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Revenue recognition: Are you in denial?

After more than a decade in the making, the FASB and the IASB finally issued new revenue recognition rules. Now if the boards needed that kind of a runway, how hard will it be for companies to implement? This is what management should be asking themselves.

But I get a sense that some are just in shock and aren’t asking the questions that need to get asked — maybe because they thought the guidance would never be issued or maybe because it’s just one more thing on the corporate plate right now. I get it. When anyone is in a state of shock, they tend to adopt a couple of go-to coping techniques — denial and procrastination. It’s been just over three months since the rules have been issued, and I have been witness to those coping techniques as companies battle implementation shock. What’s developed is a culmination of misconceptions, which we dispel below.

6 common misconceptions about the new rules

#1 The new rules don’t impact my business.
The new rules will apply to all entities that enter into contracts with customers, including long-term contracts and licenses. You cannot determine the impact until you truly evaluate each of your revenue models under the new guidance. Companies should also look ahead to how their business is growing and changing, and consider the new rules in connection with possible changes in their sales models between now and the adoption date. And, at the end of the day, even if your conclusion is “no impact,” you’ll also need to document your evaluation, vet it with your auditors, and update your financial statement disclosures and policy documentation so that they coincide with the new guidance.

#2 The implementation date is far away, so I can afford to wait.
While the standard is effective Q1 2017 for calendar-based public companies, the guidance does not allow for prospective adoption. You have some choices in terms of adoption methodology, but no matter what you decide you’ll still be looking back to 2016 and possibly 2015 if you choose full retrospective adoption…and 2015 is just around the corner. As a result, you will need to assess current contracts and those that commenced several years before the effective date. Then, when you begin to consider systems, processes, financial planning, investor communications, that date will no longer look so far off — especially when you know implementation duties will be in addition to your day job.

#3 Implementation of the new rules is just an accounting exercise.
So many people believe that it’s something that their accounting department will handle. Quite the contrary! Consider the following: debt covenants (treasury), sales incentives (HR), customer contracts (legal), investor communication (IR), systems (IT), and internal controls (internal audit). Companies big and small will need to think operationally where these rules are concerned. A successful implementation should be a collaborative effort across the organization.

#4 The standard only impacts the timing of revenue.
The fact is the new standard is comprehensive and changes the way we look at contracts with customers, the concept of delivery as well as many other aspects of the revenue process. For example, some of the collaboration revenue of life science companies may be excluded from the revenue guidance if the other party to the deal is not considered a “customer.” The new guidance also considers whether there is a financing component when an arrangement extends beyond one year. And any company opting for the modified retrospective adoption approach may have to record a cumulative effect of a change in accounting principle, which means it goes into the “black hole” of retained earnings, skipping the P&L, never to be seen again.

#5 My financial systems are savvy and can handle the rule changes.
With the complexity of contracts, there is no simple “flip-the-switch” scenario that can be employed. All types of revenue models will need to be evaluated. The new standard utilizes estimates and judgments, which can pose challenges in terms of automation. Companies may also want to look at additional reporting functionality to support their estimation process. And with all of this, internal control processes both in and around their system capabilities will need to be reviewed and updated.

#6 These changes always get delayed.
While some of us remember fondly the days when the internal controls part of SOX kept getting delayed, keep in mind that SOX was a U.S.compliance initiative. The new revenue rules, on the other hand, were developed in collaboration with the IASB in an effort to move closer to a single set of global accounting standards. The boards took great pains in developing the new standard and laying down the transition date so that reporting of revenue would be consistently applied on a global basis. So while companies may continue to lobby for postponement, this could result in nothing more than wishful thinking. Investors are going to want their companies to plan ahead — the “wait and see” approach will put delayers at high risk for financial misstatements and delayed filings.

In the face of a sweeping standard that could have extensive implications, it’s easy to understand why anyone would deploy coping strategies and try to look the other way. But as you can see from this list, there’s a lot to be done and only a certain amount of time to get it done right. The best approach is to tackle one step at a time. Start with assessing the impacts to your business — financial, operational and external. Then develop a plan. Knowing what needs to happen and how you can get there is certain to to take you away from the depths of denial to a clear path to compliance.

Kelley Wall leads RoseRyan’s Technical Accounting Group, which provides technical accounting and SEC expertise to public and private companies on complex accounting matters and implementation of new accounting pronouncements.

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