FASB’s Revenue Recognition Standard: Impacts and Challenges

With the calendar moving closer to revenue recognition implementation deadlines, the majority of companies are making slow progress toward adoption.

Paul Sheward, PwC’s US Accounting Advisory Services Leader, cited findings from an annual revenue recognition implementation survey conducted in collaboration with Financial Executives Research Foundation (FERF) in reporting that only 13 percent of respondents were in the process of implementing the standard, and only about one quarter were more than half way through an assessment.

The survey includes an online data explorer that allows users to customize their view of the survey results by industry, company size and other criteria.

Overall, 22 percent of respondents haven’t started their assessments — the first step in a potentially complex implementation process.


“Companies now have about 14 months to fully implement the new Revenue Recognition standard.”  That was the warning made by Dusty Stallings, PwC’s partner, Accounting Advisory Services, during a PwC webcast highlighting the survey results.

The objective of the webcast was to review effective dates and transition method, present findings from the August 2016 survey and suggest next steps for companies that need to implement the new standard.


The standard becomes effective for public entities for the first interim period within annual reporting periods beginning after December 15, 2017, but early adoption is permitted no earlier than January 1, 2017.  Privately-held companies have an additional year to implement.
 

Implementation Choice

Public companies have a choice of two optional transition methods, each with related pros and cons:

  • The full retrospective method will provide full compatibility across periods and may result in better investor relations, but will require a high volume of data to recast.
  • The modified retrospective method will require a recasting of less data, but may result in more work in the year of adoption.


In deciding which option to pursue, companies should ask themselves:

  • What do our analysts expect? and
  • What are our peers going to do?

Based on survey responses, Stallings reported about one-third of software companies plan a full retrospective.  She believes that the SEC will expect companies to disclose the status of their implementation plans and progress in this year’s 10-K.


The survey asked respondents “what level of total incremental costs do you expect will be required to implement the new revenue recognition standard?”  Because overall implementation costs are dependent largely on the results of the impact assessment, it can be difficult to determine the required effort and costs prior to completing the assessment.  Only 10 percent of the respondents estimated that incremental costs will total more than $1 million.  However, Sheward cautioned that the costs of new systems may not have been factored into the respondents’ estimates.

“Overall costs are impossible to answer before companies complete their assessment,” said advisory partner Brad Helferich during the webcast. “Maybe it’s capped at the costs it took you to assess. Generally speaking, it’s a crystal ball to estimate the overall time and the costs for internal or external resources, or software or otherwise. It’s not a question you can begin to guess without an assessment.”


The survey also asked, “How are you primarily managing resources to implement the new revenue recognition standard?”  Almost two-thirds of the respondents plan to leverage existing resources, and less than one-fifth say that they plan to hire consultants. However, given that many companies have not yet completed their impact assessments, it may be difficult to determine if that number will change in the face of complex changes to systems and controls.


Sheward thinks more companies may recognize a need for additional help as they complete their implementation assessment, but consultants and service providers with the appropriate expertise may be in short supply as the implementation deadline approaches.

The survey asked respondents to rate a series of challenges.  “Contract reviews” was the most frequently indicated (78%) as being somewhat to very difficult, with “developing new accounting policies” (76%) and “documentation” (76%) not far behind.


Sheward recommended a series of next steps for implementation of the revenue recognition standard:

  • Don’t underestimate the potential impact or level of effort required.
  • Complete your assessment soon.
  • Consider the pros and cons of each adoption method and plan for SAB 74 disclosures.
  • Develop a detailed plan for implementation.
  • Consider impacts of the new leasing standard.
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