The Financial Accounting Standards Board’s goal of implementing its new, principles-based standard for revenue recognition by 2017 is starting to collide with business and regulatory reality, as different parts of Corporate America grow more vocal about their ability—or lack thereof—to manage the task.
The implementation of the massive new standard has become a wait-and-see exercise for many companies as FASB considers whether to provide more guidance on some key aspects of the requirements, and possibly delay the effective date.
“A lot of companies are struggling and trying to correlate the messaging around a potential deferral and potential changes to the standard,” says Bryan Anderson, a partner with Deloitte. “This is tough anyway, and now there is this pause. It’s one more moving part in a rather complex issue.”
The Joint Transition Resource Group that is fielding implementation questions on behalf of FASB and the International Accounting Standards Board has cataloged 40 separate issues so far that warrant discussion. The American Institute of Certified Public Accountants also has 16 different industry-focused task forces exploring dozens of issues as well, some of which the groups have referred to the TRG.
That process has bubbled up three significant aspects of the standard where FASB has instructed its staff to perform additional research to determine if additional guidance is warranted.
For example, FASB is taking a look at questions around licenses to determine whether companies need more guidance to address uncertainties about how to comply with the requirements. The questions are particularly important for companies that deal heavily with intellectual property: software, research, and entertainment, to name a few.
Staff members also are exploring concerns around how to identify performance obligations in arrangements with potentially multiple obligations bundled into a single contract and how to determine if a company is recognizing revenue as a principal in a contract or as an agent of someone else, which affects whether to recognize revenue on a gross or net basis. FASB also is considering practical expedients in some granular aspects of the standard.
“A lot of companies are struggling and trying to correlate the messaging around a potential deferral and potential changes to the standard. This is tough anyway, and now there is this pause. It’s one more moving part in a rather complex issue.”
Bryan Anderson, Partner, Deloitte & Touche
With all of those questions swirling, FASB also is performing research and outreach to determine if companies need more time to implement the new standard, which takes effect in 2017. Given the financial statement requirement to present three years of comparative data under the new revenue recognition rules, a 2017 effective date means companies need to be gathering information and preparing comparative data with the opening of their 2015 reporting year.
“It’s fair to say there is quite a bit of uncertainty that the boards are dealing with, but there are also parts of the model that are not subject to the same uncertainty,” says Dusty Stallings, a partner with PwC. “All of the model is not moving. There are levels of activity that can be undertaken. We are encouraging people to go ahead and get started.”
Prabhakar Kalavacherla, a partner with KPMG, says different companies are affected in different ways by the current areas of uncertainty. Companies in the media and entertainment sectors, for example, might need more clarity about how to address revenue arising from licensing arrangements before they can move forward. “But there may be companies that don’t have a lot of licenses, so they may feel they are ready to move on,” he says.
Conflicting Opinions Emerge
FASB is getting that exact message in the early unsolicited letters it has received from companies discussing whether the effective date should be deferred. General Dynamics, a $30 billion aerospace and defense company, says it has committed considerable resources into preparing for a 2017 implementation.
GENERAL DYNAMICS SEEKS DELAY
Below is an excerpt from General Dynamics’ letter to FASB Technical Director Susan Cosper, in which VP and Controller Kimberly Kuryea seeks a delay on ASC Topic 606.
In light of the FASB’s recent discussions on Topic 606, General Dynamics wishes to provide you our perspective on the implementation of the new standard, in particular with respect to interpretive guidance and the timing of implementation. General Dynamics, with over $30 billion of annual revenues, is an aerospace and defense company that offers a broad portfolio of products and services in business aviation, combat vehicles, weapons systems and munitions, shipbuilding, and communication and information technology systems and solutions. We currently recognize the majority of our revenues under the percentage of completion method in accordance with Topic 605. Although we feel that Topic 605 is a comprehensive (and well understood) accounting model, we have supported the FASB and International Accounting Standards Board objective of a single, common revenue recognition model. Accordingly, since the issuance of Accounting Standards Update 2014-09 (Update), we have worked diligently on an implementation plan to meet the effective date of January 1, 2017. We have been following the public concerns related to the standard, including the need for interpretive guidance and additional time for implementation. We would like to share our experience and opinions on these matters.
