Disclosure Requirements Expanding Under New Revenue Standard

Broader disclosure requirements are among the nuances companies are exploring as they prepare to implement a new revenue recognition standard.

A panel discussion at Financial Executives International’s Recognition: Focus on Implementation conference in New York said determining the effects of the standard's disclosure requirements can be tricky because the standard remains a work in progress.

"We're getting questions about what the standard means and how it will impact the company, but in many respects, we still don't know," said Russell Hodge, global controller for General Electric Company. "We really don't have a final standard, and we don't know the effective date, The standard still has significant moving pieces, and consistent with most companies, we're still evaluating the potential impact."

The revised revenue recognition standard, Revenue from Contracts with Customers, was issued in May of 2014 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). The standard was designed to converge revenue recognition practices under U.S. GAAP and International Financial Reporting Standards (IFRS).

The standard has an effective date for reporting periods after beginning after December 15, 2016, but the boards earlier this year voted to propose a one-year extension to address implementation concerns raised by preparers and auditors.

As companies work to adopt the converged standard, one of the immediate disclosure concerns is the SEC's Staff Accounting Bulletin No. 74 (SAB 74), which requires registrants to provide information about the predicted financial statement effect of an enacted-but-not-yet-adopted accounting standard.

As an interim measure, most companies are making general statements describing how they are assessing the effect of the new standard, but panelists said pressure to provide more explicit guidance may increase as companies move closer to the final adoption date.

Because the standard calls for greater disclosure of performance obligations than current U.S. GAAP, companies will need to determine the materiality of items such as customer backlogs or loyalty programs.

"The disclosure requirement are going to be more forward-looking with regards to the types of obligations and the amounts, and those figures can make a difference in what companies report," said Dusty Stallings, a partner, in PwC Capital Markets Accounting & Advisory Services practice. "A customer loyalty program is a performance obligation that will now be going into the disclosure bucket. That's not the type of thing companies are used to capturing and disclosing."

Investor Relations

Communications with the investment community represents another area in which companies will have to resolve disclosure questions.

Brian J. Lane, a securities attorney with Gibson, Dunn & Crutcher, said companies should highlight the standard in their Management Discussion and Analysis filings as a "known uncertainty," and should try to determine the extent and importance of anticipated changes on the company's financial reports.

"The touchstone in disclosure is always materiality, and you have to ask 'how material is this standard going to be to our business?' Lane said. "If you are an insurance company, it may not be very much. If you're a defense contractor, the answer will be very much so... You'll be required to disclose any future impacts if the known uncertainties will be material, but most companies aren't [yet] going to know."

A similar challenge will be communicating potential impacts with institutional investors and analysts, said Deborah Kelly, a partner with investor relations consulting firm Genesis.

"It always works best to have team working on something like this," Kelly said. "You'll have your accounting and FP&A functions working on [implementing the standard], and it's a good idea to include IR as part of the team early on. They're going to hear from the Street, and they'll start getting questions about this. Your IR team will be talking to investors, and will understand how to explain the changes at the right time."

Kelly said investment analysts are going to want comparable data so they can understand revenue amounts and trends under both standards, as well as data such as implementation costs and potential changes to revenue recognition timing.

Where's Our Data?

Beyond the regulatory requirements, another practical concern for many companies will be ensuring reliable access to the types of information about customer contracts and revenue that will be required under the converged standard.

Bryan Anderson, a Deloitte partner specializing in revenue recognition, said most companies have about five to six months to evaluate their systems and figure out if they have the required data and are able to access it.

"The data you'll need probably exists somewhere in the organization, but it may be on multiple systems or platforms, and it may not be on platforms you can trust," Anderson said.

GE's Hodge said as the expected adoption date draws nearer, the company's efforts are expanding beyond the technical questions to address a broader range of disclosure considerations.

"We're doing a pretty good job with the analysis and discussion of the technical accounting questions and impacts," Hodge said. "We may not be doing enough yet to around laying out what this looks like in disclosure form. We'll have to give management a better sense how to explain changes and what this will look like in the financial statements."