Accounting

SEC’s Teotia to Industry: Don’t Drop the Disclosure Ball on Rev Rec

Preparers scrambling to complete implementation of the new revenue recognition standard -- and even those that may consider themselves to already be done -- should not give short shrift to the rule’s disclosure requirements, warned Sagar Teotia, Deputy Chief Accountant in the U.S. Securities and Exchange Commission Office of the Chief Accountant.

Speaking at Financial Executive International’s 2017 Accounting Change for Financial Leaders conference in Philadelphia on Wednesday, Teotia said companies implementing the new standard should not forgo quality disclosure while focusing on the technical accounting changes required in the new standard.

“It may be publicly shocking, but if you thought about it a year ago that today there is more talk about disclosure than there is about Non-GAAP,” Teotia said. “But it should be no surprise that we value transparency and disclosure for investors.”

In 2014, the Financial Accounting Standards Board issued a new standard for revenue recognition to increase comparability across industries. The new standard includes several significant changes and the deadline for implementation is January 1, 2018.

Teotia explained the SEC has become increasingly focused on the disclosure portion of the revenue recognition standards as preparers have absorbed the accounting and other technical requirements of implementation over the past 12 months.

“You may be wondering, while reading our speeches, why we talk about disclosure so much,” Teotia told the audience. “Our observation is that those disclosures can be time-consuming. In some cases, and for some companies, it is has taken time to find information that they have never had needed before.”

For example, Teotia said implementing the rev rec standard may include data and information from disparate parts of the business that have not provided similar disclosures in the past.

“Let’s say you are going to use revenue disaggregation and you are going to slice and dice something new,” he said. “That would require getting other business units involved and getting the company involved and testing a sustainable system of how you are going to pull that information.”

Preparers have made significant improvements on the technical aspects of revenue recognition implementation, such as internal controls and Non-GAAP conversion, Teotia added. “One year ago, roughly, is when the SEC put out the guidance on Non-GAAP. And in a relatively brief amount of time there were significant improvement made for investors,” he said. “That was really due to the entire profession working together. Obviously we had a role. But there was a critical role by audit committees and a critical role by preparers.”

The SEC continues to deal with outstanding technical issues related to rev rec and several “hot topics,” which include, according to Teotia:

  • Principal over agent issues
  • Performance obligations.
  • Non-GAAP considerations
  • Definition of contracts
  • Scoping
  • “Industry” considerations

But whether it is technical in nature, or focused on disclosure, Teotia encourages preparers to approach the SEC early to raise concerns before the end of the year deadline.

“Where this would not go well is that, if in December, we get 35 consultation requests,” he said.