Lara Long, CPA, never would have imagined five years ago that she soon would be in a room with some of her company's biggest competitors and broader industry peers, talking candidly and transparently about accounting issues.
But pursuit of a smooth implementation of the new revenue recognition standard has caused financial statement preparers to go to unprecedented lengths.
Developed jointly by FASB and the International Accounting Standards Board (IASB), the revenue recognition standard takes effect for public companies at the beginning of 2018. The standard creates a more principles-based approach and replaces multiple industry-specific rules that previously governed accounting for US companies.
The principles-based standard creates more need for accounting judgments, and these judgments are expected to be consistent across industries. As a result, participating in industry groups has emerged as one of the best tactics for success.
So Long, vice president of corporate accounting and reporting for Atlanta-based agricultural equipment manufacturer AGCO, found herself collaborating with finance executives from competitors in a working group for commercial vehicle manufacturers.
"We talked about our planned adoption approaches," she said at the AICPA Conference on SEC and PCAOB Developments in December in Washington. "We talked about system readiness, and whether we're ready from a systems perspective. We talked about challenges with the standard itself and interpreting the standard relative to our industry practices. We even sometimes went back to the literature itself and read it out loud and discussed as an industry group how we interpreted the standard."
Like many manufacturing company finance teams, AGCO's finance group is lean and hard-working. So implementing an impactful, high-profile standard such as revenue recognition has been a significant chore. Through the course of implementation, AGCO has involved representatives of multiple functions and revamped and enhanced its revenue footnote disclosure because the one it had used in the past was made obsolete under the new rules, according to Long. In addition, as AGCO's industry evolves to include more technology in its products, new revenue streams are emerging and had to be evaluated under the new standard.
Here is a look at how a global manufacturing company with more than 19,000 employees and $7 billion in annual net sales has worked to implement one of the most significant new accounting standards ever written.
Gathering resources
Because AGCO has a lean finance organization, Long did not have 30 or 40 people waiting around to devote their time to implementing the revenue recognition standard in the fall of 2014, when the work started.
"My first concern was that I needed human capital," Long said, "because I simply didn't have it."
Initially, Long looked outside the company for help. AGCO hired a Big Four firm to assist with the initial assessment of how the standard would affect the company. Then she conducted training for staff around the world on the effects the standard could have. About 150 professionals participated in the training, including with members of the company's accounting/finance and legal staff and tax professionals.
Because contracts play a leading role in the revenue recognition standard, lawyers figured prominently in the implementation process. At AGCO, standard contracts with dealers and distributors differ across the different geographic regions where the company operates. The lawyers provided finance with an understanding of the various standard contract terms as well as when and why the company modifies contracts with dealers and distributors.
The finance team documented its review of the contracts so that it could show AGCO's auditors at KPMG that it had performed the review. In addition, the finance team set up a process with the company's lawyers to make sure that if and when they modify or deviate from standard agreements in the future, finance will be notified.
That helped the lawyers understand the impact that deviating from standard contract terms will have under the new revenue recognition guidance.
"The great thing about [FASB Accounting Standards Codification] Topic 606 [the revenue recognition standard] is that it's very contract-based, and lawyers love contracts," Long said. "So lawyers are your buddies in the overall implementation project."
New revenue stream
The new revenue recognition standard requires companies to allocate their revenue to specific performance obligations. In this case, this meant identifying and analyzing all potential material new revenue streams for AGCO.
With new technology, AGCO is delivering precision farming tools that are designed to help its customers improve the uptime of their equipment and optimize the use of their machines and fleets. The technology-based tools help farmers maximize their machine efficiency and use data to coordinate their operations for peak production. This technology is subscription-based, similar to a satellite radio or GPS system for a standard vehicle.
So for revenue recognition purposes, this represents a new performance obligation, in addition to the agricultural equipment itself, and could be treated differently. Because the offering is fairly new, Long spent a lot of time with the company's technology experts so she could understand how it will be marketed, priced, and sold.
