Last-minute revenue recognition implementation tips

By Russ Banham

The implementation effort surrounding FASB’s new revenue recognition standard is nearing an end for many companies, which have prepared for the transition for several years running.

The deadline for compliance for public companies is the beginning of 2018 (private companies have an additional year for implementation).

Despite the years of preparation, certain aspects of compliance, particularly the complex disclosure requirements, are being left to the final hours. Some companies are playing catch-up, scrambling to have their disclosures in place as the deadline approaches, according to panelists who were scheduled to speak Tuesday at the AICPA Conference on Current SEC and PCAOB Developments in Washington.

In telephone interviews prior to the conference, three scheduled panelists shared their impressions of the new revenue recognition standard and their advice on compliance best practices.

While the interviewees concurred that most companies had determined how to satisfy the standard’s measurement requirements — the calculations made to arrive at their revenue figures — some companies are lagging when it comes to complying with the disclosure mandate.

“Everyone has pretty much gone through all their contracts and gathered the appropriate information to book revenue (under the new standard), and I hope they’ve moved on to assessing their disclosure requirements,” said Scott Taub, CPA, managing director at Financial Reporting Advisors LLC, a provider of accounting advisory services. “My concern is that some companies may be waiting until the first quarter financial statements to think about disclosure. If this is the case, they may realize they haven’t gathered the appropriate data needed to do the disclosure.”

Procrastination may backfire

While public business entities are required to comply with the accounting requirements of the new standard on Jan. 1, the disclosure requirements don’t kick in until they file their first quarter reports. Because of that, some companies may postpone their consideration of this element of the new standard’s requirements. But disclosure is far from a walk in the park, Taub said.

“In this case, disclosure is not simply a description of the calculations made to determine the revenue figures,” he explained. “That’s an oversimplification.”

Indeed, companies must disclose revenue in relation to the various components of a specific transaction. For example, the portion of a transaction’s price related to a company’s remaining performance obligations still to be satisfied must be disclosed. “These are not minor details,” said Taub. 

He is not alone in expressing such concerns. “I’d say the most important thing for companies to focus on now is their disclosures,” commented Rachel Simons, CPA, a partner in EY’s professional practice group. “I’m a bit concerned that some companies have left the full suite of disclosure requirements to the last minute. They’re working on their accounting policy memos and through their internal controls, but have not gathered all the information needed to make the disclosures.”

Such procrastination may backfire, given the difficulty of systems and processes to generate the data needed for disclosure compliance, she said. “Companies may have the revenue information, but their systems may not be set up to segregate the data across the different disclosures,” Simons explained. “It’s a vastly different landscape than today, where the disclosures around revenue-related issues aren’t so expansive. The new standard mandates that users of the financial statements have truly robust information about the organization’s revenue streams.”

Another panelist, Stacy Harrington, CPA, senior director of revenue assurance at Microsoft, concurred with these concerns. “Many companies have postponed work on their disclosure requirements; they’re looking first to get the revenue recognition right, and then they’ll worry about the disclosures,” she said. “But the fact remains that companies will have to disclose more numbers in far greater detail than before. To do that right, you need to be sure your systems can capture the data and the appropriate internal controls are in place.”

Ready or not

Harrington, who leads Microsoft’s revenue team from a revenue recognition standpoint, has a leg up on many peers. That’s because Microsoft had adopted FASB’s new revenue recognition and lease accounting standards effective July 1, 2017, and reported the findings in its restated financial statements for 2016 and 2017 on Oct. 1, 2017.

Microsoft is one of only a few companies to have already adopted the new standard, giving Harrington rare insight into what to expect. She noted that her work on the new standard began at least six years ago. “The number one thing we learned is that companies should be thinking deeply about their specific messaging to analysts, insofar as what is changing and what isn’t,” she advised. “The bulk of our time was invested in our messaging and education, making sure the language was clear.”

Simons shared this view. “It’s important for companies to collaborate and communicate with key internal and external stakeholders to make sure they are aware of the changes that affect their specific priorities,” she said. “Businesses need to think through how they will communicate to the investor community, which will be different than how they communicate to the audit committee and operating and business personnel. If such communications aren’t already underway, now is the time to develop these plans.”

The impact of the new revenue recognition standard is unique to each organization — even companies in the same market and industry. “In our case, only specific areas of revenue were affected, not all our revenue,” said Harrington. “For instance, our cash flow and accounting for hardware, Xbox, and cloud services all remained the same.”

What else? Taub advised companies to think through some of the indirect changes brought about by the new accounting standard. For instance, historical contract language may need altering to reflect the new ways of measuring revenue.

“Debt agreements and compensation agreements that are measured based on GAAP need to be reviewed now that GAAP is changing,” he explained. “Some companies will be left with calculations that made sense under previous GAAP but don’t make nearly as much sense under the new standard. Companies may well confront difficulties in this regard, since they will need to get their counterparties to agree to the contract amendments. That’s not easy to do.”

Russ Banham is a veteran financial journalist and author who writes frequently about accounting and compliance. To comment on this article or to suggest an idea for another article, contact Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com), a JofA editorial director.

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