Revenue Recognition: No Time to Wait: Quick Decision on Transition May Be Needed for Converged Standard
EXECUTIVE SUMMARY * Virtually all companies are expected to experience some level of change as a result of the new, converged financial reporting standard for revenue recognition, which was released May 28. * The vast array of industry-specific guidance in U.S. GAAP will be replaced with a more principles-based approach as a result of this standard. The rules will require a five-step process for revenue recognition based on the principle of control. * Companies will need to move quickly to address change management related to the standard, despite a seemingly distant effective date of reporting periods beginning after Dec. 15, 2016 (U.S. public companies), or reporting periods beginning on or after Jan. 1, 2017 (IFRS companies). Many companies may choose a full retrospective method of transition, which experts say is likely to require systems to be ready to capture data for dual reporting as early as the beginning of 2015. * The first step in the transition for many companies will be to build a cross-functional team for implementation. It may take significant effort for companies to understand what the standard means for their financial reporting, and companies may have to devote many resources to analyzing contracts and revenue streams. Systems changes and employee training also may be needed. ********** [ILLUSTRATION OMITTED] It took more than 11 years for FASB and the International Accounting Standards Board (IASB) to develop a converged standard for revenue recognition, which first appeared on the boards' technical agendas in 2002. At first glance, it seems as though the implementation date provides companies with plenty of time to get their systems ready for the changes associated with the standard, which was approved by both boards in December and was released May 28. The standard will take effect for reporting periods beginning after Dec. 15, 2016, for U.S. public companies, or reporting periods beginning on or after Jan. 1,2017, for companies that use IFRS. That is more than two years away. But companies may need to consider what the standard means for them much sooner in order to choose the appropriate transition method. Under the full retrospective method, public entities would be required to restate two comparative years prior to the implementation date. Companies may choose to take advantage of numerous practical expedients, including one that permits them not to restate contracts that begin and end within the same annual reporting period for contracts completed before the date of initial application. Under an alternative method, the new standard would be applied only to contracts that are not completed under legacy IFRS or U.S. GAAP at the date of initial application. Entities would recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings in the year of initial application. Comparative years would not be restated, but some detailed additional disclosures would be required. The full retrospective method may be more complicated, but some companies plan to use it to give investors a full understanding of trends, according to Dusty Stallings, CPA, a member of PwC's national professional services group. And that's where things could get tricky. Using the full retrospective approach could be difficult because it may require systems to be ready to capture data to perform dual reporting as early as the beginning of 2015, according to Stallings, a member of an AICPA working group devoted to helping companies implement the standard correctly. That could mean a substantial overhaul in business processes, accounting systems, or both--as well as employee training--in a short time frame. Each transition option has pros and cons. But companies may want to at least consider both options, and they won't be able to do that without a focused, thorough inquiry that would have to start very soon. …