As the fourth quarter approaches, accounting change management teams at many public companies are expected to break into a sprint in order to complete adopting new revenue recognition rules taking effect on Jan. 1.

“It’s going to be a mad dash,” says Angela Evans, a partner at EY. “There’s still a lot of work to be done.”

After a slow start, companies seem to be making progress, says Eric Knachel, a senior consultation partner at Deloitte & Touche, but he still sees indicators that there’s plenty more to do. Based on a recent Deloitte analysis of a sample of the latest Fortune 1000 disclosures, Knachel believes there is still a sizable number of public companies that aren’t yet certain how they will be affected by the standard.

Deloitte studied a random sample of 10 percent of Fortune 1000 companies that have not already adopted the new standard and found 90 of those 100 companies are still working on adoption. Of those, only a little more than half could say with hard data how they would be affected by the new standard. “That means roughly 50 percent of companies have not quantified the impact,” Knachel says.

Looking a little deeper into the data, Knachel believes companies will soon begin disclosing in increasing numbers that the new rules will have a material impact on their reported numbers. So far, however, he says that “a very large majority” of companies are disclosing the new rules will not have a material impact on the numbers they will report in financial statements.

“I suspect it’s a lot easier to determine the impact is not material and then to disclose that,” says Knachel. “If there’s a significant impact, it becomes a lot harder. So if you connect the dots, we’ll see more companies identifying in disclosures impacts that are something other than material in the coming months.”

In another recent poll at a Workiva users’ conference, an on-site survey representing more than 200 separate companies found that approximately 60 percent of respondents believed they are either finished with their implementation efforts, or are making adequate progress and are not concerned about any significant impact. The remainder were equally split in saying they were either early in the process or they were making good progress but expected a significant impact.

“It’s going to be a mad dash to the end zone. There’s still a lot of work to be done.”
Angela Evans, Partner, EY

While many companies have made considerable progress, Alex Wodka, a partner at Crowe Horwath, says he still sees a lot of companies that are still evaluating. Some, in fact, are already looking to what the handful of early adopters are disclosing in their financial statements this year.

Not many companies have elected to adopt the standard in 2017 as permitted by the Financial Accounting Standards Board when it pushed out the original 2017 effective date to 2018. But the handful that have done that might serve as the trend setters for how to arrive at the many judgments that are required in the new principles-based standard.

Companies typically like to see what others in their peer group are doing when it comes to trickier areas of accounting standards. It’s a little like students checking their work among classmates before turning it in for a grade. “To the extent there are existing disclosures on certain issues in the public domain, companies are stress testing whether they’ve got the right conclusions,” says Wodka. “They want to see what other companies have disclosed already.”

Larger companies are generally further along in their adoption efforts than smaller ones, says Philip Santarelli, partner emeritus at Baker Tilly Virchow Krause, an audit firm that serves more middle-market and smaller companies. “The bigger companies are probably in pretty good shape but when you get downstream to the thousands of nonaccelerated filers, they’re probably behind,” he says. “There are many, many, many small public companies that will have a hard time to comply.”

Santarelli is concerned about the fraud risk that might pose. Companies have been advised to assure they have strong internal controls around all of their new accounting processes and procedures, as weak controls during such a major transformation could be viewed by potential fraudsters as an opportunity to exploit.


Below is some advice for companies still struggling with revenue recognition implementation.Focus on compliance
Focus on compliance — At this point, never mind any earlier objectives the company may have had to revise its marketing or selling approaches or to make other business changes as a result of the new accounting approaches. Just do what’s necessary to assure the accounting processes and procedures necessary to comply with the new accounting will be up and running by Jan. 1 for calendar year companies.
Use manual workarounds — To the extent your IT systems simply won’t be ready to crunch the numbers according to the new accounting requirements, adapt your intended process with the manual workarounds necessary to get the job done. Be attentive, however, to strong internal controls, especially management review controls necessary to check the work.
Outsource — If you still need help, contact third-party resource providers to see what their availability is to help. Experts say their capacity is getting tighter, but many of them will still take your calls and find room for you in their schedules.
Sources: Eric Knachel, Deloitte; Sean Foley, PwC; Alex Wodka, Crowe Horwath

Controls at many companies will end up relying on manual procedures, says Shane Foley, a partner at PwC, where those companies have run out of time to implement fully automated solutions. Whether they’re using a bolt-on to an enterprise risk management solution or installing a new standalone system, “they may not have time to do that implementation between now and the deadline for compliance,” he says.

Foley calls it a “brute force” approach, relying on some combination of technology and manual procedures like spreadsheets or simple databases to achieve compliance by the effective date. “A lot of companies are thinking of this as more of an interim solution,” he says.

Knachel believes it’s “certainly possible” companies will see a spike in adverse findings with respect to internal controls. “The environment in terms of the magnitude of the change is ripe for internal control issues in general,” he says. “When you lay on top of that the workarounds, running out of time, the complexity, it certainly does increase the potential for internal control issues.”

That tends to put increased pressure on management to assure strong management review controls, Knachel says, an area of internal control that’s already been under strain the past few years. “In a manual process, the risk of things going wrong goes up,” he says. “If you have systematic controls that would otherwise be in place but are not quite there, management has to assume greater responsibility for oversight and review of controls.”

In addition to the accounting transformation and associated controls, companies also have a great deal of work to prepare for changes in tax accounting, says Evans. Changes in revenue recognition accounting will drive changes in companies’ deferred tax positions, she says, and that may mean changes in tax methods to conform with those accounting changes. That’s an entirely separate animal companies still need to tame heading into the new year, she says. “There’s still a lot of work to be done both on the accounting side of the house and the tax side.”

A number of companies are reaching out to third-party resource providers for help in finalizing their implementations, says Brad Hale, managing director at audit firm CBIZ MHM, although those firms are booking up. “I’ve been surprised by the number of companies that I’ve seen trying to go it alone,” he says. “I would have thought, with the complexity of this standard, nearly everybody would use some external resources.”

For companies that are still struggling, Hale says some third parties may still have limited capacity to help, and companies could reach out to industry groups or other similar peer resource groups for some assistance. “That may take a little of the pain away at the end of the year,” he says.

As companies are pursuing various workarounds or looking for third-party help, Knachel is telling companies their priority now should be to focus only on steps that are important to achieve compliance with the new accounting at the start of the new reporting year. Early on, he and others suggested companies could use the implementation as an opportunity to review other aspects of the business where they might want to consider changes, perhaps in IT or in the way they go to market or manage revenue streams.

“Many are saying now, let’s just focus on compliance,” says Knachel. “Let’s do the minimum required and focus on other changes later. Hopefully they will, or it’s a missed opportunity, but right now compliance is the priority.”