New Financial Accounting Standards Board (FASB) revenue recognition rules will be required to apply to reporting periods beginning after December 15, 2018 — and likely will be allowed a year earlier for those who are ready.
The new framework will impact all industries, but is most likely to affect those with longer delivery cycles or complex contract terms. Among the industries identified as potentially facing major change: Software, telecommunications, asset management, airlines, real estate, aerospace and construction.
It is an issue that needs immediate attention because companies have a choice of how they will apply the rules – retroactively (including two prior years of data), or prospectively. Companies need to be evaluating their options now in order to prepare properly for the change.
Those that have started the process are discovering that what they expected to be a straightforward accounting exercise is actually affecting operations across the board. It is critical that organizations do their due diligence and involve all key stakeholders to tackle this project.
Protiviti launched its revenue recognition webinar series in November, working holistically through our propriety Six Elements of Infrastructure — and how each should prepare for the transition. Here are the links to the previous seminars:
Webinar #1 – Revenue Recognition: It’s Here, Are You Ready? Transitioning to the New Revenue Recognition Standard (Nov. 20, 2014)
Webinar #2 – Revenue Recognition: The People Elements – A Collaborative and Cross-Functional Collaboration Process (Jan. 20, 2015)
Webinar #3 – The New Revenue Recognition Rules: Using a Methodology to Identify Gaps in Current Business Processes (March 18, 2015)
Registration is now open for the May 21st webinar, The New Revenue Recognition Rules: Systems, Data, Reporting and a Transparent Audit Trail. Register at protiviti.com/webinars.
Below, Chris Wright answers some of the top questions posed by webinar participants so far:
Q: Where do you see the biggest challenge in this transition?
A: The biggest challenge is going to be in companies going through a proper diagnostic effort to understand the degree to which the new standard will affect them: whether it will lead to radical change, or no change at all – or anything along the spectrum. The reason that’s going to be a challenge is because the process of coming to those conclusions will require a multidisciplinary approach.
It will require whoever is responsible for the effort to engage the assistance of many others – if the finance team is in the lead, they’ll need to work with HR, legal, tax; they’ll need to work with IT and with internal audit, and they’ll have to do all of that under the cover of permission from either the CFO, the audit committee, or both.
In the absence of a proper diagnostic and finding out how hard or easy it’s going to be for your company, you will likely be wasting time explaining to the people to whom you report how significant or insignificant the change is likely going to be – time that you could be spending preparing a project plan based on insight from your diagnostic. The challenge that comes with this kind of inaction is that you run the risk of overestimating the simplicity or the complexity of the process and either doing too much too soon or too little too late.
Q: What input should the external auditors have in the process?
A: There is nothing but upside in talking to your external auditors about this change. External auditors are familiar with the company, and they understand what it takes to get through the process of planning and producing accurate financial statements. They should also have a view on prospective versus retrospective application of the rules, especially in the context of how “auditable” your records are likely to be for the two earlier years, given past history or current controls in place.
It’s good to make sure the external auditor agrees, at least in principle, with how a company has interpreted the rules and reviews the process and control changes stemming from those judgment calls. When you change a process, the controls change, and then the risks change, and the company’s auditing response to risks and controls has to change as well. These changes should be vetted by both external and internal auditors.
Q: How long should the diagnostic process be?
A: It depends on what the company does for a living and how it earns its revenue. Many companies, for which the revenue recognition process is currently simple, may discover through the diagnostic process that little or no change is required. For those companies, the diagnostic process may be very quick and the company will gain comfort in knowing it is not overestimating the simplicity or the complexity of the change.
For others that are more complex, or diverse in terms of products, geography or business lines, the diagnostic process will be more complicated, due to the complexity of their own business model.
It shouldn’t take terribly long in either case. That said, we are aware of extremes, anecdotally, from having participated in conferences and conversations with companies, where, on one hand, some companies are able to use internal resources and quickly conclude on what it is they have to do, and on the other, global multinationals with complex contracting processes are discovering they have to spend thousands of hours and millions of dollars to prepare to adopt the new standard.
Protiviti will be offering more answers to webinar questions in May as part of Internal Audit Awareness Month. For additional information about the month-long initiative, spearheaded by the Institute of Internal Auditors, please visit The IIA’s website.