New FASB Standards Pose ‘Huge Task’ for Companiesby
A new survey report by KPMG LLP about adapting to the Financial Accounting Standards Board’s (FASB) new revenue recognition and lease accounting standards can be boiled down to one key message: Get going.
The very first sentence of The Great Accounting Challenge states that “the task ahead is huge.” But of the more than 140 mostly public companies surveyed, 80 percent said they’re still determining what the impact of the new revenue recognition standard will be. Some haven’t started doing even that much, while 7 percent said their implementation was in progress. And while the new lease accounting standard is only a few months old, the survey indicates that companies may fall behind on implementing that, too.
So, is this really such a big deal or just a scare tactic?
“Companies that are not able to wrap up their assessment in the near future may find themselves challenged to design and implement process and system changes before the effective date,” the report states. “These companies will be forced to rely on manual processes and manual controls when they ‘go live,’ delaying the introduction of new systems or other automated processes until sometime after the effective date.”
The effective date of the revenue recognition standard is Jan. 1, 2018, for calendar-year public companies and 2019 for nonpublic companies.
The leases standard takes effect Jan. 1, 2019, for calendar-year public companies and 2020 for nonpublic companies.
Here are revenue recognition takeaways from the survey report:
- The majority (63 percent) of companies reported facing competing priorities and financial and personnel constraints, while 37 percent said they’re on track.
- Forty-six percent of respondents will change existing systems or add new software. About the same number (47 percent) will handle the changes either with existing systems, manually, or with Excel.
- About half (51 percent) of respondents said implementation will cost less than $500,000; 15 percent said $500,000 to $999,999; 17 percent said $1 million to $2.49 million; and 17 percent ranged anywhere from $2.5 million to $20 million or more.
- Increased disclosures will hit companies the hardest, followed closely by accounting procedures and systems.
- Not quite a third (29 percent) of respondents said their tax advisors are involved in assessing the changes.
As for the leases standard, the survey revealed the following:
- More than half (58 percent) of respondents have fewer than 1,000 leases.
- Almost a third (28 percent) have 30 or more locations with leases.
- Nearly half (49 percent) said they’ve started to assess the standard’s impact, while 47 percent said they haven’t.
- Of those that have started assessments, few have completed the necessary tasks. The most progress has been made in taking lease inventories, with 55 percent of respondents indicating they’ve begun the process. The next-largest category was validating data, with 47 percent saying they’re doing it.
- The least progress has been made in analyzing the lease process, tax impacts, assessing technology system requirements, performing upgrades, and training – with a total of 70 percent in those five categories combined indicating they’re in the process.
- More than a third (38 percent) expect implementation will cost less than $100,000, while 32 percent say it could cost up to $499,999.
- More than half (55 percent) expect the standard to moderately impact taxes, while 37 percent expect minimal-to-no impact.
- More than half (54 percent) expect the standard will affect debt covenants in that bankers will allow for reduced net-worth ratios because of “grossing up the balance sheet,” the report states. Almost half (47 percent) say there may be a negative effect on financing.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.