Transitioning to the New Revenue Recognition Standard Will Likely Be Harder Before It Gets Easier

Chris Wright, Managing Director Global Leader, Business Performance Improvement Practice

The new revenue recognition accounting standard from the Financial Accounting Standards Board (FASB) is going into effect for most public companies in their next fiscal year, and a year later for everyone else. This fast-approaching deadline explains the increased interest and focus on the standard in Sarbanes-Oxley initiatives. The focus also showed up more demonstrably in our 2017 SOX survey than it has in the past. A majority of respondents (56 percent) indicated they are well into the transition process and have begun to update their controls documentation.

In theory, the new standard is intended to simplify revenue recognition by replacing years of accumulated industry-specific guidance with a single global model. It includes a number of disclosure requirements intended to enable users of financial statements to understand timing and judgments related to revenue recognition.

This may appear simple to some companies in industries not substantially affected by the new standard, but many other organizations will still have to work through some uncertainty in the few months remaining between now and the effective date as they analyze current processes to identify gaps, and design and implement new processes and procedures to the extent necessary. And for those organizations for whom the apparent change will be substantial, the actual change may be even more substantial than first impressions, as well.

The new standard provides a five-step revenue recognition framework in which companies must:

  1. Identify customer contracts
  2. Identify performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to each performance obligation, and
  5. Recognize revenue as each performance obligation is met

There are a number of changes that companies need to plan for. Multiple-element arrangements (arrangements in which companies deliver more than one thing — goods, services and after-market services; hardware with software that requires upgrades, etc.) need to be looked at in terms of whether or not each individual element should be considered a distinct element requiring revenue and expense recognition.

The ability to use estimated selling prices across all industries is also new and, for many, quite welcome. Some would say this is an easier way to allocate selling price than prior models, particularly for software companies. Similarly, companies that regularly receive performance bonuses at the end of a contract, or some other variable form of consideration, may now be able to recognize that revenue earlier, provided that they have experience and good data documenting previous outcomes. Transitioning to this new standard, even if the result is an easier future process, will nevertheless take effort to get there.

For example, identifying contracts and designing and implementing new controls and procedures can be a tedious and time-consuming process. Many companies are seeking guidance with their transition efforts with the goal of defining and implementing an approach that results in a smooth transition and sustainable processes. We held a SOX compliance webinar last month, in which we outlined a structured approach for the transition. The nine key elements of this approach are grouped by transitional phase (Analyze, Design, and Implement).

In the Analyze phase, organizations form a steering committee — which should include not just accounting and finance staff but legal, IT and internal audit as well, among others — to perform a gap analysis of current processes compared to the new standard, determine the transition method and assess reporting capabilities against the new requirements.

Once the process and reporting gaps have been identified, the transition enters the Design phase. This is where remediation recommendations are honed into a transition strategy and assigned to a project management office (PMO) for implementation.

During the Implementation phase, the PMO, with guidance from the steering committee, works with process owners to update and test critical accounting policies and financial reporting controls, and produces the updated financial statements and other reports required under the new standard.

Some early adopters in industries for which the accounting change is substantial have been surprised by the amount of documentation required to substantiate their findings under the new standard. This will continue to be a topic of increasing concern in the weeks and months ahead as we move toward the first quarter of 2018 and as smaller companies, which may lack the project management infrastructure of some of the early adopters, move closer to implementation. A good starting point for those still in the early stages is our recorded webinar. And we are happy to answer your questions, in the comment section below.

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