adoption of the standard ideally would be prepared at the start of next year, or soon thereafter, to run parallel systems that would collect and prepare data under both standards, facilitating full presentation when companies are required to provide it beginning in 2017. “That would be the ideal scenario,” says Dee Mirando-Gould, senior technical director at MorganFranklin Consulting. “Maybe some very big companies are ready, but I would be willing to bet that not many are.”
Doug Reynolds, a partner at Grant Thornton, says he believes more companies will adopt the standard following a modified retrospective approach. That allows companies to present prior periods under existing accounting rules, but with plenty of disclosures and an adjustment to opening retained earnings to explain what the numbers would look like if they had been stated under the new rules. “I haven’t talked with any entity that has decided it’s going to do a full retrospective adoption,” he says. “I’m just not sure how many of those there will be in the end.”
Tony Sondhi, president of consulting firm A.C. Sondhi & Associates, which focuses on revenue recognition, says he has been performing polls on readiness to adopt the standard during monthly Webcasts to explain the new rules. He says his average attendance is around 350 per Webcast, and his latest poll in late October found 15 percent of participants said they had done some work on preparing for the new standard. “That tells me that implementation is lagging, which is why there are demands or requests for more time,” he says. “Large companies are probably very far along, but I don’t think a lot of companies have even put together their teams yet.”
“Those companies that advocated for change seem to be in a better state of readiness because this is something they not only favored, but also anticipated.”
Chris Wright, Managing Director, Protiviti
Prabhakar Kalavacherla, a partner with KPMG, says he is seeing several companies lately that are taking closer notice of the new standard and its effect on the full organization—“and they generally feel they need every minute they can get.” The accounting and disclosure requirements of the new standard are extensive and may affect systems, processes, IT offerings, internal controls, compensation, and plenty of other business areas. “So companies are getting their arms around the implications and taking action,” he says.
Tech Gearing Up
Chris Wright, managing director at Protiviti, says he sees preparation for the standard falling along industry lines. “Those companies that advocated for change seem to be in a better state of readiness because this is something they not only favored, but also anticipated,” he says. “In the technology community, there’s been a lot of activity, and many appear headed for retrospective application.” He sees many tech companies that have a plan for how to capture data under the new standard beginning with the new year so they will have it accessible to apply the new rules to it.
Other industry sectors, says Wright, are not as far along. He is seeing some pushback, he says, in sectors where companies took note that the change was coming, but didn’t advocate for it or prepare for it as intently, and are just now coming to grips with the effect. Companies in construction, or those that are involved in long-term contracting, he says, are starting to awaken to the significance of the change that lies ahead. “The extent to which this applies to them and is meaningful was perhaps unexpected,” he says.
Below KPMG offers companies some tips on identifying gaps in their current revenue policies and disclosures against the new standard.
After developing an understanding of the standard, the next step companies should take is analyzing their current revenue policies and disclosures so that those can be mapped against the new requirements. Once that is done, companies can identify the gaps. This analysis will identify the accounting policies that may need to change and the additional disclosures that will be required. Factors to consider during the gap analysis include:
• Arrangements with customers that are subject to transaction- or industry-specific revenue guidance that is being superseded;
• Revenue that is spread across multiple business lines or multiple geographies that could involve different implicit promises through differences in customary business practices
• Customer contracts with unique revenue recognition considerations or terms and conditions;
• The degree of variation in the nature and type of goods or services being offered;
• The degree to which contracts include multiple performance obligations, variable consideration, or licenses of intellectual property;
• The pattern in which revenue is recognized;
• The current accounting treatment of costs incurred to acquire or fulfill a contract with a customer;
• Whether centralized access to the population of customer contracts exists;
• Documentation about how existing policies apply to individual arrangements or revenue streams;
• Sales of non-financial assets (including in-substance non-financial assets) not part of an entity’s ordinary activities such as sales of intangible assets and property, plant, and equipment; and
•Additional disclosure requirements.
Among smaller and mid-sized companies, Mark Winiarski, senior manager at CBIZ and a member of Mayer Hoffman McCann’s professional standards group, says CFOs are just learning about the new standard. There’s some peril in taking such a slow approach to adoption, he says, even if companies aren’t gunning for a full retrospective adoption.
Kroeker indicated when he discussed the board’s consideration of a delay that he would not regard inaction or procrastination as a good reason for the board to give companies more time. Winiarski echoes that caution. “If they defer it, it’s because there’s something in the standard that needs additional clarification or additional guidance,” he says. “That means you need even more time than you thought you needed in the first place.”
The joint Transition Resource Group formed by FASB and the International Accounting Standards Board has met twice and cataloged more than two dozen implementation questions or concerns that have been brought to the group’s attention for consideration. The TRG is discerning whether to recommend that FASB or IASB take action on any of them. SEC Chief Accountant James Schnurr also remarked recently that SEC staff has identified as many as 250 potential issues that might arise during implementation, prompting consideration of whether any SEC action is warranted.
Adam Brown, a national director of accounting with BDO, says some of the implementation issues that are surfacing are industry-specific, so not necessarily equally applicable to all companies. The TRG has devoted a great deal of attention, for example, to questions that have surfaced over how to apply the new rules to licensing arrangements. “There are plenty of companies that don’t engage in intellectual property transactions, so they may not have as many questions as technology or entertainment companies might,” he says.
Wright and others cautioned companies against sitting back and waiting for regulators to act. “Notwithstanding the possibility of delay, companies should not take their eye off the ball or their foot off the gas on this,” he says. The new requirements are not going to go away. “Use any time you can get to become more ready rather than to delay your own activities.”