Revenue Recognition: Pain Points Beyond the Accounting

The countdown has begun. In less than five months, public companies that operate on calendar year-ends will be required to implement the US Financial Accounting Standards Board’s (FASB) new revenue recognition standard, ASU 2014-09, Revenue from Contracts with Customers. [Editor’s note: The equivalent IFRS standard is IFRS 15, which also comes into effect on or after January 2018.]

The experiences of some companies have already made clear that this standard will affect more than just accounting.

Many companies are finding that revising accounting processes and controls to support the new standard is a more significant undertaking than originally thought

The accounting ramifications are formidable enough: Given that the new standard is more principles-based than the existing one, finance professionals will need to apply more judgment to accounting decisions going forward. In addition, much of the industry-specific guidance in the existing standard has been dropped in favor of guidance that applies across sectors.

But it’s the broader ramifications—the impacts to information technology (IT) systems and human resources (HR) policies as well as the time and resources required to complete the necessary changes—that should have CFOs even more concerned.

In fact, those broader implications may find companies working on adjustments well into 2018. In this issue of CFO Insights, we will look at the multiple tentacles of the new standard, and outline some of the things CFOs need to prepare for—and how they can reduce surprises.

No accounting for time

Developed jointly by the FASB and the International Accounting Standards Board (IASB), the new standard, which was released in May 2014, provides a global framework to recognize revenue more consistently. Specifically, companies under contract to provide goods or services will now follow a five-step process to recognize revenue that requires more judgments and estimates than previously used.
Those judgments and estimates will typically require additional data-gathering and reporting, including extensive disclosures specifically on that data and those new judgments. In addition, companies will need to develop processes and controls related to the new standard itself.

Little wonder that many companies are finding that revising accounting processes and controls to support the new standard is a more significant undertaking than originally thought.

Then there is the accounting itself, which is posing its own implementation challenges. Aside from the increase in judgments, the new standard requires many companies to work through new levels of materiality and greater depths of analysis.

Consider, for example, the decisions around multiple element arrangements. If the contract pricing does not align with what the standard specifies, companies may find they need to perform allocations across multiple deliverables, multiple units of accounts, and multiple performance obligations—not an easy exercise across high volumes of transactions.

There are also confusing aspects to the standard. What happens, for example, if a company wants to identify contract costs that should be capitalized under the new standard, particularly with respect to costs to obtain, fulfill, or set up a contract, such as a sales commission?

Cost guidance in the new standard seems to indicate that it applies only to transactions that are not already in the scope of another standard. However, if companies are already accounting for these transactions, they likely are already under the scope of another standard, making the guidance potentially confusing.

The time and complexity involved in implementing the new standard may be why many companies are leaning toward using the modified retrospective approach instead of the full retrospective. 

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