Companies choosing riskier path for revenue recognition

Most U.S.-based public companies are choosing a less burdensome, but riskier method for complying with the new revenue recognition standard, according to a new report.

The report, Impact of Revenue Recognition Standards on Public Companies, released Monday by the regulatory compliance analytics company Intelligize found the vast majority of public companies are using the modified retrospective method of adopting the revenue recognition standard as opposed to the “full retrospective transition” method, which requires companies to restate their revenues going back to fiscal year 2016.

The modified retrospective method doesn’t require companies to recast their past revenue, so it involves less effort. But by offering less historical context, the modified retrospective method increases the risk that the market will misinterpret reductions in revenue numbers caused by the accounting change, according to the report. The reluctance of many S&P 500 companies to adopt the “full retrospective” method is consistent with another finding from the report: fewer than 32 of nearly 4,000 public companies chose to become early adopters of the new accounting standard.

Revenue recognition methods

The study found only 12.5 percent of S&P 500 companies chose the full retrospective method, but nearly half (46.9 percent) of the early adopter companies did. The early adopter companies varied widely in both size and industry; they included Alphabet and Ford Motor Co., along with a number of smaller issuers. The Financial Accounting Standards Board and the International Accounting Standards Board worked for approximately a dozen years to converge the rules for the revenue recognition standard under U.S. GAAP and International Financial Reporting Standards.

“These rules have been in development for 12 years, but, given that this is the first complete overhaul of these standards in a decade, they are still bringing a lot of uncertainty with them,” said Rob Peters, the report’s lead author and a senior director at Intelligize, in a statement. “Our findings suggest that for most public companies, the advantages of taking a more cautious approach did not outweigh the burdens they imposed.”

The report used public company filings, Securities and Exchange Commission comment letters and other data from the Intelligize research system to examine how both companies and the SEC have handled the adoption of the new revenue recognition standards on public companies.

Comment letters to issuers from the SEC about revenue recognition have focused on areas the agency has cited as its main concerns—most often, measuring performance obligations. The significance of revenue recognition is reflected in a wide variety of filing areas in which companies cite them, including management discussion and analysis, risk factors and proxy issues.

While the SEC did issue rev rec-related comment letters to nearly one-third of early adopters about 18 different topics, 70 percent of those were directed to the measurement of performance obligations. Three companies — Alphabet, Commvault Systems and General Dynamics — received multiple rounds of comments, indicating the SEC’s desire to more fully understand the judgments and analyses used to determine those companies’ approach to recognizing revenue in particular facets of their business.

Intelligize plans to release a second part of the report during the second quarter of next year to discuss the latest changes and guidance in different areas of the rev rec standard, the impact of the standard on issuers and the SEC’s disposition regarding the first wave of rev rec reporting.

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