PwC and the Financial Executives Research Foundation have offered some fresh evidence that companies don’t yet have their arms fully wrapped around a new standard for how to recognize revenue in financial statements.

In the survey of 174 companies, more than half public companies, 54 percent said they are familiar with the revenue recognition standard issued May by the Financial Accounting Standards Board and the International Accounting Standards Board to completely overhaul the method companies must follow to determine timing and amounts of revenue to recognize in financial statements. Only 29 percent of companies said they would be prepared to adopt the standard under the full retrospective method, generally the most transparent and comparable method, by its effective date in 2017, and 25 percent said they would not be prepared for such an adoption.

Only 12 percent indicated they had already settled on adopting under the full retrospective method, and only another 12 percent said they were confident they would follow a modified retrospective method, allows for cumulative adjustments rather than full statement of prior year figures under the new method. More than one-fourth of companies in the survey said they would be more likely to adopt under the full retrospective approach if they had an extra year to do so, yet 18 percent said having another year would not motivate them to take the more aggressive retrospective approach.

The survey also showed 77 percent of companies expect to make some significant changes to IT systems to adopt the standard, but few could estimate the costs the company would incur to adopt the standard. The result suggest companies still have a lot of work ahead of them to understand the standard and its implications for their accounting, controls, and business generally. “Companies do not know what the implementation journey fully looks like yet in terms of implementation processes, costs, timing, contract reviews, IT and systems, operations, quantification and reporting,” says Farhad Zaman, a partner at PwC. 

FASB Vice-Chairman James Kroeker said recently the board had begun an outreach effort to assess the extent to which companies will be prepared to adopt the new standard to determine whether a delay in the effective date might be warranted. In the PwC/FERF survey, companies that said they did not believe the effective date provided enough time for a full retrospective adoption provided some write-in reasons on where they see obstacles. Most said they would need to have processes, systems, and controls in place by 2015 to ensure accuracy of reporting, a deadline they are not prepared as the end of 2014 approaches to meet. “The feedback on the survey was mixed, so we can’t conclude from that to whether there should be a delay,” Zaman says.

Aside from the effective date, companies took note of other difficulties they expect to encounter in implementing the new standard, including applying the variable consideration constraint, determining the impact of contract modifications, determining whether items are “distinct” in multiple element arrangements, estimating the standalone selling price of performance obligations, and determining the impact of a new requirement for companies to consider collectibility in determining whether to recognize revenue.

“Many of these are areas that require more judgment and more estimation,” says Zaman. “Companies are going to need time in terms of how they think about processes and controls around making estimates and having a consistent estimation process. The implementation issues around those areas require more subjectivity, so they need to figure out the technical requirements and how to operationalize it to make it consistent.”

Through the FASB and IASB Joint Transition Resource Group, companies also have asked for some help understanding the new requirements around licensing arrangements. “The new model is quite a change from the current model,” says Chad Kokenge, a partner with PwC. “Companies are trying to analyze the literature and figure out where they are relative to that, based on their interpretation of their own fact patterns.”

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