As discussed in the June 2014 Update, earlier this year the Financial Accounting Standards Board and the International Accounting Standards Board adopted a new standard on revenue recognition. For U.S. public companies, the new standard is scheduled to take effect for reporting periods beginning after December 15, 2016. Since the recording and recognition of revenue is fundamental to all businesses, most companies will be affected to some degree by the new standard and will need to consider, long before 2017, whether and how their systems, reporting processes, and controls need to be modified to accommodate the new standard. Companies that elect full retrospective implementation (i.e., presentation of three years of comparable financial information) will need to have procedures in place to that permit the standard to be applied to transactions entered in 2015.
A survey conducted during the summer of 2014 by the Financial Executives Research Foundation and PWC indicates that many companies are off to a slow start in preparing for the new standard. FERF and PWC surveyed 174 respondents, 63 percent of whom represented public companies. Company revenues ranged from less than $100 million to more than $10 billion. Key findings include –
- Slightly over half of respondents (54 percent) stated that they were “somewhat familiar” or “very familiar” with the new standard. Eight percent were not familiar with the new standard.
- Most audit committee respondents either had not yet considered the new standard or had considered it only “somewhat.”
- Only 10 percent of respondents stated that they had attempted to quantify the financial statement impact of the new standard. About a third of respondents (35 percent) indicated that their companies had not attempted to quantify the impact, while 13 percent were “not sure” and 42 percent declined to respond to this question.
- Excluding those who were unsure or declined to respond, 77 percent of respondents said they expect to make significant changes to IT or enterprise resource planning systems as part of implementation of the new standard.
- Twenty-nine percent of respondents thought that the FASB’s effective date afforded sufficient time to adopt the full retrospective implementation approach, while 25 percent thought the time was not sufficient. Nearly half of respondents were unsure or did not respond. As noted above, under the current effectiveness schedule, full retrospective application will require 2015 data applying the new standard.
The PWC/FERF survey notes that a delay in the effective date of the new revenue recognition standard is a possibility. The FASB has announced it will perform outreach to assess whether a delay is warranted and plans to reach a decision no later than the second quarter of 2015. On December 9, the Journal of Accountancy reported that FASB Chair Russ Golden said in remarks at the AICPA’s Annual SEC and PCAOB Developments conference that FASB members are conducting field visits to learn how implementation efforts are progressing. “If companies have started to consider it and need more time, we’d want to know why they need more time,” Chair Golden was quoted as saying. At the same conference, SEC Chief Accountant Jim Schnurr said that a delay “depends on a number of things, but certainly if the parties determine there are implementation issues that require additional standard setting, I would think that would be a reason why you’d have to delay the adoption.”
Comment: Revenue recognition accounting and disclosure is a significant issue for virtually all public companies. Audit committees that have not already done so should discuss with financial reporting management how the company will be affected by the new standard, what changes in systems and controls will be necessary, and the likely financial statement impact. While a delay in the effective date is possible, it appears that many companies – consciously or unconsciously – are assuming a delay. A better strategy would be to formulate an implementation timetable.