There may be some false comfort in the faraway implementation date of the proposed, converged financial reporting standard FASB and the International Accounting Standards Board (IASB) are in the final stages of developing.
The standard, scheduled to be released in the first quarter of 2014, would take effect for reporting periods beginning after Dec. 15, 2016 (FASB), or reporting periods beginning on or after Jan. 1, 2017 (IASB). But some companies may want to capture data required by the new standard as early as the beginning of 2015.
During a recent webcast, Deloitte & Touche LLP Partner Nicholas Difazio, CPA, said the transaction volume around revenue can be so extensive that organizations using full retrospective transition may want to put a system solution in place to achieve dual reporting beginning Jan. 1, 2015, particularly if some reallocation has to occur.
“For companies in that position, the need to have an awful lot of this problem solved by 1/1/2015 is particularly a challenge,” Difazio said. “And it would require some careful assessment and planning in the very near term to gauge what would be involved in trying to get that done.”
The standard, which appears to be on the fast track to approval by the boards, would eliminate a lot of the industry-specific guidance that exists in U.S. GAAP. It would require recognition of revenue to follow a five-step process:
- Step 1: Identify the contract with a customer.
- Step 2: Identify the separate performance obligations in the contract.
- Step 3: Determine the transaction price.
- Step 4: Allocate the transaction price to the separate performance obligations in the contract.
- Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
During a recent webcast on the effects the standard will have on the aerospace and defense industry, Deloitte experts provided advice that applies across all industries. They said companies may choose to:
- Assess their various revenue streams to understand how the standard would affect the manner in which revenue is recognized. Some companies may see few changes, but others may see substantial challenges that need to be addressed.
- Identify important accounting and tax issues and new policies that may be required.
- Resolve areas where the standard will require interpretations or judgments. Depending on the industry, these could be significant, especially for those who are moving away from current, industry-specific U.S. GAAP requirements.
- Examine the overall effect the standard will have on the financial statements in order to address questions from stakeholders such as boards and audit committees.
- Evaluate controls, processes, and systems that may need to be changed to make sure implementation occurs smoothly.
- Determine what training will be needed to prepare staff for implementation.
One of the first decisions companies will need to make involves transition. The standard would require either retrospective transition, including some provided practical expedients, or an alternative transition method. Under the full retrospective method, public entities would be required to restate comparative years (two fiscal years prior to the implementation date).
Under the alternative method, the new standard would be applied only to contracts that are not completed under legacy IFRS or U.S. GAAP at the date of initial application. Entities would recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings in the year of initial application (comparative years would not be restated). And some additional disclosures would be required.
At first glance, the full retrospective method may seem too complex and difficult to consider. But Deloitte Director Mark Crowley, CPA, said companies may have to at least consider it because, upon adoption, the acceleration of revenue would be recorded as a cumulative adjustment, booked straight to equity.
Companies may hesitate, Crowley said, to bury that equity in revenue in 2017. Instead, they may want to reflect it at the beginning of 2015, for example, and then show revenues trending from there on into 2017.
“It doesn’t seem like it would be the easiest approach, but it could be the way to go,” Crowley said. “And it’s one of the reasons why we are certainly suggesting people start working on the implementation of the standard earlier rather than later, so you can make that decision and not be locked into one or the other.”
Choosing retrospective application could mean being ready to execute dual reporting, perhaps as early as the beginning of 2015, Difazio said. If dual reporting is not used, it may be difficult to go back in time to find data for retrospective application that companies haven’t typically captured or retained.
One key throughout implementation will be collaboration between the finance and IT teams.
“The importance of linkage and coordination between finance and IT becomes, in many cases, kind of the central risk area on these projects,” Difazio said. “And the sooner attention can be brought to that, the better.”
The depth of this implementation effort has caused some preparers to suggest to Crowley that they would like to retire instead of going through the process.
“If you’re in that position, that’s great,” Crowley said. “But if you’re not, you really can’t ignore this standard. We’re obviously not recommending that companies wait until the last minute to get moving on this project, or even wait until 2016 or 2015. It’s something that we’re encouraging them to get on right away.”
—Ken Tysiac (email@example.com) is a JofA senior editor.