New revenue standards may change compensation arrangements

Companies are figuring out how to adapt.

Compensation arrangements tied to revenue metrics or trends are emerging as a big concern for companies implementing the new revenue recognition standard.

FASB and the International Accounting Standards Board (IASB) issued the new, converged standard in May 2014 but delayed the effective date and have been working on clarifications to the standard. The effective date for public companies is annual reporting periods beginning after Dec. 15, 2017, for U.S. GAAP, and annual reporting periods beginning Jan. 1, 2018, for IFRS.

For some companies, the standard will change the timing of when revenue will be recognized and therefore may change the way compensation is awarded under existing arrangements.

Existing compensation arrangements may not contemplate the new standard, and the effects of the standard on compensation arrangements differ by industry and the individual company.

The new standard could result in earlier recognition of revenue, which could lead to higher commissions or bonuses—one reason companies may need to include human resources in their discussions as they implement the standard.

Eric Knachel, CPA, a partner in the Professional Practice Group with Deloitte & Touche LLP, suggested that finance and accounting lead implementation teams, which also might include:

  • Human resources.
  • Information technology.
  • Legal.

Many companies have not decided whether to make a full retrospective or modified retrospective transition to the new rules. But more companies are leaning toward the full retrospective method, Knachel said. That method will give analysts more information and may not require significantly more work than the modified retrospective method, he said.

Companies that use the full retrospective method and file a registration statement with the SEC during the period of adoption could be required to restate an additional, fourth year under the new standard, according to Knachel.

The next three to nine months are expected to be a critical period for companies in terms of complying with the new standard, he said.

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