We understand some have expressed that there is a need for clarification of the principles outlined in the Update. We believe this is a natural reaction to a standard that is more principles-based than rules-based. In fact, questions continue to arise as we analyze our contracts under the provisions of the Update. However, we have accepted that judgment is required and believe we can apply that judgment consistently across our contract portfolio. We also know concerns have been raised regarding whether the Update will yield consistent application among companies. We believe the FASB has made a number of decisions in writing the Update that have improved comparability. Therefore, we urge that caution be exercised as consideration is given to issuing interpretive guidance that could convert this principles-based standard into a set of prescriptive rules. The result may appear to increase consistency, but the rules may not adequately consider the nuances of individual contracts. We believe when practitioners appropriately use judgment in applying principles to varying facts and circumstances and disclose these key judgments in the notes to the financial statements that investors are better informed.
For example, there has been much discussion over the proper application of the second criteria in 606-10-25-19 (distinct within the context of the contract). In our defense businesses, we produce highly complex systems designed to our customer’s unique specifications. Although we may produce more than one unit, we believe there are frequently either significant integration services or highly interrelated activities that do not make the individual units distinct within the context of the contract. This conclusion requires significant judgment and a close examination of the complex facts and circumstances. We are concerned that interpretative guidance in this area could inadvertently create an arbitrary rule that in practice would require these contracts to be accounted for in a manner that may not reflect the substance of the contract. Although rules may drive uniformity, the most representationally faithful answer may not result.
We also understand that others have expressed their desire for a delay in the effective date of the Update to provide more time for implementation. We would like to apply the amendments in the Update retrospectively to each prior period and are preparing to gather the necessary data beginning with the first quarter of 2015 (i.e., running parallel). If you are considering a delay in the effective date, we ask that you do not penalize the companies that have moved forward on a project plan to meet the January 1, 2017 effective date by preventing the adoption of the Update on the existing schedule. There are significant internal efforts and consulting costs being incurred for IT and non-IT-related implementation activities. These costs will naturally and inevitably grow if the implementation period is extended. We appreciate there are circumstances where certain companies or industries may need more time, but we believe there are other companies who committed themselves financially and strategically in good faith to the original timeline and they should not be disqualified from transitioning on January 1, 2017.
Source: General Dynamics.
“If you are considering a delay in the effective date, we ask that you do not penalize the companies that have moved forward on a project plan to meet the Jan. 1, 2017, effective date by preventing the adoption of the update on the existing schedule,” wrote Kim Kuryea, controller and principal accounting officer for the company. “There are significant internal efforts and consulting costs being incurred for IT and non-IT related implementation activities. These costs will naturally and inevitably grow if the implementation period is extended.”
On the other hand, a half dozen technology companies, including Adobe Systems and Symantec, sent FASB a joint letter asking for a two-year delay in the effective date. “Detailed analysis and evaluation of the new revenue standard leads us to conclude that additional implementation guidance and time is required, especially specific to arrangements that include licenses,” the companies wrote.
The tech companies say more time is necessary so regulatory bodies can issue more guidance, which the companies need to develop their implementation plans. Plans for what? The tech companies gave a litany of concerns that spanned the whole quote-to-cash cycle: go-to-market strategies, tax planning, procedures for internal operations and financial planning, internal control over financial reporting, monitoring controls, and ERP systems. Plus time to communicate with and educate stakeholders both inside and outside of the company.
FASB said recently it is researching not only a delay in the effective date, but also whether to permit companies to move forward in 2017 if they are prepared to do so. FASB’s standard prohibits any early adoption ahead of the effective date to avoid any confusion about comparing financial performance between businesses that early-adopt and those that don’t. (IASB’s standard allows early adoption.)
Brian Marshall, a partner with McGladrey, says the TRG has reached some conclusions on issues that will not be incorporated into GAAP, but still provide some guidance on how to move forward. One in particular, he says, focuses on collectability. The TRG agreed that companies accounting for a large portfolio of like contracts should assess the likelihood of collection as a whole, and if collection is probable, companies should recognize the full transaction price as revenue, then recognize bad debt expense for the amounts that are not expected to be collected.
Many of the issues the TRG has addressed and not referred to FASB or IASB for consideration have been left to the corporate accounting officer’s judgment, Marshall says. “There are a number of issues where they’ve said we don’t think any guidance is necessary, but there is going to be a lot of judgment involved,” he says. “That’s the theme for the standard as a whole.”
John Armour, managing director at CBIZ MHM and a member of the TRG, says the questions around identifying distinct performance obligations might prove to be an obstacle to continued implementation planning for many companies.
“That is the unit of account that defines where you’re going to measure revenue,” he says. “If I can’t define the thing that I’m measuring yet, if there’s still uncertainty around that, I can’t implement.”
The debate, Armour says, focuses on whether the new standard requires companies to define a much larger number of distinct obligations than they have in the past. Some are saying yes, while others say they can continue doing what they’ve done in the past. “They can’t both be right,” he says.