"I think of this standard as a bit of teaching old dogs some new tricks," said Brian Allen, a KPMG partner, at the Revenue Recognition: Guidance, Changes and Implementation conference sponsored by EY and Financial Executives International. "We can all agree with the concept that contracts can be implied, oral or written, but how we're going to corroborate that as an auditor and support that a contract exists is something that we're all going to have to work out together."
Because the principles-based standard requires a higher use of estimates and judgment, companies are required to begin using the standard in 2017 and audit firms are discussing the potential effects on financial reporting and internal controls, as well as related processes and IT systems.
"As with any big initiative, the key for both sides is going to be effective project management," said Dan Finneran, a PwC partner. "You'll need to have open and frequent discussions and make sure you have the right team in place, because this is going to have an IT impact and could have a tax impact. You'll need to identify pressure points and make sure everyone's on board with your challenge areas and timeline."
Following the release of the converged standard by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in late May, implementation and planning efforts are kicking into full gear. John DeMelis, an EY partner, said his firm has launched a robust effort to educate employees about the standard, as well as its requirements and likely implications.
"We're reviewing our audit methodology to determine if we need to modify our guidance," DeMelis said.
Similarly, PWC's Finneran said his firm has formed a global revenue recognition team to ensure the firm is providing consistent interpretations, communications and guidance.
Evolving Efforts
KPMG's Allen said the early planning efforts by the firms and their clients are likely to evolve as the implementation data draws. Preparers are in the early stages of evaluating potential implications, for example, but many questions remain about the immediate and longer-term effects of the standard. Many of these issues will likely be addressed by efforts being coordinated by including the AICPA, the FASB and IASB' Transition Resource Group, industry discussions and audit firm advice.
"It's going to be important to talk to your peers and to get as much advice as possible," Allen said.
The implementation efforts of U.S. companies may also be influenced as international firms adopt the converged standard. Phillip Austin, a Deloitte partner, said because the IASB is allowing companies that file under IFRS the option of adopting the converged standard ahead of its 2017 deadline, U.S. companies may be able to learn from their international peers.
"U.S. companies won't be beholden to guidance from overseas, but they can't ignore it either." Austin said,
A Fine Line
As audit firms prepare advice for preparers, they'll have to avoid triggering regulatory concerns about being overly helpful. Martin Baumann, chief auditor and director of professional standards at the Public Company Accounting Oversight Board (PCAOB), said although auditors can serve as an information resource for companies during transition planning efforts, they will also have to remain objective and guard against potential independence issues.
"If the auditor plays a role in building processes and systems, that can influence the auditor's judgment," Baumann said. "There's a careful line auditors have to walk."
And while companies can evaluate recommendations from audit firms about revenue recognition, they'll bear the ultimate responsibility to make the best choices for their situation.
"It's the companies' jobs to be experts in U.S. GAAP," Deloitte's Austin said. "If the auditor's independence is tainted, companies could have issues as a result."