Avoiding the Doomsday Countdown: How Companies Can Prepare for Changes in Revenue Recognition

Published on November 28, 2016

The countdown is on for 2018, as new international accounting rules, IFRS 15 for international countries and ASC 606 for the U.S., will change the way companies need to manage revenue recognition.

While 2018 seems far away, a recent survey by PwC and the Financial Education Research Foundation found that 75 percent of companies haven’t completed an initial assessment of the standard’s effect, and nearly 27 percent of respondents haven’t started the assessment process. This is a huge problem because it takes the average Fortune 1000 company 18 months to get ready for a change of this magnitude—a milestone that just eclipsed us in June.

Regulatory compliance is non-negotiable and imminent changes to accounting standards are likely keeping chief accounting officers and CFOs up at night. With a compliance deadline looming, corporate finance departments need to act now to ensure they’re ready when the standards take effect.

What’s Changing?
The new revenue recognition standard will supersede virtually all current revenue recognition requirements. These new standards—passed in 2014—eliminate the transaction and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition.

While public companies are expected to comply with these standards sooner than private entities, all organizations that have contracts with customers are effected—whether public, private or nonprofit.

The actual date of compliance is specific to the fiscal year of each company, but generally Jan. 1, 2018 is seen as the deadline for public companies, with private companies gaining an extra year to meet the new standards.

Challenges Ahead
While it may seem that companies have plenty of time to adjust to IFRS 15, time is actually running out. Finance professionals that have yet to begin their assessments are in serious danger of not meeting the January 1 deadline, which could lead to investor discomfort, penalties and fines.

Another challenge when it comes to racing the clock is training talent for these new standards. It can take a traditionally trained accountant up to nine months to get up to speed. While the updated revenue recognition standards have been a part of the higher education curriculum for years, existing staff will need training, and companies will need to work on a strategy for attracting millennial CPAs. Finance departments should also be prepared to partner closely with operations, sales and IT, because the standard affects so many aspects of the business.

Beyond the pressure of the final countdown, the impact on revenue is one of the most top-of-mind factors for corporate finance departments. While some businesses might not notice a big difference in their final reporting, certain industries such as telecommunications and leisure/vacation could be greatly impacted due to multi-year contracts and revenue streams that are calculated on an installment basis.

A change in revenue recognition standards can impact not only how revenue is calculated, but change the outcome and timing of earnings, and how those are announced and communicated to investors and key stakeholders.

How Companies Can Adopt
Since the prospect of preparing for the new revenue recognition standard can be daunting, companies should begin preparing as soon as practicable for the transition by understanding their systems and the tools available to them. How an entity chooses to adopt the revenue recognition standard dictates how many years of revenue will need to be restated. Two years of comparative reporting will often need to be provided once the new standard goes live and there are two models of adoption:

Modified Retrospective – Companies that adopt a modified retrospective approach begin implementing the new standards in parallel with the current GAAP standard for one year, no later than the 2018 deadline. This option allows companies to use with the new standard sooner.

Full Retrospective – If an entity chooses full retrospective adoption, there will be no change in accounting principles until 2018. At that time, all contracts will need to be restated for 2016 and 2017 to show comparative financial statements in tandem with going live on Jan. 1, 2018. This option allows CPAs additional time to conduct assessments before switching over to the new standard, but does require some extra legwork on the backend.

Next Steps
In order to ensure a smooth transition to compliance of these new revenue recognition standards, it’s important that CPAs and finance departments more broadly take the time to understand the changes to the current GAAP standards, recognize what’s needed for the transition, and develop a plan for how their company will comply.

While a change of this magnitude can be overwhelming, the good news is CPAs do not have to embark on this endeavor alone. Finance professionals should lean on strong partners that can assist in scaling a large number of transactions. By implementing the right technology and tools, accountants can better ensure a smooth transition that is more effective, efficient and ultimately successful in being compliant.
(Source:  AccountingToday – First Look – November 2, 2016)