New revenue recognition rules prompt wide variety of adoption strategies

Like the proverbial elephant in the room, that massive new accounting standard on revenue recognition is still waiting to be reckoned with at most public companies.

Calendar-year companies still aren’t saying much in their year-end filings about what effect they expect with the adoption of the new accounting requirements with the beginning of the 2018 reporting year. Companies are required under Staff Accounting Bulletin No. 74 from the Securities and Exchange Commission to disclose the expected effect of new accounting standards they are required to adopt in future reporting periods. SEC staff members have said they expect increasingly detailed disclosures as companies move along the revenue recognition adoption curve.

“The disclosures are still pretty vague,” says Lisa Delfini, a partner with audit firm Marcum. “I think companies are moving along, but there’s still a long way to go as evidenced by the fact that SAB 74 disclosures are still not giving a whole lot of detail.”

Defense company Raytheon, for example, regarded as one of the pioneers in moving forward with preparing for the new standard, provides only a few sentences in its 2015 10-K filing on the expected effect, saying it expects to continue using the cost-to-cost percentage-of-completion method to recognize revenue for most of its long-term contracts. The company says it has not yet determined if it will adopt the standard on a full retrospective basis, meaning adjusting all periods presented in financial statements as if the standard had always been in effect, or if it will use the modified method permitted in the standard, which relies on cumulative adjustments to present historic periods. The disclosure says the company is evaluating the potential changes from the new accounting standard to future financial reporting and disclosures.

Companies like Time Warner Cable and eBay say less. “We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements,” eBay says in its latest 10-K. Time Warner discloses: “The company is currently assessing the impact of this guidance on its consolidated financial statements.”

It could be that companies have been too resource-constrained to make much progress the past several months with the year-end close followed closely by quarterly results, says Erik Bradbury, professional accounting fellow at Financial Executives International. “We’re hearing controllership functions in general are experiencing a lot of cost pressure,” he says.

“The disclosures are still pretty vague. I think companies are moving along, but there’s still a long way to go as evidenced by the fact that SAB 74 disclosures are still not giving a whole lot of detail.”

Lisa Delfini, Partner, Marcum

The FEI also has heard many companies say they were waiting for the Financial Accounting Standards Board to finish amending the standard with clarifications. “Some suggested until things really finally settled, they were not able to set systems in place,” says Bradbury.

FASB has issued three amendments to the standard so far—one to defer the effective date to 2018 from its original requirement of 2017, and two others to answer questions on principal versus agent considerations, identifying performance obligations, and licensing. A final amendment is expected soon that will provide some narrow-scope improvements and practical expedients.

INDUSTRY TASK FORCES

The AICPA has formed sixteen industry task forces to help develop a new Accounting Guide on Revenue Recognition that will provide illustrative examples for how to apply the new Revenue Recognition Standard. The industries involved with this project are:
Aerospace and Defenses
Airlines
Asset Management
Broker-Dealers
Construction Contractors
Depository Institutions
Gaming
Healthcare
Hospitality
Oil and Gas
Power and Utility
Software
Telecommunications
Timeshare
Based on the work of the industry task forces and review of the AICPA’s Revenue Recognition Working Group, the AICPA’s Financial Reporting Executive Committee (FinREC) has issued several working drafts of accounting issues related to the implementation of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and is requesting your feedback.
* Available working drafts discuss helpful considerations for entities implementing ASU 2014-09.
Source: AICPA

“It seems like we are at a point where FASB has wrapped up the major amendments it was planning,” says Steve Thompson, a partner with KPMG. But that doesn’t mean companies should assume the guidance puts all uncertainty to rest. “We continue to run across areas that will require significant interpretation. I’m seeing companies starting to realize there are not always going to be easy answers to questions.”

Eric Knachel, a partner with Deloitte & Touche, says he sees continued uncertainty in a few specific areas. One focuses on the extent to which companies should separate performance obligations in a contract, one of the subjects addressed in a recent FASB amendment to the original standard. “The guidance on customization and interdependency is proving to be very difficult,” he says. “The clarifications in the amendment are helpful, but it doesn’t address all the implementation questions that arise when you try to apply the guidance to a specific fact pattern.”

Some companies are puzzled by how to account for certain costs associated with fulfilling certain contracts. “Costs have generally been just a bit off the radar screen, so it’s going to be a sleeper issue,” says Knachel. “People will only get to the costs after they feel like they’ve wrestled with the revenue issues further.”

Companies are still deciding how to evaluate and account for restrictions on the use of licenses, Knachel says. That’s also the focus of a recent FASB amendment to the standard, but industry task forces at the American Institute of Certified Public Accountants continue to field and vet questions on licensing issues as well.

Some companies also are working through gray areas on how to determine when a contract provides a customer with a material right, says Knachel, a topic discussed recently by FASB’s Transition Resource Group without a clear conclusion. FASB staff plans to perform more outreach to help arrive at some consensus there.

Amid continued uncertainty on some specific areas, it’s not surprising companies aren’t disclosing more specific detail about their adoption plans, says Alex Wodka, a partner with Crowe Horwath. “Given the dynamics that companies need to work through, it’s a fair assessment,” he says. “This standard has a tremendous amount of judgment. It’s a matter ultimately of applying all that judgment.”

Brad Hale, a shareholder at audit firm Mayer Hoffman McCann, says he senses companies are starting to feel a need to make more progress. “I have seen a shift of people starting to talk about it more and starting to want to take action,” he says. “I do think companies are starting to feel a little more nudged to move in that direction.”

Thompson says he sees plenty of companies still working their way through an assessment of how they will be affected by the standard. “I think most companies would acknowledge that they’re behind where they’d like to be,” he says. “It’s a little unclear what the implication of that is going to be.”

At a recent regional accounting conference, EY partner Alison Spivey said companies need to get moving, especially now that it appears FASB will not be making any further changes to the standard. “If that were to happen, we would never be done, and we all need to be done,” she said. “We all just need to get along with implementing the standard. I do think there’s a state of urgency here.”