Members of the finance staff also spoke with marketing staff and leafed through product descriptions in catalogs provided to dealers to get a better understanding of the company's products.
As she examined AGCO's contracts, products, and services, Long also met with the company's competitors. Since the beginning of 2015, the group of finance executives from 10 to 15 public companies has met twice a year and more often by telephone to work through challenges posed by the standard. Preparers don't want to be outliers on revenue recognition judgments in their industries because the standard was written to create comparability across industries as well as jurisdictions.
That's not the only group AGCO collaborated with. For about 10 years, finance executives from 25 prominent Georgia public companies have met for a monthly roundtable to talk about current accounting issues and pronouncements that are new or challenging. This group also discussed several facets of the revenue recognition standard; Long said she particularly achieved a better understanding of some of the nuances of "point-in-time" versus "over-time" recognition principles after hearing a colleague from a different industry discuss the topic at the roundtable.
Experts say this type of collaboration gives preparers important perspectives as they prepare to make their revenue recognition judgments.
"Peer sharing is very helpful," said Brian Allen, CPA, a KPMG partner who served on the FASB/IASB joint transition resources group for the revenue recognition standard. "Especially if it's peer sharing and it also includes auditors so you can get a good dialogue going of open and honest communication of where the tension points in the standard are."
Experts also recommend that judgments—as well as other alternatives that were considered but rejected—be documented carefully. AGCO's judgments are documented in a 90-page white paper that Long carries with her everywhere.
It documents the reviews the company has done and the business issues for AGCO that will be affected by the standard, and cites paragraphs within the standard to support the company's positions on those issues. AGCO provided the document to its auditors at KPMG, who gave feedback on the procedures and judgments the company made.
Documentation is a key part of the judgment process, according to SEC Chief Accountant Wesley Bricker.
"An appropriate application of judgment will often identify and define the issue; gather the facts and information, including an understanding of the contractual terms and economic substance; perform the analysis and identify alternatives; reach a decision; and complete documentation and rationale for the conclusion," Bricker said at a conference at Baruch College in 2016, before he was named chief accountant.
Disclosures
Long started fresh with AGCO's disclosures, which will be much more extensive than under the previous revenue recognition standard.
From a company's MD&A to investor presentations to the business overview at the front of the company's 10-K, she found that the new revenue recognition standard required new presentation.
"You literally have to take a clean sheet of paper and start from scratch and really describe what it is that you're promising your customers and the time that it takes to satisfy those performance obligations," she said.
Part of AGCO's challenge with disclosures is that it's not just selling tractors, combines, and poultry-feeding equipment anymore. The company had to put a great deal of thought into how it would document and disclose its performance obligations related to the subscription revenue from technology and farm optimization products, as well as other services it may provide, as those revenue streams become material.
AGCO's disclosures will describe how it allocates its transaction prices among the vehicles, the ancillary technology products, and other products or services the company provides. AGCO's previous disclosure practices put the company in good shape to meet new requirements for disaggregated revenue disclosures. Previously, AGCO was providing disclosures disaggregated by geographic region, by country, and by products.
Some other disclosures also will be similar to the past, such as significant payment terms and standard warranty obligations. And for all of it, AGCO has had to build systems with internal controls around them to capture numbers that will be included in those disclosures.
"But again, bottom line, start fresh [with disclosures]," Long said. "Look at what you're telling investors. Look what's on your website. And look at what your product descriptions are in the front of your 10-K or registration statements."
Exchanging ideas
As AGCO prepares to put the revenue recognition standard into place at the beginning of 2018, Long is pleased with the work the company has put into implementation. It has involved significant efforts from the finance staff, a painstaking review of contracts, and contributions from different functions throughout the company.
Along the way, Long even gained useful perspective from competitors with whom she never thought she would partner.
"We're not divulging trade secrets," she said. "We're very different cultures. We market differently. We even sell different products. But it's definitely been a great sounding board to discuss challenges and how we face those challenges together."
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.
