Seven Revenue Recognition Considerations: New Standard May Force Companies to Wrestle with Many Changes
EXECUTIVE SUMMARY * Many companies will see changes in their financial reporting as a result of the converged revenue recognition standard under preparation by FASB and the International Accounting Standards Board. * Building a project team and a plan is an important early step in implementation of the standard. Companies also may want to take inventory of major revenue streams as they begin implementation. * Updated criteria for contract determination and new disclosure requirements are some of the changes companies may wrestle with as they implement the standard. ********** The prospect of preparing for a historic, game-changing revenue recognition standard at a huge, global public company is a bit daunting for GE Technical Controller Russell Hodge, CPA. "I'll admit to it being a little bit overwhelming to us," Hodge said. "We have $150 billion of revenue and so many diverse, different business models. It's a tough question. It's a tough thing to think about." The new, converged revenue recognition standard that's in the final stages of development by FASB and the International Accounting Standards Board is expected to lead to at least some changes in financial reporting for virtually all entities that use U.S. GAAP or IFRS. When this issue of the JofA went to press, the boards were scheduled to release the standard in the first quarter of 2014. In December, Hodge and other panelists at the MCPA Conference on Current SEC and PCAOB Developments described in detail some of the changes companies may face in moving from the industry-specific guidance m U.S. GAAP to one principles-based standard. Christopher Bolash, CPA, a partner in EY's Financial Accounting Advisory Services practice, encouraged CPAs to start thinking about the standard even before it is issued. He urged companies to build a project team and a plan, and to take inventory of major revenue streams so they will be ready to begin implementation when the final standard is issued. Here are some of the changes the panelists said companies may need to wrestle with under the new standard: 1. Updated Criteria for Contract Determination For a contract to exist under the new guidance, Bolash explained, an arrangement must have: * Commercial substance, which means changes in cash flows would be expected as a result of the arrangement. * Approval and commitment to perform obligations from both parties. * Identification of rights and responsibilities--and payment terms--by both parties. This is a bit different from the "persuasive evidence of arrangement" criteria some companies use in U.S. GAAP today, Bolash said. Companies will need to examine whether their arrangements meet the new criteria to be considered a contract. They may need to change their accounting policies if previously they relied only on the persuasive evidence of arrangement to determine whether a contract existed. 2. New Depictions of Contract Modifications The standard will include a new framework for reporting on contract modifications that could cause challenges and be a huge undertaking for some companies. Companies that retrospectively adopt the new standard will need to consider past contract modifications in determining contract balances. GE has many 15- and 20-year contracts that have changed over the years, and that could lead to implementation difficulties, Hodge said. "That's going to be a huge change," he said. "Having to go back and retrospectively restate those, thinking about all the modifications that have occurred in those contracts over the last 15 or 20 years, is overwhelming to think about." 3. Identifying Different Performance Obligations Companies that have followed long-term contract accounting under AICPA Statement of Position 81-1 typically think of the contract as the unit of account, Bolash said. …