For example, because the converged standard treats revenue associated with multi-year contracts differently, public companies will be required to prepare a variety of quantitative and qualitative disclosures about the actual and estimated assets, as well as liabilities associated with customer contracts. Companies will also have to disclose costs, such as commissions associated with obtaining or fulfilling those contracts.
"There is a significant amount of new disclosures that will be required, both on an annual and interim basis," said Eloise Wagner, an executive director with EY's Financial Accounting Advisory Services practice, at the Revenue Recognition: Guidance, Changes and Implementation conference sponsored Monday by EY and Financial Executives International. "The objective is to enable the user to understand the nature, timing and uncertainty around cash flows and revenue arising from contacts with customers."
Gregg L. Nelson, VP of accounting policy & financial reporting for IBM Corporation, said the requirement to disclose contract assets and liabilities may be challenging for preparers to collect if their business processes or systems don't aggregate that data.
"The backlog disclosure of [your] expectations when remaining performance obligations will convert to revenue on the income statement is a major new disclosure that users have long wanted," Nelson said.
The heightened disclosure requirements will have wide-ranging implications on their own, since adding information to the balance sheet will expand the scope of financial statement audits as well as internal controls over financial reporting.
Broader Disclosures
Another change under the new standard is the shift of supplemental data, such as segment or geographic revenue, that companies may share voluntarily during quarterly earnings or analyst presentations to financial statements.
As a result, said Jennifer Mak, controller, performance materials and technologies for Honeywell International Inc., companies will be disclosing more data more frequently.
"I think the interim disclosure requirement is a bit of a sleeper that will require information to be tracked at a much more granular level and presented on a quarterly basis, which is a much shorter filing [period] than the 10-K," Mak said.
IBM's Nelson said his department is collaborating with senior management and the investor relations team to identify any gaps in the company's current reporting infrastructure.
As one example, he cited about 37 sales incentive and compensation programs in different geographic locations that the company will need to add to its balance sheet.
Transition Disclosures
One of the immediate challenges companies will face, Wagner said, is a need to disclosure how the company plans to implement the new standard. As the standard becomes effective for public filers in 2017, companies will have a choice of restating revenue for 2015 and 2016 under the new standard or preparing footnotes explaining how revenue for earlier years would have been accounted.
In the meantime, companies will need to discuss their transition planning in their financial reports starting with the current quarter -- in effect, to start disclosing how they plan to disclose the required disclosures.
This year, Wagner said, those disclosures will likely be boilerplate statements saying the companies is determining the effects of the converged revenue recognition standard, but the disclosures will need to become more detailed as companies approach the final implementation date.
Preparation Underway
The need to determine how 2015 revenue will be recognized means companies have to approach their transition planning aggressively. Companies should review current and required disclosures, as well as their existing contracts, to determine the best way to assemble the necessary information efficiently.
Rather than assessing the potential effects of the converged standard and then examining the disclosure requirements down the road, Wagner suggests expanding their current transition planning to include disclosure additions or revisions.
"We're recommending that as companies begin assessing the revenue streams and contracts that will be affected by the standard, they should also start thinking about disclosure," Wagner said.