The top line on financial statements around the world is about to change.
And companies need to move quickly to determine which personnel will be responsible for implementing the new revenue recognition standard, said Dusty Stallings, CPA, a member of PwC’s national professional services group.
“Companies need to get their project management approach in place,” said Stallings, who is serving on an American Institute of CPAs (AICPA) working group devoted to helping companies implement the standard correctly. “… Get the structure in place that you need to understand the change, and follow that change all the way through.”
Historic changes that will affect revenue recognition for virtually every company that uses US GAAP or IFRS are on the verge of being put into place by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
A majority of members of both boards have indicated that they will vote later this month to support the converged standard. The standard will include a five-step process for recognising revenue that will not include much of the industry-specific guidance to which US companies are accustomed.
Companies that use IFRS for their financial reporting also will see a change, as the principle of the standard is focused on control, whereas previous IFRS focused on risks and rewards. Stallings said the effects on different companies and industries will vary widely, but everybody will experience some changes.
“I don’t think there is anyone who will see no change,” Stallings said. “But certainly there are some industries that will have some major changes that they will be facing, such as telecommunications.”
After the boards’ anticipated approvals this month, the final standard is expected to be released in the first quarter of 2014. Initial implementation efforts, Stallings said, should focus on:
1. Building a team and a plan. Companies need to put a structure into place to analyse the change and follow it through the implementation process, Stallings said. She said the personnel involved will depend a lot on the structure and size of the individual organisations, but the effects on systems, processes and controls means that personnel from many functions could be involved. These could include:
- Finance. The change is so important that someone high up in the finance organisation should be involved, Stallings said.
- Sales. The impact the change will have on sales negotiations will need to be considered, she said.
- Legal. If contracts will change, legal may need to play a role.
- IT. Companies may need to evaluate whether systems changes are necessary.
Once the team is built, a timeline with responsibilities and accountabilities can help the transition occur smoothly.
2. Make sure you understand the standard. This may be particularly difficult for US companies that are accustomed to prescriptive, industry-specific guidance.
“People are going to have a natural tendency to want to do what they do today … so it’s going to be very important that you understand what’s actually there and not bring along practices in today’s GAAP and superimpose it when it might not belong there,” Stallings said. “Make sure you truly understand the differences that come about as a result of this standard.”
Getting direction on how to do something new may not be easy, though. FASB and the IASB are creating a Transition Resource Group to help with implementation questions. The AICPA is updating the industry audit and accounting guides to reflect the changes from existing GAAP, as well as issuing an accounting revenue recognition guide that will provide helpful hints for applying the new standard. Comparing notes with peers in industry groups also is a good idea, Stallings said.
3. Decide on transition. This is where the urgency for implementation may increase for some companies. The standard will take effect for reporting periods beginning after December 15th 2016 (FASB), or reporting periods beginning on or after January 1st 2017 (IASB).
One transition option is a full retrospective method, which would require public entities to restate comparative years for two fiscal years before the implementation date. An alternative, simpler transition method that would not require two fiscal years of restatement also is available, but Stallings said some companies plan to use the full retrospective method to help investors get a full understanding of trends.
Many companies that use the full retrospective method will want to have systems in place for dual reporting at the beginning of 2015, she said. That shortens the implementation timeline considerably.
4. Analyse contracts and revenue streams. Companies are going to have to review their contracts and understand the effects the standard will have, Stallings said.
“Do you need to review every contract? Not necessarily,” she said. “But you need to review all [different] types of contracts. If you’re in a company where every contract is unique, you probably have a bit more of a challenge on your hands than if you’re at a company where there are a lot of very similar contracts that you typically enter into.”
5. Consider systems, training and education implications. Any company that is performing systems upgrades for other reasons will want to take into account the implications of the new standard, Stallings said.
She said it’s a bit too early to predict, though, whether companies will need massive systems changes or overhauls just to accommodate the new revenue recognition standard. She said the finance department and anyone associated with accounting and the financial statements should be trained on the changes the new standard brings.
Education should go upward, too, according to Stallings. She said board members should be kept up to date on the changes and their implications.
“Educating, making sure people understand that this is different and how it’s going to be different is going to be critical to getting it right,” she said. “And it is revenue. It’s the top line. It’s the one area where more education would be better than too little education.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.