The Financial Accounting Standards Board is still in the process of deciding whether the revenue recognition standard that it converged last year with the International Accounting Standards Board should be delayed to allow more companies to adjust to it before the new rules take effect in 2017. But that doesn’t mean companies should wait in case there’s a postponement.
Protiviti’s managing director and firm-wide leader of finance remediation and reporting compliance, Chris Wright, attended the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments in Washington, D.C., last month and heard from various SEC and PCAOB officials about the new standard and the possibility of a delay (see SEC Considers Supplemental Use of IFRS by U.S. Companies). His advice is not to wait until FASB makes its decision on pushing back the effective date.
“You’ll have companies that will want to retrospectively adopt that, and they’ll need to be gathering or preserving data for 2015 in 2016,” said Wright in an interview last week. “At the time of the conference that was a few weeks away. Now the beginning of 2015 is a few weeks behind us, and so there is some need for companies to be considering should they retrospectively or prospectively adopt whenever it is applicable.”
Wright believes that’s a decision companies should make in conjunction with their audit committees and senior management.
“The finance folks shouldn’t be going it alone on a major policy decision like that,” he said. “Then, once they do make that decision, should they choose to do so retrospectively, what is it that they’ll need when the time comes to be able to recast 2015 or 2016, or both, under the new rules?”
Wright pointed out that the PCAOB issued a Staff Audit Practice Alert last fall on revenue recognition under the current rules and is keeping a close eye on how companies will apply the new standard.
“They’re looking for more coverage on a geographic basis, on an industry basis, on differentiating between types and classes and streams of revenue,” he said. “I think you’ll see that manifest itself, with companies doing their audits now and the need for white papers and policy position papers on why and how they’re recognizing revenue under the current rules, and also—at the nuts and bolts level—more sample sizes from more locations. That will affect companies and their internal audit departments if they’re used to supplement the audit, and that will affect their finance departments in terms of responding to requests. The SEC and PCAOB do seem as interested in revenue recognition under the current rules as the entire audience was in the potential changes that will come from the new standard as it applies.”
SEC and PCAOB officials discussed the possibility of a delay in the new standard, with FASB officials saying they are visiting companies to gauge their readiness for the changes. But Wright does not believe companies should take the delay for granted.
“A lot of speakers at the conference were talking about the possibility of a delay as if it might happen,” said Wright. “If it happens and it’s only a year, and if companies wait until then to find out just to begin their work, they will have burned up half their period delaying, as opposed to using that time to get ready,” he said.
Protiviti recently hosted a webinar to gauge the readiness of companies for the new standard, asking over a thousand attendees on whether they are ready or have started preparing, or if they have even read the new standard. “Only between a quarter and a third of the people on the line have even started,” said Wright. “Depending on how we asked the question, whether they had read the standard, or had started working on how it applied to them, no matter how we asked it, the general answer was only between one-quarter and one-third had started in some way or another.”
He believes many companies feel they don’t have to get ready for another two years. “It’s two years away and as you see from the TRG [FASB and IASB’s joint Transition Resource Group] and other activities there are a lot of questions,” said Wright. “The more people who get involved, the more questions they have and the more questions they are trying to answer. As companies begin the process, it’s becoming clear to them, as it to us and to others who are helping them, this is not necessarily a need to just write a position paper. It’s going to be something that affects data flows and sources of information from people outside the finance group who are going to need to be educated and trained.”
The IASB is less likely to authorize a delay in the standard. Unlike FASB, the IASB is giving companies the option to adopt it early.
“One of the differences is that they’re allowed to early adopt, and of course one of the things about the U.S. standard is that you can’t early adopt, and because you can’t early adopt, nobody can say that they’re finished,” said Wright. “Then there’s no example for everybody to look to either. It’s a process that is dynamic for everybody at the same time, and applies to all the calendar-year companies at the same time. Companies need to be engaged with their internal and external auditors, their other service providers, and across their organization, IT, sales, tax and legal, accounting and finance departments. They need to engage all of these parts of the organization to be as ready as they possibly can be for what will be a more subjective standard.”
The revenue recognition standard, whether or not it is delayed, and the upcoming lease accounting standard, will both lead to major changes for many types of companies.
“As companies approach some of the new issues, in particular the new revenue recognition model and in the not too distant future, the lease accounting model, when that becomes a final pronouncement, they should be considering not only the accounting policy, which is a necessary first step, but also what they’ll need around infrastructure, people, process and technology, and what other departments beyond finance will need to be involved in making sure that they not only become compliant with the new standard but remain compliant with the new standard,” said Wright.
As FASB officials gather feedback from stakeholders, Wright advises companies to get ready, whether or not a delay is approved. “It seems like we won’t know until the spring, and that’s not a period of time in which we would advise companies to wait for an answer,” he said. “We would advise them to use every second of the time that might be available to them to get ready, as opposed to delaying. In other words, use the delay to be better prepared, not to be behind.”