With the deadline looming for private companies to comply with the new revenue recognition standard, many companies are still in the assessment stage and have yet to start the actual implementation work. According to a PwC webcast poll of more than 3,000 financial executives, 44 percent are still in the assessment phase, 32 percent are remediating known issues, and 24 percent have completed the project.
The following are three important elements companies should consider early as they work toward compliance:
1. The impact on financial statements: As this is one of the most extensive accounting changes to occur in years, the impact could be financially far-reaching or limited to additional disclosures. In either case, companies need to complete an exercise to determine the impacts on their organization. Based on our experience, a few things should be considered:
- The implementation will likely demand more time and effort from financial personnel than other new accounting standards;
- Companies should use an implementation approach that includes cross-functional teams beyond accounting; and,
- Executive sponsorship and support, as well as adequate project management, are important from the outset.
Impacts of the new revenue standards are much more extensive and not just an accounting exercise that can be carried out with a few top-side journal entries. Overall, the time commitment will be considerable for many companies, but will vary depending on the industry and diversity of an entity’s contracts and revenue types.
2. Method of adoption: Companies can choose between two methods for implementing the new standard. They can either undertake a full retrospective approach, requiring them to recast prior-period financial statements as if the new standard had existed as of the earliest period presented, or they can use a modified retrospective approach. The modified prospective method requires a company to apply the standard only to contracts that are not completed as of the date of initial application without having to adjust to prior reporting periods. However, if companies choose the latter method, additional disclosures are required to reflect changes to each financial statement line item affected.
Keep in mind the mandate for businesses to disclose the impact to each line item will essentially result in companies applying both the new and previous revenue guidance in the year of initial application. Thus, private companies might not see much savings in time and effort when presenting only two years of financial data.
The modified option is meant to shorten transition time and effort for those who choose it, but pros and cons exist for each approach. Companies should take into consideration various stakeholders, including users of their financial statements, requirements of the parent company, if applicable, and the trend of other companies operating in the same industry.
3. Consider disclosures: Companies frequently leave the drafting of their financial statement disclosures until late in the process. Current revenue disclosures are very limited. The new standard is much more prescriptive, requiring expanded disclosures, both qualitative and quantitative. While private companies can elect to opt out of certain disclosures, others are required. Many of the new required disclosures may be information not previously transparent to financial statement users and thus may not have been data that was already gathered by or readily available to the company. Important consideration should be given to the new disclosures, and companies can again review industry practices for disclosures as there isn’t a “one-size-fits-all” model.
For more information, view PwC’s report, The New Revenue Standard: It’s Time to Get Started.