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Many Companies Still Unsure of Revenue Standard's Impact

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Oct 30th 2015
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The new revenue recognition standard, and its effective dates for public and nonpublic companies, are no secret to anyone. Yet a majority of companies have yet to complete their initial impact assessments.

That's one of several key findings revealed in a new report by Big Four firm PricewaterhouseCoopers (PwC) LLP and the Financial Executives Research Foundation, which surveyed 335 executives from companies of varying sizes, most of whom (60 percent) represented companies with $1 billion or more in annual revenue.

“Many companies do not yet have a clear understanding of how the new standard will impact their organization,” the report states. “There has been little actual implementation to date, and significant indecision exists regarding which of the two methods of adoption companies are likely to follow.”

The converged standard on the recognition of revenue from contracts with customers was introduced by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May 2014.

The guidance – which standardizes how companies should recognize revenue in financial statements under both US GAAP and IFRS – was supposed to take effect starting in 2017. However, after several companies expressed concern that they would not have enough time to update their systems and processes before 2017, the FASB agreed to push back the effective date to Jan. 1, 2018, for public companies and to Jan. 1, 2019, for nonpublic companies. The IASB also delayed the effective date by one year for companies that use IFRS.

According to PwC, the FASB and the IASB are hoping to finalize various changes to the standard by the end of this year.

Companies can elect one of two adoption methods for financial reporting under the new standard: a full retrospective method that would apply the standard to each period presented or a modified retrospective method that would apply the standard to existing and future contracts as of the effective date, with disclosure of line items that differ under the new standards from what would have been recorded under legacy guidance in each quarter.

Because some dual GAAP reporting will be required, companies will have to have two sets of accounting records for a period of time.

Here are the key takeaways revealed by the survey:

  • Many companies don't yet fully understand how the standard will affect them. Only 5 percent of survey respondents indicated they've begun implementation of process changes “despite the fact that public companies planning to utilize the full retrospective method of adopting the standard will need 2016 information,” the report states.
  • Why the delay? More than a third (38 percent) of respondents don't believe there will be a significant impact on their company financials, 27 percent are awaiting more guidance, and 18 percent cited resource constraints.
  • Financial statement impacts may be underestimated. The majority (78 percent) of respondents said their companies hadn't yet tried to quantify the new standard's financial statement impact. And half don't believe there will be any impact on their income or balance sheets.
  • Most (83 percent) are undecided about which adoption method to use, while 65 percent are undecided but leaning toward the full retrospective method. Of the 17 percent who had decided, 10 percent chose the modified retrospective, while 7 percent opted for the full.
  • Most (more than 66 percent) are working toward the 2018 effective date.
  • Most (67 percent) believe the new standard will require significant-to-moderate effort to implement.
  • A third (33 percent) believe business models will change to some degree, while 23 percent are uncertain.
  • About half (53 percent) expect to make some system changes; 23 percent are unsure.
  • Respondents were similarly concerned about many business aspects of applying the new standard. But customer contracts (37 percent), the disclosure process (33 percent), and billing systems (33 percent) were ranked as the most difficult.

“There is no one-size-fits-all solution to address the new standard,” Andrej Suskavcevic, president and CEO of Financial Executives International and the Financial Executives Research Foundation, said in a prepared statement. “For some organizations, the most challenging aspect of the transition will be determining the impact on identifying performance obligations. For others, it may involve deploying the right combination of technologies and processes to address the new requirements.”

Either way, he said, “it is high time for companies to get started, if they have not already.”

Related articles:

FASB, IASB Unveil Final Standard on Revenue Recognition
FASB Agrees to Defer Revenue Rule Effective Date by One Year

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