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How Audit Committees Can Assist in Revenue Recognition Efforts

Dec 21st 2016
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There is only a year left before the new revenue recognition accounting standard goes into effect, and according to several recent reports, most public companies are nowhere near ready to handle the huge changes that will occur.

Implementation of the new standard, Revenue from Contracts with Customers (Topic 606), will take a significant effort, one in which audit committees will play an important role.

“Oversight of the implementation of new accounting standards is an important part of the audit committee’s responsibilities, and revenue is one of the most important financial reporting measures,” Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), said in a written statement.

So, the CAQ has just released an eight-page publication, Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees, to help guide audit committees through the implementation process. It provides several key questions that audit committees can ask management about the impact assessment, implementation plan, transition method, and disclosures.

“It is urgent that audit committees understand how management is assessing the impact of the new revenue recognition standard and forging a successful path to its implementation,” the publication states.

But it won’t be easy. According to a recent survey of executives by PwC and the Financial Executives Research Foundation, only 17 percent of public companies report being in the implementation phase. Three-fourths say they are still assessing the standard’s impact, while 8 percent say they haven’t even started an impact assessment or implementation.

In addition, just 15 companies in the S&P 100 have disclosed how they plan to make the transition to the new standard, according to the Wall Street Journal.

“If companies have not begun the process already, it is imperative to start preparing immediately,” the CAQ publication states. “The effective date of the standard for calendar year-end public companies is Jan. 1, 2018 (annual reporting periods beginning after Dec. 15, 2017, and interim reporting periods therein). For many companies, the new standard will require evaluation of 2016 and 2017 financial information under the new rules.”

The publication is broken into four sections of information for audit committees to consider.

1. Understanding the new revenue recognition standard – what is it? This section provides a brief overview of the core principles of the standard.

“Being knowledgeable about this complex standard is integral to effective audit committee oversight of its implementation,” the publication states.

To adopt the new standard, a company needs to elect either a full or modified retrospective application.

“Audit committee members are encouraged to be involved in the oversight of this decision and consider the market impact,” the publication states. “Companies should consider disclosing the transition method they elect once it has been decided.”

2. Evaluating the company’s impact assessment – how will revenue recognition change? This section assists audit committees in discussing with management and auditors the impact of the new standard due to various factors related to the company’s business, such as:

  • Industry
  • Key judgments
  • Differing revenue streams/varying types of contracts
  • Performance obligations
  • Impact to accounts other than revenue

3. Evaluating the implementation project plan – how do we need to prepare? This section assists audit committees in their efforts to understand and evaluate management’s implementation project plan.

“Due to the breadth and scale of the new revenue standard, it is expected that companies will develop an implementation plan, communicate it to the audit committee, and provide updates to the audit committee on a regular basis,” the publication states.

4. Other implementation considerations – what else do we need to consider? This section assists audit committees with other considerations, such as transition decisions and new disclosure requirements.

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