Priority Areas to Evaluate for the New Revenue Recognition Standard
For professionals in the accounting and finance professions, any changes to accounting standards usually lead to some apprehension as these rules require companies to make key adjustments, expand disclosure practices and implement new procedures for recording various financial metrics.
We know this firsthand because our clients are increasingly asking us about the FASB guidance pertaining to looming changes in recognizing revenue in contracts with customers. Issued in May of 2014, the objective of this revised framework was to establish the principles to report useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.
With the new revenue accounting standards set to become a reality in 2018, PwC and the Financial Executives Research Foundation teamed up to survey more than 700 accounting and finance executives to determine their overall progress in the implementation process. From key challenges and impacts, to expectations on incremental costs and management of resources, this year's survey provides a helpful snapshot of how prepared companies are to adopt the new standard.
According to our survey, 78 percent of companies have at least started analyzing the impact of the new standard, but most haven’t completed their assessment, which delays the next, and often more challenging, steps toward implementation. It’s no wonder some anxiety is building. Below are the three key takeaways and considerations from our survey that I think were most noteworthy for companies to know:
A majority of companies have not chosen an adoption method. Fifty-two percent of respondents haven't yet decided which adoption method they will choose. This wasn’t surprising. The dilemma surrounding the choice is understandable, given the potential pros and cons of each option. The interests of investors, analysts and key stakeholders need to be weighed against the time and effort that may be necessary under either model.
Internal resources may be strained. Looking at staffing and costs, 63 percent of respondents plan to utilize internal resources to support the implementation of the new standards and only 18 percent plan to hire consultants at this juncture. However, given that many companies have not yet completed their impact assessments, it’s difficult to determine if that number will change in the face of complex changes to systems and controls.
Firms view implementation cost as significant, not outrageous. From a cost perspective, 58 percent see incremental expenses in the range of $500,000 to implement the new revenue recognition rules, while only 10 percent see incremental costs rising above $1 million. These figures can increase significantly, however, if there is a need for significant systems, process and controls changes.
While most companies don't expect the new rules to have a material impact on their income statements, many of them that are currently performing their impact assessments have found more changes than they initially anticipated. With revenue being one of the most important financial metrics for companies, the effects will vary by industry and by company, but all companies should expect to see some level of impact, given the changes in the guidance and the extensive disclosure requirements.
The changes are coming and financial executives are taking notice. With revenue being a critical and often complex accounting area, many boards and investors will want to know what to expect, and there are steps you can take to inform them. The earlier implementation issues are identified, the more likely something can be done to address them, or to sensitize key stakeholders to potential changes.
For a timely summary of where many of your peers are in the implementation process, the results of our survey have been summarized in our online data explorer, accessible here. We hope you find this information useful as you move forward with your implementation plans. For additional guidance on the new revenue recognition accounting standards, visit CFOdirect, PwC’s online resource for accounting guidance.
Dusty Stallings is a partner in the Capital Markets and Advisory Services practice at PwC.