Financial statement preparers are embarking on a daunting task as they begin to ramp up for implementation of the new, comprehensive, converged standard on revenue recognition.
Reading and understanding the standard, which was released Wednesday, is the first item of business for preparers, according to Brian Marshall, CPA, a partner in the National Accounting Standards Group at McGladrey LLP. Even that isn’t easy. The US Financial Accounting Standards Board (FASB) standard weighs in at 706 pages. Preparers who want printed documents may need to recruit a forklift operator just to transport the pages back to their desk. The many pages reveal an uneven distribution of duties for preparers in different industries, standard-setters have said.
But whether companies expect many changes or just a few, experts are advising companies not to delay their implementation work because it will be no small undertaking and revenue is such an important item in financial statements.
Marshall suggested that preparers need to do the following to ensure an effective implementation:
Consider the requirements in the context of the company’s revenue streams.
There is a long list of things that may be reported differently under the new guidance. The timing of revenue recognition could change. New judgements and estimates may be required. And companies may need to allocate revenue to performance obligations in different ways from the past.
“In any case, there’s going to be some change,” Marshall said. “It’s just a question of what that change will be.”
Pay close attention to new disclosure requirements.
Standard-setters have said the new, enhanced disclosure requirements are one of the most important aspects of the standard in terms of adding value for investors. These disclosure requirements also will create challenges for preparers.
“One of the things that companies should be considering as they’re evaluating or mapping out a plan is, do they have the processes and systems in place to gather that information?” Marshall asked. “Or do they even have the information that might be required for these additional disclosures?”
In some cases, Marshall said, companies may not have that information. So they may have to adopt processes to capture that information, and they will need controls over any new processes, as well as around any new judgements that are being made as a result of the standard’s principles-based focus.
Decide on a transition method.
Companies have two options for transition in the standard, which takes effect for public companies for reporting periods beginning after December 15th 2016 (FASB, effectively January 1st 2017 for calendar-year entities) or reporting periods beginning on or after January 1st 2017 (International Accounting Standards Board). Nonpublic entities will have an additional year to adopt the new standard.
A full retrospective transition approach would require calendar-year companies to capture data for dual-reporting starting from the beginning of 2015. An alternative method would not require restatement of comparative years, but some detailed additional disclosures would be required, including disclosing in the first year of adoption what the revenue under the old guidance would have been, to give users some ability to compare.
Choosing a transition method will be one of the biggest decisions for companies to make, Marshall said.
“And they’re going to want to make that decision sooner rather than later,” he said, “because in a perfect world if you do go with a full retrospective approach, you would want to have a dual-reporting approach of sorts for what will be the prior periods in the year of adoption and not wait until 2016 and then say, ‘I’ve got to go back and adjust all my prior periods and gather that information.’ ”
Prepare public disclosures for required company filings.
In public filings, going forward companies will now have to describe the standard, when they are required to adopt, and the expected impact of adoption, Marshall said.
“Obviously, if you’re filing financial statements a month after this is issued, you’re not going to have a lot of detail on that yet, because you’re still going through and evaluating the standard,” Marshall said. “But in the future, those disclosures would have to get a little more granular and detailed with each filing as you’re accumulating information about the impact of adoption.”
Consider how to deploy company resources to meet the requirements.
Companies will have to figure out if they have enough resources to handle implementation – and who should be involved, Marshall said. In addition to finance and accounting, numerous other functions may have a role, including information technology, legal, tax, operations, internal control experts, financial planning and analysis, and investor relations.
“You’re going to want to have more than just your accounting folks [involved],” Marshall said. “There may be the initial tendency to say, ‘This is an accounting matter, and only my accounting people are going to be involved with this.’ That’s not necessarily the case here.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.