As former Corp Fin Director John White observed during the PLI Securities Regulation Institute last week, the new revenue recognition standard will represent a massive change for many companies. Perhaps with that in mind, SEC Chief Accountant James Schnurr, in an October speech before the UCI Audit Committee Summit, noted that, “the effective date of the standard will be upon us before you know it.”
The new standard, agreed upon by FASB and IASB, was designed to increase comparability across industries and capital markets and to enhance disclosure. The model involves a five-step process for deciding when and in what amounts to recognize revenue as well as extensive new disclosures. See this PubCo post, this PubCo post and this FASB summary. The new standard will apply to annual reporting periods beginning after December 15, 2017, i.e., starting in January 2018. See this PubCo post.
In his remarks, Schnurr urged companies to create implementation plans, taking into account the impact of the new standard on information systems, business processes, compensation and other contractual arrangements and tax planning strategies, among other things. Companies will also need to consider the adequacy of resources available for the task. In particular, companies should
“give early and ongoing consideration to implementing new controls or redesigning existing controls where necessary. This includes both controls that operate at the process or transaction level as well as controls in other components of [internal control over financial reporting] such as control environment, risk assessment, and information and communication. Given the special importance of properly accounting for revenue, to the extent changes are made to ICFR in advance of adoption that also relate to current period financial reporting, I would also remind management to consider its quarterly obligations to disclose material changes to ICFR. [emphasis added]
In light of the enhanced disclosure requirements of the new standard, companies may also need to implement new processes and controls to gather information and ensure its accuracy and completeness. In addition, audit committees will need to oversee the changes made by management to the company’s system of ICFR in transitioning to the new revenue recognition standard. (For further information on the Schnurr’s view of the role of audit committee members in overseeing the implementation of the new standard, see this PubCo post.)
As part of its implementation, Schnurr said, management will also need to consider the additional disclosures that will be necessary, including disclosures about the impact of the new standard on the financial statements when the new standard becomes effective in the future. Importantly, for the current year, Schnurr indicated that the SEC “expect[s] the level of these disclosures to increase between now and adoption and are looking forward to understanding more about the impacts during our review of the 2015 financial statements.” [emphasis added]
However, a 2015 survey conducted by PwC and Financial Executives Research Foundation suggests that even that level of disclosure may be difficult for many companies; according to PwC, the survey revealed that “the overall state of readiness may be lagging.” In the survey, 335 executives across a variety of industries (including 60% representing companies with $1 billion or more in revenue) were asked a variety of questions about their companies’ levels of preparedness. According to PwC, the four key findings of the survey were that:
- Many organizations do not even have a complete understanding of how the standard will affect their organization — 75% of respondents had not yet completed their initial impact assessment and almost 27% had not yet begun an assessment. Without completing an assessment, PwC says, companies may not have enough information to understand the impact of the new standard.
- Financial statement impacts may be underestimated — 78% of respondents reported that their companies had not attempted to quantify the financial statement impact of the new standard. Nevertheless, 50% indicated that they do not expect the standard to have a material impact.
- There is considerable indecision regarding method of adoption — only 17% of respondents could definitively say that which method of adoption they plan to use — the modified retrospective or full retrospective method.
- Very little implementation progress has been made – while the vast majority are planning for a 2018 effective date, most also recognized that “moderate to significant” effort will be required.