Results are in: Takeaways from rev rec implementation
With the deadlines for companies to comply with new revenue recognition standards layered between now and 2019, PwC conducted a survey to evaluate how public companies that have already undertaken the process handled the change, and how companies still looking ahead toward this task anticipate the impact.
The deadline for most public companies and IFRS reporters to comply with rev rec standards has passed, with the standard going into effect for fiscal years beginning after Dec. 15, 2017. A recent PwC GAAP Change survey indicated that 66 percent of public respondents have completed their implementations. Only 19 percent represent non-calendar year-end companies and another 15 percent are continuing to remediate issues or are exploring further automation options.
Meanwhile, the deadline for non-public U.S. GAAP reporting companies is approaching for fiscal years beginning after mid-December of this year. At this point, 57 percent of companies are not yet finished assessing the impact of the new rev rec standards. As we enter the time when these companies must get this process moving, private companies have the advantage of understanding the key challenges that complicated the process for public companies and have an opportunity to devise a more strategic action plan.
Overall, complying with the new rev rec standards has challenged public companies, with 42 percent indicating that the level of effort in assessing or implementing them was greater than expected. Private companies might be underestimating this burden, with only 22 percent predicting that complying with the rev rec standards would be a challenge. Many public companies have reported taking anywhere from six to 18 months to assess and implement the changes, meaning private companies have time to evaluate and learn from their public counterparts’ experiences to address the primary areas of difficulty — time, labor and cost.
Public companies acknowledged underestimating the time needed to comply with the new standards. The top overall challenge identified by public companies concerned contract reviews — 71 percent of public companies reported the process to be somewhat or very difficult. The tedious review process required significant manpower to ensure appropriate application of the new standards. As part of the adoption process, 52 percent of the public companies surveyed said they reviewed or expected to review more than 100 contracts. In comparison, 31 percent of non-public companies expected to review this quantity.
Along with the quantity of contract reviews, public companies identified other aspects of implementation as particularly challenging. More than 60 percent of public respondents indicated that accounting policies were somewhat or very difficult, and more than half indicated the same for human capital needs and business process changes, respectively.
Specifically regarding accounting challenges, more than half of the public companies surveyed noted that disclosures, identifying performance obligations, variable consideration and timing required more effort to evaluate than anticipated. The labor-intensive interpretation and accounting application requires significant, dedicated human capital.
The intricacies of applying the new standards requires a dedicated and appropriately staffed team. A majority of public companies polled (74 percent) indicated they had a revenue recognition team that is greater than 3, while only 47 percent of non-public companies reported having a team of this size. A third of public respondents said their teams were comprised six or more people.
What is the approximate size of your overall revenue recognition implementation team (internal and external)?
Private companies also need to plan and prepare for the financial investment required to effect the changes. Given the time and labor required to comply with the new rev rec standards, adopting these changes can be an expensive undertaking. In order to implement the new standards, 42 percent of public companies incurred or expected to incur a cost of greater than $500,000, while only 16 percent of non-public companies anticipate this cost. Another 18 percent of public respondents said they incurred costs of $1 million or greater, while only 3 percent of non-public companies anticipated this expenditure.
Meeting the FASB deadlines is crucial for both public and private companies alike. With private companies beginning to realize the task at hand, and deadlines approaching sooner than current attitudes may imply, the learnings of public companies will be vital to a seamless transition. Balancing these efforts with other strategic initiatives, planned and unplanned, is critical. Private companies should leverage the experiences of companies that have worked through implementation and take advantage of the time remaining.
For additional insights on the challenges that companies have faced in implementing the new rev rec standards, view PwC’s 2018 accounting change survey data here. You can also view a recent PwC webcast featuring real private companies discussing their experiences implementing here.