If your accounting department is celebrating the extra year granted by the Financial Accounting Standards Board to adopt the new revenue recognition standard, experts observing implementation efforts suggest tempering that enthusiasm.
“Half of the extra year is already behind us,” says Chris Wright, managing director at Protiviti.
As widely expected, FASB decided on July 9 that companies need a year longer than originally provided to comply with the enormous new standard that changes when, how, and in what amounts companies will recognize revenue in financial statements. The original date (Jan. 1, 2017, for public companies) proved difficult to meet for many companies, FASB determined, given the enormity of the changes some companies will face. The new effective date: Jan. 1, 2018.
“Even FASB acknowledged they proposed the deferral to address concerns that continue to be evolving in various implementation groups,” says John McGaw, a partner with EY focused on the revenue recognition effort. Many companies are still trying to sort out what changes they will need to make to IT systems and internal controls, never mind the labor of implementing those changes.
“People doing the work recognize the accounting complexity in terms of interpretations is high,” McGaw says. “Once the business requirements are determined, the level of effort to implement across the organization will be very high as well.”
The one-year deferral will help, says Dusty Stallings, a partner with PwC, but perhaps not help as much as some might assume. “It’s not providing that much relief if you haven’t done much,” she says. “It’s critically important that companies don’t use the extra time unwisely.”
Stallings says she sees most companies have done at least something to get started, but “unfortunately some companies have done very little at this point.” That the clock is ticking has started to dawn on many, she says. “Most companies are finding they are more affected by the standard than they thought. Whether a little more or a lot more, the fact is that it’s more.”
Along with the one-year deferral, FASB also added a provision to allow companies to adopt the standard as of the original 2017 date. That gives companies another decision to make sooner rather than later, Wright says. All along, financial reporting departments have had to decide whether they will adopt the standard following a retrospective or modified retrospective approach; now they must also decide whether they will adopt early, he says.
“It’s one more thing for CFOs and accounting officers to talk about with their audit committees, boards, and auditors, who may have a view on whether they are ready to adopt,” he says.
“[The deferral] is not providing that much relief if you haven’t done much. It’s critically important that companies don’t use the extra time unwisely.”
Dusty Stallings, Partner, PwC
Steve Thompson, a partner at KPMG, says he doesn’t see many companies wrestling with the decision to early-adopt. “Most companies are extremely relieved with the one-year deferral,” he says. “I have not heard anyone speak up that they are relieved they could still adopt it early.”
Bryan Anderson, a partner with Deloitte, says FASB was “prudent” to delay the required date but allow early adoption. “They were cognizant of companies that had actually gone through a significant amount of effort and planned for it,” he says.
Early adopters might still include a fair number of companies that fall into one of two buckets, in Anderson’s view. “There are the ones that don’t have a significant amount of impact, and can do the adoption relatively painlessly and just want to get it behind them,” he says. “And there are others that have gone down a well-thought-out implementation path and for other organizational reasons, maybe a systems or IT change, it fits better for them to do the adoption along with whatever else is going on in the organization.”
Experts say far more companies are likely to take the extra year because they will need it to work through the accounting complexity and the ongoing implementation questions that are arising. The Transition Resource Group staffed by both FASB and the International Accounting Standards Board has logged more than 70 questions on various aspects of the new standard. The TRG met recently and plowed through nine of them, mostly involving consideration, variable consideration, performance obligations, control, credit card fees, and restocking fees.
WHAT TRG TALKED ABOUT
Below, the PwC highlights the Transition Resource Group’s discussion on revenue recognition.
TRG members discussed nine issues related to the new revenue standard:
Portfolio practical expedient and application of variable consideration constraint–determining whether an entity is applying the portfolio practical expedient when it considers evidence from other, similar contracts to account for variable consideration
Completed contracts at transition–how to apply the transition guidance to contracts that are considered “completed” at the date of initial application
Consideration payable to a customer–various issues related to applying the guidance on consideration payable to customers
Application of the series provision and allocation of variable consideration–how to apply the series guidance to various arrangements, including those that include variable fees
Practical expedient for measuring progress toward complete satisfaction of a performance obligation–how to apply the practical expedient for recognizing revenue equal to the amount an entity has a right to invoice its customers
Measuring progress when multiple goods or services are included in a single performance obligation–how to recognize revenue when a single performance obligation contains multiple goods or services
Determining when control of a commodity transfers–considerations for determining wehter control of commodity (for example, electricity, natural gas, oil) transfers to a customer at a point in time or over time
Credit card fees–determining whether credit card fees charged to a cardholder and cardholder reward programs are in the scope of the new revenue standard
Accounting for restocking fees and related costs–recognition of restocking fees and related costs for products expected to be returned
Additional background on these issues can be found by clicking on the links above.
The TRG did not, however, resolve questions around how to apply the modified retrospective transition method to contracts that are not complete as of the adoption date. If the contract is ongoing but the accounting rule is changing, should companies apply old Generally Accepted Accounting Principles, new GAAP, or some combination as of a transition date? “That’s one of the issues that will be discussed at the next meeting [in November],” says Doug Reynolds, a partner with Grant Thornton. “That’s one of the big issues that will be very important.”
FASB also is still moving toward final tweaks to the revenue recognition standard that address implementation questions around identifying performance obligations, licensing arrangements, and gross versus net recognition depending on the involvement of third parties. FASB has said it will finish those changes by the end of the year.
Thompson says FASB is likely to wrap up its guidance quickly so companies will be able to take it and continue with implementation plans. “We’ll just have to let the standard setting process play out,” he says.
As for issues being considered by the TRG, few are likely to be so broad-based that they will affect all companies in a pervasive way. “It’s an issue-by-issue, company-by-company analysis to understand whether something affects one company or not,” he says. “At some point, companies may need to put a stake in the sand and move on. They may not be able to wait for that TRG process to fully play out.”
Stallings says she’s encouraged that the TRG is not scheduling any further meetings past November unless pressing questions arise beyond those already discussed. “Hopefully, the biggest issues that had the most challenges have already been to the TRG,” she says. “We must be getting closer.”
Alex Wodka, a partner at Crowe Horwath, is not as quick to conclude that the end of implementation questions is in sight. Both the TRG and various working groups within the American Institute of Certified Public Accountants continue to discuss interpretation of the new standard. “Clearly there is still a flurry of activity,” he says. “We still have some ways to go, and in some respects the extension will help that process.”