Microsoft and other companies report their progress on rev rec standard
Pace University’s Lubin School of Business held its second annual Pacesetters in Financial Reporting Conference in New York on Tuesday, presenting an award to Microsoft as a 2017 Pacesetter in Financial Reporting.
The conference was hosted by Pace’s Center for Excellence in Financial Reporting, in association with Financial Executives International and EY.
Microsoft received the award in recognition of its leadership in early adopting the new revenue recognition and leasing accounting standards, as well as their proactive approach to educating investors and sharing insights with others. Most public companies are required to adopt the new revenue recognition standard in 2018 and the new leasing standard in 2019. At the conference, Microsoft officials, including senior manager of investor relations Kristin Chester and senior director of corporate revenue assurance Stacy Harrington, discussed how the company adjusted to the new standards.
“Microsoft adopted the new revenue and leasing standards early to simplify communication of our results by providing one set of restated financial statements to investors and eliminating the need for non-GAAP revenue reporting,” said Frank Brod, chief accounting officer at Microsoft, in a statement. “The upfront education that we provided our analyst and investor community resulted in a smooth transition to the new standards in the first quarter of our fiscal year 2018. We are honored to be recognized for this work.”
The conference was hosted by Leslie F. Seidman, executive director of the Pace Center for Excellence in Financial Reporting and former chairman of the Financial Accounting Standards Board. She and Patrick Finnegan, a former member of the International Accounting Standards Board and currently a senior director at Fitch Ratings, said they were gratified to see the standards they helped develop finally being adopted.
“U.S. companies are poised to adopt several significant changes in accounting in the next few years, starting with the new revenue standard in 2018,” said Seidman. “Today, we learned from the real-world experience of early-adopter Microsoft, with emphasis on how they educated analysts and investors about the effects of the new revenue standard on their financials. The CFA Institute also shared some tips about how to communicate effectively with investors during this period of change.”
Sandra Peters, head of the Financial Reporting Policy Group at the CFA Institute, presented investor perspectives on the new revenue recognition standard. “We’ve actually suggested to people that they should review some of the publications that the firms have done related to particular industries because they give good insight— while they’re not authoritative— on what might happen for the particular industry that the investor or analyst actually follows,” she said. “Also investors should consider whether there were any changes in contracts leading up to the adoption because those changes might change the accounting, but they also might change the cash, and that’s what we’re really focused on. The impacts will differ by industry.”
Peters noted that some non-GAAP measures such as EBITDA could change as a result of the revenue recognition standard, and the CFA Institute is concerned about some of the estimates that may be made as a result of the new standard.
Sam Eldessouky, corporate controller at Valeant Pharmaceuticals, said the disclosure of risk factors can sometimes be overwhelming for investors.
FEI’s Accounting Policy Group shared the results of an updated analysis of corporate disclosures related to the anticipated impact of the change in revenue recognition guidance. It found that companies are continuing to expand their disclosure of the anticipated impact of adopting the new revenue recognition standard. However, as of the third quarter of this year, only 14 percent of the Fortune 500 had quantified this impact in their disclosures, and over half of those companies disclosed that the anticipated impact would be immaterial to their financial statements. The complete update, which includes insights by industry, is available at www.financialexecutives.org/2017RevRecDisclosures.
The survey found that 14 percent of the companies disclosed an estimated quantitative impact in Q3 from the standard, 58 percent indicated the standard is expected to have an immaterial impact, and 45 percent indicated they are continuing to assess the impact of adopting the standard.
In recent years, the Securities and Exchange Commission and FASB have undertaken Disclosure Effectiveness initiatives, and have been reconsidering existing requirements, such as Regulation S-K and S-X. Meanwhile, SEC officials and others have encouraged companies to enhance their financial reports, with particular focus on risk disclosures.
“Risk factors are often criticized as being generic and boilerplate,” said Jonathan Nus, an executive director at EY, who shared a recent study by the firm on risk disclosures. “However, a growing number of companies are taking a more insightful and innovative approach in disclosing their risks. This has become increasingly more pertinent as emerging risks such as cybersecurity remain front and center.” The report is available at www.EY.com/disclosures.
Chris Taylor, vice president of listings and services at the New York Stock Exchange, commented on the state of the markets and the importance of transparent and accessible information. “There is a renewed sense of optimism in the capital markets as more companies from around the world turn to the U.S. to IPO,” he said in a statement. “We are advocating on behalf of private and public companies in support of improved disclosure standards and increased accessibility of relevant data to investors, which will ease the path to going public, while also increasing transparency to make investor relations a less daunting task for public companies.”
“Today, we heard from a number of industry leaders who have taken the initiative to enhance their financial reports by focusing on the simplification of disclosures and on critical information such as the anticipated effects of accounting change,” said FEI president and CEO Andrej Suskavcevic in a statement. “These companies recognize the importance of telling their story as effectively as possible to inform shareholders and the investor community.”