Speakers at Financial Executives International annual Current Financial Reporting Issues Conference (CFRI) said questions and differences in professional judgment related to revenue recognition aren’t a good reason to avoid assessment and implementation efforts, because questions are likely to remain long after the standard takes effect for public companies at the start of 2018.
“We have questions in existing GAAP, but just because we have questions, we don’t stop applying it,” said Paul Munter, a KPMG partner. “Questions are likely to come up as companies and business models evolve.”
Holding Pattern
While implementation questions are inevitable given the scope of the changes under the standard, a large number of companies remain unclear about the potential implications for their organizations.
According to a survey by PwC and the Financial Education Research Foundation (FERF), 75 percent of companies haven’t completed an initial assessment of the standard’s effect, and almost 27 percent of respondents haven’t started the assessment process.
One of the areas of uncertainty accounting executives face as they prepare for implementation projects is the replacement of the rules-based approach to revenue recognition under U.S. GAAP (which has been supplemented with industry-specific guidance over the years) with a principles-based standard that’s open to professional interpretation.
Differences of Opinion
Russell P. Hodge, global controller of General Electric Company, said his company, as part of its efforts to follow the SEC’s desire for a consistent application of the standard, has been meeting with peer companies in GE’s various industries to discuss implementation and interpretation.
“We have nearly identical fact patterns because we’re in the same industry, and there couldn’t be two or three more different thoughts about interpretation,” Hodge said. “We couldn’t be further apart in how we’re thinking about this.”
Differing opinions about applying the standard should be expected, according to Munter, since professional judgments are likely to vary.
“The challenge will be determining whether diversity in opinion is between nuanced differences in specific fact patterns that lead you to take different positions, versus differences in judgment for the same fact pattern,” Munter said.
“You can have different fact patterns that lead to the same outcome, but the challenge will be that fact pattern might look identical at a high level, but when you start drilling into an individual transaction, it may not be substantially identical with a peer with a similar transaction.”
Internal Understanding
Another significant issue companies are addressing is training finance professionals not only on the standard’s implications, but also how its requirements are likely to affect the interpretations of existing contracts and the drafting of new agreements.
“We’ve been sending questionnaires to our finance groups, conducting training, and working to find the right people in the organization that can understand this at the right level,” said Stephen Rivera, worldwide senior director, Financial Compliance & Procedures Group, at Johnson & Johnson.
“This is the first time many people have had to work with a principles-based standard. Do people understand the nuances? Can they read a contract and make that judgment call? Reading these contracts and understanding the revenue implications is really heavy lifting.”