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.

Licensing Developments from the January 6, 2016 FASB Board Meeting

While no official decisions were made, the Board observed two major points in relation to the accounting for licenses.

Observation #1 - Under ASC 606, license renewals will not be recognized as revenue until the term of the license renewal begins.

Under current GAAP, license renewals are to be recognized once an agreement is made between the Licensor and the Customer, regardless of when the new license term actually begins.  Since no additional performance is required by the Licensor by extending the term of a license, delivery (the triggering event) has occurred.

Under the new standard, a Customer must be able to use AND benefit from a performance obligation before a Vendor can recognize revenue.  

Accordingly, a Licensor cannot recognize revenue from a term license renewal until the Customer has the right to use and benefit from the license (i.e. when the term actually begins).  

Observation #2 - The application guidance on licensing does not override the five-step revenue recognition model in Topic 606.

In other words, licensing arrangements will still be considered under the context of ASC 606.  The licensing sub-topic will work in conjunction with the new revenue standard and will not require Companies to evaluate licensing deals outside of ASC 606.

The Argon Advisors Presents The Rundown: Gross vs. Net – Clarity on Services, Credit Risk, and Indicators

The IASB and FASB held joint board meetings on December 16, 2015 to discuss comments received by the public on the proposed guidance on Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The Boards largely approved the proposed amendments with few changes. We have included highlights from the meetings in the second edition of the Argon Advisor's Rundown.

Click here to read the full version of the Rundown.

Sam Kerlin

Prior to joining The Argon Advisors, Sam was a partner at KPMG. Sam recently completed a rotation as an audit partner in KPMG’s Department of Professional Practice, the firm’s national technical office in New York City. Sam has served several global and public audit clients in software technology, pharmaceuticals and bio-manufacturing. Previously Sam also served as tax manager in KPMG’s Washington National Tax practice in D.C., specializing in mergers and acquisitions tax accounting. He spent several years abroad in Germany and Russia and is fluent in both languages. Sam’s rotation in KPMG’s Department of Professional Practice included serving primarily on the firm’s Revenue and Debt/Equity topic teams. Sam has also served as the lead partner on several public software and other technology companies in recent years and specializes in technology and healthcare industries. Additionally, Sam serves as a representative observer for KPMG on the AICPA’s Software Task Force. Sam helped implement the adoption of SFAS 123R, Accounting for Share-Based Payments, at several companies within the Southeast. He has served as a consultant for revenue recognition and accounting for income taxes on several advisory engagements and leads firm training in revenue recognition, income taxes, and accounting for business combinations. Sam is a frequent instructor/speaker for clients and national training events on various accounting topics, including FASB/IASB convergence, revenue recognition, and accounting for income taxes. Sam has also co-authored several articles of KPMG thought leadership and helped draft KPMG’s publication on the new revenue standard. He has also taught corporate taxation in the graduate school at Georgia State University Other Activities Member of Finance Society, Technology Association of Georgia Member of Program Committee, GaBio Sam holds a CPA license in the state of Georgia and New York. He graduated from Wake Forest University with a BA in Russian and Masters in Accountancy.

Reminder: Part II of EY's 3-Part Revenue Recognition Live Webcast Airs 12.2.15 #RevRec

Click here to register for Session 2 of EY's three-part webcast series*, The new revenue recognition standard: a closer look, airing 2:00 PM EST on 12/2/15This webcast series includes a detailed discussion and a variety of examples for each step of the new revenue recognition model.  You will receive 1.5 hours of CPE for attending.

The following requirements of the new revenue recognition model will be discussed:

  • Determining the Transaction Price (Step 3)
  • Allocating the Transaction Price to the Performance Obligations in the Contract (Step 4)