Accountants Start Preparing for Newly Released Revenue Recognition Standard

CPA firms are advising clients to begin to get ready for the newly released revenue recognition standards, even though they won’t be taking effect until 2017.

The Financial Accounting Standards Board and the International Accounting Standards Board released the long-awaited converged standard on Wednesday (see FASB and IASB Release Revenue Recognition Standard). The changes are expected to have a bigger impact in some industries than others. “It’s well known that there are certain industries where there are going to be significant effects, like the telecommunications, software, real estate, construction and asset management businesses,” said Deloitte partner Joel Osnoss. “But accountants should not assume that if their companies or clients aren’t in those businesses, there’s no effect. It might just be some practice they’ve been living under for a while that made sense many years ago. But when you look at it in the context of performance obligations, there might be a bit of a surprise.”

The new standard strips away much of the industry-specific guidance that had such a big impact in many sectors, but provided detailed rules for accountants to use under U.S. GAAP. “There are those within the financial reporting community who felt we had a system in place that wasn’t necessarily broken, so therefore why this massive overhaul,” said James Comito, shareholder and member of the professional standards group at Mayer Hoffman McCann. “That’s certainly a legitimate point of view, but if I just shove that aside and look at what this thing brings forward, there is a lot to like about it. You think about the nature of U.S. GAAP and revenue recognition. We have so many pieces of literature that accountants are accountable for. You’ve really got to cover a lot of ground. Even for some relatively straightforward contracts, you’ve got to be up to your eyebrows in accounting literature. Now we come forward with a single contract-based standard that applies to everyone, so all that industry guidance falls by the side of the road, and in many ways, I think that is good.”

Comito is skeptical that the new standard will make life simpler, though. “People talk about simplification,” he said. “I don’t think this new standard is going to be simple by any means. But I do think over time it may result in a better platform in terms of comparability. It may become easier, over time, once people become familiar with the new aspects that it brings into play.”

Osnoss advises accountants to give the new standards a careful perusal. “It may behoove a lot of companies to read the standards and see whether they have appropriately designated or identified the performance obligations that they have under their contracts, for example,” he said. “If you take a step back and look at your business and how you interact with your customers, especially as your business is evolving, there may be a way to adapt to the new standard in that way.”

Osnoss points to an element of additional exposure that some companies may be facing. “Even if there’s no big difference in how they account for revenues because maybe the multiple elements approach that was used before is very similar to the effect of identifying performance obligations, now under the new standard, there’s going to be a need to disclose the remaining performance obligations over the contract,” he noted. “It’s really kind of a forward look that companies need to have. For the big multinational companies, that in and of itself could be a challenge, just in terms of gathering the information, making sure it’s gathered correctly and in time for periodic reporting, that the controls are in place, and that they are functional for the purposes of financial reporting.”

“It will result in changes for most every company,” said PricewaterhouseCoopers partner Dusty Stallings. “Even companies in industries that do not have major changes will discover they may need to make more estimates and disclose more to investors.”

Osnoss believes the standard is a big step in the right direction toward global accounting standards. “If you step back and look at what’s happened, you’ve got the two boards reaching virtually identical conclusions and as a result investors are going to be able to compare across borders within industries and start to make sense of the numbers,” he said. “I think that’s going to potentially raise some questions for companies in the U.S. and outside the U.S. You’re starting to have a global view of how a standard gets applied, and you’re starting to have investors and regulators from all around the world looking across the industry and across borders.”

While the new standard won’t take effect until 2017 for public companies and 2018 for private companies, some public companies may need to start disclosing any adjustments for the new standard sooner to their shareholders and the Securities and Exchange Commission, Osnoss pointed out. “To the extent that companies start to identify and calculate the effects as they gear up towards adoption, and they’ve got some numbers coming into view, they may need to disclose that in advance of adoption because for public companies the SEC does require for new standards that if you’ve started to identify or calculate what the impacts are going to be, and if you have a reasonable idea of what the effects are going to be, you need to disclose that, even before adoption,” he said. “For the companies that are going to have an impact and have started to calculate the effects, there is certainly going to have to be communication to the shareholders in that regard.”

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