Financial Reporting

Revenue Recognition Buys Time, But Not Less Work

Although Wednesday's vote by the Financial Accounting Standards Board (FASB) to propose deferring the implementation of the new revenue recognition standard provides breathing room, companies should avoid complacency because even with a deferral pending, the clock is ticking toward eventual adoption.

After hearing recommendations from the FASB staff, the board voted to propose delaying the implementation date of the new standard by a year. Under the proposed timeline, public organizations would apply the new standard to annual or periodic reporting periods beginning after December 15, 2017, and private companies would apply the standard to periods starting after December 15, 2018.

In addition, FASB voted to permit early adoption (as of the original effective dates) for public and nonpublic entities. The board plans to issue an exposure draft, which will have a 30-day comment period before final adoption.

“I am pleased the proposal provides enough flexibility to give companies more time to complete their assessment while giving other companies the ability to early adopt,” says Stephen Rivera, worldwide senior director, financial compliance & procedures, for Johnson & Johnson. “It is a ‘win-win’ for many companies”.

But despite the proposed relaxation of the adoption timeline, financial reporting experts say it’s important for companies that have been preparing to implement the new standard to maintain their momentum — and for companies who might have waiting for a potential deferral to get moving.

“Companies should continue full-steam ahead with at least their diagnostic efforts,” says Chris Wright, managing director of finance remediation and reporting compliance at Protiviti. “A quarter of that extra year is already behind us, and by the time an exposure draft is released and subjected to a comment period, the extra year could be half over.”

“It’s critical for any companies that haven’t begun their transition efforts to start with a diagnostic process that at least demystifies how simple or complex adopting the new standard will be for them.”

Deferral Expected

FASB’s decision this week to propose deferring implementation of the standard was largely expected within the financial reporting community.

The new standard, designed to converge U.S. GAAP guidelines for recognizing revenue with those of International Financial Reporting Standards, was adopted last May after considerable collaboration between FASB and the International Accounting Standards Board.

With preparers and auditors raising questions about implementation, FASB began an outreach effort to assess unclear issues and explore a potential need to defer adoption of the new standard, and began discussing the possibility of a deferral last fall.

“There are still a lot of unanswered questions with the standard, and a lot of people are uncomfortable with the high level of ambiguity,” Joseph Howell executive vice president, strategic initiatives at Workiva. “Revenue is really important for companies and, in a lot of instances, influences how the market views your performance.”

Matthew Perreault, partner-in-charge of the technology and SEC audit practices of Armanino LLP, said the minutes of the two Transition Resource Group meetings held so far indicate a significant number of issues that would need to be incorporated into implementation guidance.

“Many companies will be glad that they have additional runway to examine their implementation issues,” Perreault says.

Time to Act

With more clarity about the adjusted adoption timeline, Protiviti’s Wright says it’s important for companies that may have been waiting to begin assessing where it stands, and what it’s going to have to do to meet the revised timeline.

“If a company hasn’t started its transition efforts, they won’t understand whether the standard is a big deal for them or not,” Wright says. “It’s easy to overestimate the complexity, or to underestimate the simplicity of the transition. In either case, a company can run into problems if their efforts are too much, too soon, or too little, too late.”

The complexity of a company’s implementation initiatives are likely to be influenced by industry practices. Wright says companies in technology, media and communications have long had complex revenue recognition considerations, and many were preparing for the new standard in earnest. Companies in industries with long-term agreements, such as construction or defense contracting, may have more challenges separating contractual elements required by the converged standard.

Similarly, Howell says for companies with simple supplier and customer agreements, like most retailers, the transition is likely to present few issues and should be relatively straightforward. In contrast, companies that rely on multiple subcontractors are likely to find the transition more complicated.

“You have to capture and present a lot more information reliably and sustainably, and for many companies, that’s going to involve information they’re not collecting, or dealing with different parts of the company to gather additional information,” he says.

Howell says companies should take the extra time offered by the deferral to improve data collection and documentation procedures, since auditors are likely to apply additional scrutiny and skepticism as everyone adjusts to the converged standard.

“Anytime there is ambiguity, there is a risk of someone taking an issue with the way you reported something,” Howell says.

Armanino’s Perreault says companies, as part of their implementation efforts, should also consider improvements to business and operational processes as well as financial reporting.

“You don’t want business decisions being driven just by accounting issues, but this is a good opportunity to examine your sales force’s practices and compensation plans to possibly incent behavior that delivers the best business result while achieving compliance with the new standard,” Perreault says.

And despite the extra year, it’s important for preparers to guard against complacency as they begin gap assessments or implementation planning.

“I’ve already had a client express doubt that this is going to happen,” Perreault says. “We thought changes to the leasing standard were going to go through two or three years ago, and some companies that have been working on that standard for two years think they have wasted their time. But that’s probably dangerous attitude to take with the revenue standard.”