How revenue recognition changes are affecting preparers like GE, Microsoft

By Ken Tysiac

FASB and the International Accounting Standards Board designed their converged revenue recognition standard to enhance comparability across industries. But the standard has presented different implementation challenges to the various business sectors.

With the public company effective date approaching at the beginning of 2018, the financial statements of many companies provide a detailed analysis of the effects the new rules will have on their financial reporting.

Some companies have seen limited disruption to their revenue recognition practices.

"Based on the analysis conducted to date, the company does not believe the impact upon adoption will be material to its Consolidated Financial Statements," DuPont said in its Form 10-Q for the quarterly period ending June 30, 2017.

Others are informing investors that the differences will be substantial. In its 10-K for the 2016 fiscal year, GE said it expects significant changes in the timing of revenue recognition and changes in classification between revenue and costs. Although the standard doesn't have a cash impact and doesn't affect the economics of GE's underlying customer contracts, applying the new guidance to existing contracts will result in lower reported earnings in 2018 and the early years after adoption, with an increase in reported earnings on those contracts as they mature.

Nonetheless, GE notes some benefits that the new rules will provide to investors.

"The new standard will provide for a better alignment of cash and earnings for the affected long-term customer contracts and we expect that it will enhance comparability across industry peers," GE noted.

An analysis of public company financial statements provides a snapshot of issues various industries are experiencing as they adopt the new standard. Preparers at private companies—which have an extra year for implementation—may wish to take note of these areas as they consider their own adoption of the standard.

Retail: Gift card changes. Walmart expects its most significant timing change to result from the revenue associated with the unredeemed portion of company-issued gift cards. Likewise, Home Depot reports a change in its method of recognizing gift card breakage income, which is based on historical redemption patterns under current GAAP.

Under the new standard, income associated with unredeemed gift cards "will be recognized over the expected redemption period of the gift card … rather than waiting until the likelihood of redemption becomes remote or waiting for the gift card to expire," Walmart reported.

Software: Timing change. Microsoft, which early adopted the standard effective July 1, 2017, reports that the most significant effect of the standard relates to its accounting for software license revenue. For Windows 10, Microsoft will recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device.

Under the new standard, point-in-time recognition is required when a license is a right to use an entity's intellectual property as it exists at the point in time when the license is granted.

Adoption of the standard therefore will result in the recognition of additional revenue of $6.6 billion for fiscal year 2017 and $5.8 billion in FY 2016, with an increase in the provision for income taxes of $2.5 billion in FY 2017 and $2.1 billion in FY 2016.

IBM also expects the timing of its revenue recognition for certain software licenses to change but does not expect material changes to its financial statements as a result.

Aerospace and defense: Accelerated recognition. Boeing reports that most of its defense, space, and security contracts will recognize revenue under the new standard under a costs-incurred measurement method. Under current GAAP, recognition takes place as deliveries are made or performance milestones are achieved.

"The new standard will not change the total amount of revenue recognized on these contracts, only accelerate the timing of when the revenue is recognized," Boeing wrote. "We expect a corresponding acceleration in timing of cost of sales recognition for these contracts resulting in a decrease in [i]nventories from long-term contracts in progress upon adoption of the new standard."

For some contracts, aerospace and defense manufacturers may be switching from a units-delivered to a costs-incurred measurement method because the new standard states that output methods don't take into account work that's in process that belongs to the customer.

Similarly to Boeing, Lockheed Martin reports that it expects an acceleration on certain contracts as revenue is recognized under a costs-incurred method under the new standard rather than as units are delivered.

Telecommunications: Revising allocation. Sprint and Verizon report that the allocation of revenue under fixed-term wireless service plans will result in more revenue allocated to equipment and earlier recognition compared with current GAAP.

The new revenue recognition standard eliminated the contingent cap requirement, which limited the revenue that could be recognized upon delivery of a cellphone handset, on the presumption that the revenue was contingent upon providing wireless service. So now, more revenue may be recognized upon delivery of the equipment as the transaction price is allocated to the performance obligations based on the stand-alone selling price of each performance obligation.

Sprint and Verizon also expect that the timing of recognition of sales commission expenses will be affected. Verizon expects commission expenses to decline as wireless customers continue migrating from fixed-term service plans to device plans that have lower commission structures.

Oil and gas: Excluding certain taxes collected. Chevron and ExxonMobil say that after the new standard takes effect, their revenue will exclude sales-based taxes collected on behalf of third parties, which will have no effect on earnings.

The new standard states that amounts collected on behalf of third parties should be excluded from the transaction price.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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