How to tackle implementation of multiple high-profile accounting standards

Published on July 25, 2016

A wave of significant accounting standard setting has created heavy compliance burdens that many company finance departments are struggling to handle.

Just 37% of more than 140 companies surveyed by KPMG LLP said they are on the right track in their implementation of the new revenue recognition standard issued by FASB and the International Accounting Standards Board (IASB), which takes effect at the beginning of 2018 for public companies.

Meanwhile, new lease accounting requirements have companies attempting a challenging process of locating all their lease agreements and extracting data points from them that haven’t been necessary for accounting in the past.

This is a challenge because more than two-thirds (68%) of companies surveyed by PwC and commercial real estate services and investment firm CBRE have used spreadsheets as their primary system for tracking leases, and 84% currently abstract key terms from their lease agreements manually.

The problem starts with revenue recognition, as many companies are behind schedule despite a one-year delay in the effective date that FASB and the IASB announced last year. Seventy-one percent of the KPMG survey respondents are only at the point where they are assessing the accounting impacts of the standard, and an additional 8% haven’t even begun implementation.

This is a concern because almost half of respondents say they will need systems changes—which could be time-consuming. Thirty-seven percent will be implementing changes to existing systems, and 13% will be implementing a new software solution for revenue recognition.

Respondents in the KPMG survey who are not on track in their implementation said they have other competing priorities, are constrained by human resources, or are lacking financial resources.

Here are tips that experts say can help ease the burden of these multiple implementations:

Focus on first things first. Revenue recognition is the standard whose implementation date is coming up first, and for many companies, it may be the most challenging of the standards to implement.

Finish your revenue recognition assessment. The majority (71%) of companies in KPMG’s survey are conducting their assessment of accounting impacts.

Bring tax to the table. Just 29% of companies in the KPMG survey said their tax professionals were at least moderately involved in the assessment stage of their revenue recognition implementation.

Those who are not involving tax may be making a mistake, because the new revenue recognition rules may affect existing tax-compliance processes, taxable income, accounting for income taxes, tax accounting method changes, and other areas of tax, including transfer pricing, according to KPMG.

Many companies do expect the new lease accounting rules to have a tax impact. Sixty-four percent of companies in the KPMG survey expect the new leases standard to have at least a moderate impact on tax reporting.

Examine your current lease structure. Seventy percent of more than 500 executives responsible for lease accounting or lease management have either started implementation of the new standard or plan to start this year, according to the survey by PwC and CBRE.

As a result, extracting data from lease contracts can be a challenge. Some companies are using technology to assist them in this process in an effort to reduce the number of hours spent by staff.

Be mindful of debt covenants. Because the lease accounting standard will bring new liabilities onto company balance sheets, it has the potential to affect debt covenants that may be based on debt-to-equity ratios.

More than half (54%) of respondents to KPMG’s survey said the standard would result in bankers adjusting debt covenants to allow for the reduction in net-worth ratios. Companies should have a discussion with their bankers as soon as possible about the impact of the standard on the balance sheet.
(Source:  AICPA – CPA Letter Daily - Journal of Accountancy – July 15, 2016)