Accounting may need help in revenue recognition implementation

Many companies are going to find that the attention of finance and accounting will not be enough to ensure successful implementation of the new revenue recognition standard.

Finance and accounting will play a leading role, of course, as companies consider the impact they will experience from the new, converged standard released Wednesday by FASB and the International Accounting Standards Board (IASB). But in many cases, companies will find that the expertise of multiple functions is necessary for proper implementation.

“In the beginning it’s going to be very accounting-oriented, but for many companies, it will quickly start expanding to include other parts of the organization,” said Stephen Thompson, CPA, the leader of KPMG’s revenue recognition accounting change practice.

Here are some of the functions that Thompson said could be involved—and what their role might be:

• Finance and accounting. The first step in implementation will require finance and accounting to get an understanding of the new guidance and compare it to the company’s current accounting practices to see where changes will be necessary, Thompson said.
  
  The standard takes effect for public companies for reporting periods beginning after Dec. 15, 2016 (FASB, effectively Jan. 1, 2017, for calendar-year entities), or reporting periods beginning on or after Jan. 1, 2017 (IASB). Given the seemingly long implementation period, some finance and accounting departments may be tempted to delay this step.
  
  But Thompson said delaying consideration of the standard could be a mistake because the new standard may require systems and process changes that could take substantial time to put into place.
  
  He said it’s a good idea for finance and accounting to get working immediately on the assessment of the effect the new standard will have on their accounting policies. Because the effects will be spread unevenly across different industries, the impact may range from minimal for some companies to hugely disruptive for others.
  
  Companies that perform their accounting policy assessment and see only small changes may be able to wait a while before beginning the remainder of the implementation effort, Thompson said.
  
  “But I think a lot of companies will be surprised and realize they’re going to need every bit of this two-, two-and-a-half-year window to get this done in an appropriate way, especially if systems changes will be required,” Thompson said.

• Information technology. For some companies, IT will need to be involved early in the implementation process in order to design system changes that facilitate the collection of new data and automate new calculations and disclosures, Thompson said.
  
  Because the standard is more principles-based than current U.S. GAAP, companies in the United States may find that it requires more judgments, estimates, and calculations than in the past. This too may require systems changes to ensure appropriate information is available to support management’s decision-making process.
  
  “In order to be able to produce that data in any sort of an automated fashion that’s scalable throughout a whole organization, you’re going to need process changes and in some cases systems changes,” Thompson said.

• Legal. The new guidance contains different criteria from current U.S. GAAP on what constitutes an agreement that could be considered for revenue recognition.
  
  Revenue can be recognized under the new guidance for agreements that are legally enforceable—regardless of whether the agreement is written, oral, or implied by customary business practices. Under some circumstances, a handshake could be enough of a commitment to create a legally enforceable arrangement that results in revenue.
  
  In addition, the new guidance specifies that a vendor’s obligations under a contract may not be limited to just those that are explicitly promised in the contract, but they also could include obligations outside of the contract if the customer has a valid expectation that the obligation exists. As a result, a vendor might have to evaluate other information, such as its past business practices or statements, when determining the appropriate accounting for an arrangement.
  
  A company’s legal representatives may need to be involved in helping finance and accounting develop policies and apply these aspects of the standard.
  
  “It may be different in the U.S. than it is in Germany or China,” Thompson said. “You have different business practices and commercial codes in different jurisdictions, complicating the legal interpretations required to apply these provisions.”

• Tax. Companies that are expecting changes in their accounting as a result of the new guidance will want to consider the impact to their tax accounting, Thompson said.
  
  Tax accounting methods may need to be changed to create consistency with book methods, Thompson said. Transfer-pricing schemes that rely on revenue or profit-based methods for establishing transfer prices could also be affected if the timing or methods of revenue recognition are changed.
  
  If the revenue standard brings about a change in a company’s mix between product revenue and service revenue, the calculation of sales tax could change, as products and services sometimes are subject to different tax rates, Thompson said.
  
  “I’m not saying those are going to be huge issues or that sales tax or transfer pricing will be a huge issue for every company,” Thompson said, “But those are examples of some of the nuances that for some companies may result in unexpected impacts.”

• Operations. The impact of the new standard on business practices may also need to be considered, Thompson said.
  
  He said software companies, for example, may be able to adopt more flexible pricing strategies with the elimination of the vendor-specific objective evidence requirements in current U.S. GAAP. Other companies may find it is possible to make changes to contracting that better manage business risk—without unfavorably affecting the timing or allocation of revenue.
  
  Thompson said companies deciding whether to make changes to their business and contracting practices will have to weigh the benefits against the impact those changes will have on the accounting staffs that in some cases may be forced to make more difficult estimates and judgments as a result.

• Internal control experts. Personnel responsible for the design and operation of a company’s internal control over financial reporting will also need to be involved in the implementation process, Thompson said.
  
  Once the changes to financial reporting, processes, and systems are known, controls will need to be evaluated and, in some cases, enhanced, according to Thompson.

• Financial planning and analysis. Staff that perform forecasting, planning, and budgeting will need to consider the impact of the changes to their work as well.
  
  “At some point before the effective date, your revenue is going to switch to the new standard, so you will have to decide when to begin forecasting under the new standard as well,” Thompson said.

• Investor relations. It will be important to communicate the effects of the changes to investors and analysts, Thompson said.
  
  “If you do have significant impact, messaging that to investors and analysts who follow the company so they’re not confused and they start understanding what to expect will be important,” Thompson said.

Involving all these groups and others, where necessary, could make implementation of this standard a significant undertaking. But the scope and breadth of the standard may demand that level of effort.

“Revenue is one of the most important single metrics for any business in any part of the world,” Thompson said. “Given the extent to which the revenue model is changing, and the fact that it may impact many areas of an organization, I would say this is one of the most impactful accounting standards in recent history.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

More information about the new standard is available at the AICPA revenue recognition resources page.