Revenue recognition: SEC looking ahead for comparability

As preparers work on implementing a new revenue recognition standard, the SEC is eager to see companies achieve consistency and comparability in the future once transition is complete.

The new standard, FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers, has been a significant focus of talks by SEC officials at the AICPA Conference on Current SEC and PCAOB Developments this week in Washington.

“One of the objectives of Topic 606 was to enhance revenue standards by establishing broad principles and concepts that should result in improved comparability in the accounting for similar fact patterns,” SEC Professional Accounting Fellow Ashley Wright said. “Though similar diversity may exist under application of Topic 605 [the previous/existing revenue recognition standard], we are focused on achieving more consistent interpretation and application of the principles as part of the transition to Topic 606.”

Preparers are busy implementing the new revenue recognition standard, which takes effect for U.S. public companies in annual reporting periods beginning after Dec. 15, 2017. The standard is converged with just a few differences for U.S. GAAP and IFRS, and was designed to create comparability across jurisdictions and industries for one of the most important metrics that companies report.

SEC Deputy Chief Accountant Wes Bricker was asked what should happen if a preparer learns something new about the company’s existing revenue recognition policies while implementing Topic 606. Brinker suggested that the SEC would be more interested in the implications for the future accounting under Topic 606.

“In that instance, I would suggest that if you’re going through a thorough process, you probably are learning new things about different aspects of the thinking, particularly under 606 relative to revenue recognition,” Bricker said. “So, from our perspective, [as] we approach this transition period, we’re very much focused on 606 implementation rather than trying to narrow diversity under 605. We’re looking to narrow diversity as part of 606.”

All companies will experience some degree of change during the implementation because the principles-based standard is replacing nearly all existing guidance, Wright said. Changes may include the creation of new business processes, systems, and controls; the need to make additional estimates and judgments; and a requirement to provide expanded disclosures.

Preparers should make a change management project a high priority for management and audit committees, Wright said. Allocation of sufficient resources and appropriately skilled personnel to the implementation across the business will be necessary.

Some companies have had success with a “bottoms-up approach” to assess the effects of Topic 606, Wright said. This approach typically includes:

• Identifying each of the different revenue arrangements and contracts.
• Taking a fresh look at historical accounting policies and practices.
• Identifying any differences that may result from applying the requirements of the new standard to those arrangements.

Differences regarding Topic 606 implementation should be raised with the FASB/IASB Joint Transition Resource Group, AICPA industry task forces, or the SEC’s Office of the Chief Accountant, Wright said.

“Resolutions of differences sooner rather than later is preferable from a comparability standpoint,” Wright said.

The SEC plans to provide guidance about Rule 3-09 of Regulation S-X that would allow companies that are adopting retroactively to continue to use their pretransition significance tests for the years prior to adopting the standard, SEC Deputy Chief Accountant Craig Olinger said.

Olinger also provided some clues about current disclosures regarding the revenue recognition implementation. “We understand that you probably haven’t identified all of the implications of the standard at this point,” he said. “But you should disclose what you have concluded so far, such as if you have decided what your adoption date is going to be. And we would expect those disclosures to increase between now and adoption.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.