Companies slow to prepare for the new revenue standard

KPMG recently polled financial statement preparers across various industry groups regarding their progress towards implementing the new revenue standard.

  • Less than 29% of corporate financial preparers say their companies have a clear plan to implement the new standard.
  • Less than 13% say they have completed an assessment of the effects of the new standard and are planning implementation.
  • 82% say they are still assessing its effects or have taken no action.

Public companies must apply the new revenue standard beginning after December 15, 2017, which includes all interim periods leading up to the reporting date.  Private companies are delayed one year.

Clearly, most companies are seemingly behind on implementing the new standard. But why?

Well, we've compiled some common myths and facts we've consistently heard from F/S preparers preventing timely implementation below:

  1. "This new revenue standard sounds like IFRS convergence 2.0.  It's never going to happen."  Yes, IFRS convergence has practically been delayed into perpetuity...but ASC 606 is happening.  The FASB has drafted and published the new standard and many  industries will face drastic changes to the way they account for revenue from contracts.
  2. "I don't see how the new standard will affect my industry at all.  My numbers won't change."  While many industries will see significant changes to the way they report revenue, it's true that some industries will see no impact to the top-line numbers they've historically reported.  However, under the new standard, companies will still have to modify disclosures on the F/S, update internal GAAP policies, make changes to their SOX programs, and potentially change the way in which they record and capture data.
  3. "It seems as if the standard is still being updated...I'm going to wait till it's finalized."  While certain provisions of the new standard are still being reviewed by the FASB (namely the licensing guidance), the core of the new standard will not change.  There are some key tasks to be performed that will not be affected by updates to the standard:
    1. Performing initial gap assessments and drafting new revenue models
    2. Understanding the data needed to comply with the new standard and current system limitations
    3. Updating accounting policies and revenue checklists
    4. Implementing SOX compliant contract review processes
    5. Training of accounting personnel
  4. "We will address the new standard internally as the convergence date approaches."  ASC 606 is complicated.  And it presents vast changes to the way many firms will be forced to recognize revenue.  It will most likely be extremely difficult to rely on internal staff with already busy schedules to A) obtain the high-degree of ASC 606 knowledge required to understand the unique challenges each firm faces, and B) implement those changes across different functions of the business (finance, sales, IT, legal, etc.).
  5. "We don't want to spend the money implementing the new revenue standard at this time."  Unfortunately, the demand for ASC 606 implementation is only going to increase.  As the KPMG study indicated, most firms have not started preparing for this substantial accounting change.  And since each company presents its own set of unique facts and circumstances, it will be difficult to find 'out-of-the-box', cheap, wholesale solutions.  The companies that start this process sooner will save in the long run.

Will technology companies that implement the new revenue standard (ASC 606) early be able to recognize more upfront revenue on sales?

Existing GAAP for software companies (SOP 97-2 or ASC 985) requires companies to defer revenue until all four criteria for revenue recognition have been met, and until fair value can be be established for any undelivered elements.  Many technology companies, particularly software providers, are subject to this guidance.

The new revenue guidance ASC 606 will do away with these stringent standards, which often caused revenue recognition to be out-of-sync with the economic reality of sales transactions.  You'll now be able to estimate aspects o revenue accounting, including fair value of promised goods and services as well as future variable consideration.

And so the question presents itself:  will companies with a better grasp of their data be able to recognize more revenue earlier through better estimates?

Let’s take a look at the concept of variable consideration, which is a key aspect of Step 3: Determine the Transaction Price under the new model.  From the opening summary of the new standard:

If the amount of consideration in a contract is variable, an entity should determine the amount to include in the transaction price by estimating either the expected value (that is, probability-weighted amount) or the most likely amount, depending on which method the entity expects to better predict the amount of consideration to which the entity will be entitled.

Companies may be able to begin recognizing revenue for promised goods or services that wouldn’t have met the delivery or the fees are fixed or determinable criteria under the existing standard.

But wait.  There's an important caveat to variable consideration, which will potentially limit companies that don’t have a firm grasp on their historical contract data: the variable constraint.

The variable constraint concept will allow companies to only recognize revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Companies eager to pull forward revenue that would previously have been deferred under existing GAAP will need to be weary of the variable constraint when recognizing revenue from variable consideration. 

Data will need to be aggregated and analyzed in ways that may not have been required in the past, as revenue can only be recognized to the extent you can support a significant adjustment is unlikely.

Ultimately, we believe in practice that companies will be required to estimate variable consideration, and the impact of the variable constraint will be based on external factors only.  In other words, companies will be required to have supportable estimates, as opposed to being able to take a hit on upfront revenue in exchange for being able to delay implementation.

Do you have a plan in place for assessing the data you could be collecting now to support your revenue recognition down the road?