AICPA Issues Audit Risk Alert on Revenue Recognition, With More Guidance to Come

Charles Soranno - MD New JerseyBy Charles Soranno, Managing Director
Financial Reporting Compliance and Internal Audit

 

 

The American Institute of Certified Public Accountants (AICPA) recently issued an Audit Risk Alert on Revenue Recognition – an early and significant entry in what will be a growing body of guidance concerning the Financial Accounting Standards Board’s (FASB’s) new revenue recognition standard. It’s an important resource for preparers and auditors, because it explains the new revenue recognition accounting and auditing requirements for financial reporting and governance, expected to be released in 2017. The detailed Flash Report we published on July 11 gives an overview of this important alert, provides background on the new revenue recognition standard, and describes the implementation and internal control considerations it will engender.

In 2017, the AICPA will issue a new Revenue Recognition Guide, including several industry-specific implementation guides. The sheer volume of upcoming guidance stresses the significance of the new standard, and hints at the scope and number of implementation challenges confronting preparers and auditors of financial reports. Companies will want to act now to ensure an effective and timely transition to compliance.

After the FASB announced last summer that it is deferring implementation of the new standard by a year, the standard is now finally scheduled to go into effect – as early as 2017 for some entities, with others (those who prefer to keep to the original timeline) permitted to begin early application in 2016.

Accountants and financial reporting managers, as well as internal auditors and others charged with financial reporting compliance and governance, will benefit from becoming familiar the issues that must be addressed not only during the transition but also afterward. Thus, the alert should serve as a helpful resource for understanding the standard itself as well as its impacts on accounting, financial reporting, and disclosures.

The AICPA’s alert explains the new standard’s principles and emphasizes points that preparers and auditors should consider to avoid misstatements of revenue. The alert also mentions auditors’ responsibilities regarding consideration of fraud in conjunction with a financial statement audit. Preparers and auditors should recognize that improper revenue recognition is a fraud risk, and that misstatements can arise not only from overstatement, but sometimes also from understatement, of revenue.

FASB’s new revenue recognition standard will require management to exercise more judgment, and potentially formulate more estimates, in recognizing revenue than it ever has before. Organizations will want to design an effective system of internal controls to address the heightened financial reporting risk. The AICPA alert includes a table that aligns the new standard’s five-step revenue recognition model to corresponding control activities that could support compliance, and suggests that audit committees and executives include revenue recognition considerations in their audit plans.

As this new standard comes into effect, internal auditors might want to extend their monitoring of internal controls to management’s ongoing implementation of the new revenue recognition standard, and encourage its integration into their organizations’ audit plans. Familiarity with the standard’s requirements and technical accounting acumen are, of course, essential.

Beyond changes to accounting and reporting, the new revenue recognition accounting standard will prompt changes to “people, processes and technology.” AICPA’s publication of the alert – and their forthcoming comprehensive implementation guides – demonstrate the importance of mastering the material, planning the transition early, and making a plan to monitor results after implementing the changes.

Access our detailed Flash Report here.

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