The challenges associated with FASB’s new revenue recognition standard have been substantial for many companies, but at least they’re gaining valuable data and process improvements as a result of the implementation.
Getting the required data for the new financial disclosures under the standard was challenging for a substantial majority (88%) of 300 companies surveyed by EY in October and November. The survey of 300 CFOs and CIOs from U.S.-headquartered public and private companies with annual revenues of $750 million to $10 billion revealed an estimated average of $3.3 million in costs for implementing the standard at those companies.
In a 2017 EY survey, 55% of finance and IT professionals had expected it would cost $1 million or less to implement the changes.
But despite those challenges, 94% of CFOs and CIOs in the most recent survey said that over the long term, implementing revenue recognition changes will deliver a value return that exceeds the investment they will make. That’s up from 62% last year.
“Some of the biggest success stories we’ve seen with our clients are where they use the new guidance as an opportunity to reinvent their accounting processes. When they take a fresh look at them and incorporate automation, they can improve their data quality and gain deeper insight into their business,” Éloïse Wagner, CPA, EY Americas accounting change leader for revenue recognition, said during a telephone interview.
FASB’s revenue recognition standard was issued with the goal of replacing industry-specific guidance with one standard that would provide comparability across industries as well as across borders because the standard was converged with that of the International Accounting Standards Board.
Because it’s a principles-based standard, it requires a significant amount of judgment on the part of preparers. And since public companies were required to implement the standard last year, public filings contain information that’s valuable for private companies that are working through their own implementations to meet this year’s due date.
“There’s a wealth of information out there that’s publicly available,” Wagner said. “And private companies should take advantage. They should look at public companies within their industry and try to learn from their disclosures, especially in reporting areas where there is a lot of judgment.”
According to the 2018 EY survey:
- More than half of respondents (55%) said they have found or expect that developing new accounting policies and procedures will be a challenge.
- A majority (54%) have found or expect that designing new process changes will be a challenge.
- Almost half (47%) have found or expect that developing new controls will be a challenge.
Wagner said dedicating the appropriate personnel to revenue recognition has been a challenge for companies that also are working to implement FASB’s new lease accounting standard and other accounting rules.
“You have a limited amount of resources,” she said. “You have revenue recognition, you have leases. There are other new accounting standards that may or may not impact you, and there are other competing priorities within a company. You get to the point where you need to make decisions and allocate resources to what’s more urgent.”
Public companies also are finding that they’re not finished with the implementation even after adoption, as 71% have made changes to their disclosures since first reporting under the standard. Meanwhile, 80% of all respondents will use or have used manual workarounds, and Wagner said there’s a post-adoption opportunity to transition short-term manual workarounds to long-term technology solutions.
In general, though, Wagner said many companies took advantage of the opportunity to review, simplify, and optimize their processes. They have replaced the Excel spreadsheets they once used for revenue recognition with automated systems, improving the quality of the data and the insights they get from them.
“I think it’s really leveraging the opportunity,” Wagner said. “Implementing [FASB ASC Topic] 606 is not a choice. It’s a compliance exercise. How do you get the best out of this … finding a way to improve the quality of the data and getting more insight into the business is really where the future of finance should be more focused [rather] than crunching through the large volume of data.”
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.