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FEI Daily spoke with Steve Thompson, KPMG’s Advisory lead for Revenue Recognition and Marybeth Shamrock, KPMG’s Advisory lead for Leasing, following the release of KPMG’s 2017 Accounting Change survey results. In part one, we discuss implementation issues and why private companies in particular are falling behind.
FEI Daily: The data revealed that 60 percent of public companies are facing challenges in implementing the new revenue recognition standard – nearing the January 1, 2018 deadline for complying with the FASB. What is the most prominent reason for the 60 percent falling behind?
Steve Thompson: The top two reasons cited in our survey are competing priorities and human resource constraints. In addition, the effort has taken longer than initially anticipated due to the need to gather and process historic data and make system changes.
FEI Daily: 22 percent of private companies acknowledged they had yet to begin the process. To what do you attribute the delay of some private companies in moving forward with implementation efforts?
Thompson: Private companies tend to be smaller and may have even fewer resources, particularly in technical accounting. In addition, they are not required to adopt the new rules until January 1, 2019 and, as such, have an extra year for their implementation. That said, one of the key learnings from the public companies is that the implementation process can take longer than a year. Our survey showed that many private companies have been “paying attention” to the level of effort public companies have been putting in and hopefully will heed the lessons learned by public companies and prioritize their own efforts.
FEI Daily: Only 13 percent of respondents expect major tax consequences. Of the small percentage of respondents that are expecting tax consequences, what is the nature of these impacts?
Thompson: Companies faced with significant changes in the timing or amount of revenue recognized are more likely to have more significant tax impacts because they will need to determine whether their reporting of revenue for tax purposes will also change. In some cases these “tax methods” of accounting may be required to change to the new method, or there may be an ability to elect a different method for tax purposes. Working through these changes requires companies to balance the potential benefit of maintaining a tax method of revenue recognition that is different than their “book method” against the extra costs it will incur to track and report on that basis. Additionally, global corporations that use a revenue-based metric for transfer pricing may need to reconsider their transfer pricing scheme if in fact the timing or amount of revenue being recognized in the future changes.
FEI Daily: Could that 13 percent increase?
Thompson: Yes, we may see an increase in this percentage as more companies actually begin to look at tax impacts. In our experience, companies tend to assess tax impacts during later stages of the implementation. In our survey, slightly more than half of our respondents are still in various stages of the assessment phase and only 2 percent have completed implementation. As more companies enter the later phases of their implementation, we expect to see more companies realize they need to address tax impacts.
FEI Daily: Companies are incurring significant costs related to implementation efforts. Of this spend, how much is related to investments in new systems and/or revisions to existing systems?
Thompson: This will vary by company and how significant the impacts are as well as the level of customization being made to existing or new systems. For those companies that are implementing a new system, the external cost typically is several million dollars, typically ranging from $1-2 million on the low end, up to $5 million or more on the higher end. The cost of making revisions to existing systems is typically less, though it can vary widely, as the effort could be as simple as creating new reports or as complex as creating customized functionality that requires assistance from third party consultants.
To read part two on the leasing standard, click here.