Corporate finance departments are playing the silent type right now about how they plan to implement the new revenue recognition standard—which is not quite the amount of disclosure the Securities and Exchange Commission and others were hoping to see.
Granted, accounting leaders close to Corporate America’s revenue recognition adoption efforts do have different expectations about how much companies can, or should, say in their 2015 Form 10-Ks to comply with SEC disclosure requirements. But for an implementation project of this size (and for many businesses, the project could be huge) the 2018 implementation deadline is coming up fast.
The SEC’s historical Staff Accounting Bulletin No. 74, now codified under Topic 11M, does require companies to disclose in their financial statements the expected effect of accounting standards that will be adopted in a future reporting period. “From a SAB 74 standpoint, companies need to disclose where they are at in the process,” says Joe Talley, an assurance partner with Deloitte. “If you’re at a point where you can quantify the impact, you should disclose what that impact will be. If you aren’t able to quantify it, you should communicate what you do know at the time you file the 10-K.”
What’s more, SEC Chief Accountant Jim Schnurr recently told a conference of audit committee members that he and his staff will be very interested to see what those 2015 year-end disclosures contain. The Financial Accounting Standards Board and the International Accounting Standards Board adopted the standard in May 2014, then deferred the effective date to 2018 to give companies an extra year to implement it.
Schnurr reminded audit committee members that it is their duty to develop appropriate disclosures to tell investors what effect the new standard will have when it is adopted. “We expect the level of these disclosures to increase between now and adoption, and are looking forward to understanding more about the impacts during our review of the 2015 financial statements,” he said.
Alas, Schnurr and his staff may be disappointed. Recent survey data from PwC and Financial Executives Research Foundation suggests public companies have not done a great deal in 2015 to advance their implementation efforts. Half of companies said they had started their impact assessment but not completed it, and more than one-fourth had not even begun the assessment. Only 20 percent said they had completed their impact assessment.
“That is consistent with our own observations and the results of our webinar polling,” says Chris Wright, managing director at consulting firm Protiviti. “It does concern us. The delay has been granted, and we’re now nine months into that extra year. Companies are putting themselves at risk of oversimplifying this.” Protiviti’s webinar polling even shows through mid-2015 that many folks had not yet read the new standard.
“It’s still a bit early at this stage. I don’t think companies are there yet in their processes. I’m sure the SEC will be interested to see what they get, but I’m not sure they know what to expect.”
Amy Hover, Managing Director, MorganFranklin
In the short term, all this raises questions about exactly what more companies will say at the end of 2015 about their adoption plans than they said at the end of 2014, and whether their disclosures will increase, as Schnurr says he expects. Some are expecting disclosures to say little more this year than last. Some are urging companies to say what they can at least qualitatively, even if they can’t give hard data.
Talley says many companies will say they haven’t begun their assessment or they won’t be in a position to quantify the expected effect. “That could very well be most companies,” he says. That shouldn’t stop companies from disclosing whatever they can even at a high level, however. “Even if you haven’t quantified it, you may have some qualitative factors that you’re aware of at this point.”
Companies may know, for example, that they will have more or fewer performance obligations to identify under the new standard, or they may know that they will accelerate the recognition of revenue. “If companies are far enough along that they are going to anticipate that, it would be helpful to readers of financial statements to understand where they are in the process,” Talley says.
Dusty Stallings, a partner with PwC, says companies should know the SEC will expect to see more granularity in their disclosures, especially into 2016. “A lot of companies may need to say, ‘We’re still assessing,’ but do you think you will have more volatility?” she says. “Will you have earlier or later recognition of revenue? That’s something directionally investors will be looking to hear.”
IMPACT ASSESSMENT STATUS
Below, results of a PwC and Financial Executives Research Foundation survey show how prepared companies are for the revenue recognition standard.
Many companies do not yet have a complete understanding of how the standard will affect their organizations.
We asked survey participants the level of preparedness for adopting the new standard their companies have achieved. A majority (75%) of respondents have not yet completed their initial impact assessment, and almost 27% of respondents have not begun an assessment. An initial assessment enables an organization to determine the required timeline, costs, and resources needed, if any. Without having completed an assessment, companies may not have enough information to understand what the impact of the change may be. Only 5% of respondents have started to implement systems, process and controls changes, despite the fact that public companies planning to utilize the full retrospective method of adopting the standard will need 2016 information.
Sources: PwC; FERF.
Diana Gilbert, a senior consultant at RoseRyan, says her clients are reluctant to move forward while FASB and IASB still discuss possible changes to the standard (which they are). “How can they put a stake in the ground when the rules are changing?” she says. “They feel like it’s a moving target.”
In one particular case, Gilbert says, she knows of a company that would see a material difference in financial statements based on a proposed change to the standard. “It’s night and day in terms of what it does to them,” she says. “We have an idea of where we think it will go, but until it’s done we don’t know for sure.”
Amy Hover, managing director at consulting firm MorganFranklin, says she believes it’s too early to expect any meaningful progress in disclosures. “The disclosures at the end of 2015 will still be very high level,” she says. “It’s still a bit early at this stage. I don’t think companies are there yet in their processes. I’m sure the SEC will be interested to see what they get, but I’m not sure they know what to expect.”
Stallings says she is most troubled by the survey data that suggests many companies have not started to assess how they will be affected by the standard, while also saying many companies believe the standard will not have a significant effect on them. “If you haven’t started, you can’t validate that belief that you won’t be significantly affected,” she says.
Lorraine Malonza, director of accounting policy and financial research at Financial Executives International, is disturbed by the state of readiness and curious about year-end disclosures as well. “The SEC normally looks as companies start assessing the impact to get more robust disclosures,” she says. “To get there, you have to be further along with the assessment.” For those who don’t expect a material impact, “you have to do the work to really appreciate if you won’t have a material impact to financial statements.”