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How the new revenue recognition rules should help global businesses

One of the issues global companies have always faced is how to manage a global sales force in an environment where local accounting rules for revenue recognition vary. Countless times, sales teams have vented to me because U.S. GAAP doesn’t allow us to recognize revenue when IFRS does. My response has always been that accounting rules should inform us, but they don’t define good business. Ultimately, the sales team needs to negotiate the best deal for the company (only one consideration of which might be whether or not we can recognize revenue), and we accountants will advise them on the best way to structure the deal and, ultimately, figure out how to account for it.

The new revenue recognition rules, expected to be issued simultaneously by the FASB and IASB in Q1 2014, will create a new global environment with enhanced comparability across industries and geographies. Global companies will be operating on the same playing field, which should give them some relief. OK, sales guys—time to stop venting and focus on making good business deals.

Judgment is a double-edged sword
The beauty of the proposed new rules is that they allow for judgment. However, that’s a double-edged sword, since filers have abused “judgment” in revenue recognition in the past and caused regulators (the SEC, EITF, AICPA, et al.) to respond by drawing “bright lines” in their issuance of “clarifying literature” (staff accounting bulletins, technical practice aids, EITF interpretations) to provide consistency in accounting and reporting where the FASB hadn’t drawn those lines. It will certainly be interesting to see how well regulators embrace this principles-based approach to accounting for revenue with this complete converged rewrite of international accounting standards.

Under the new revenue recognition rules, the five basic steps for accounting are:

  1. Identifying the contract with the customer. (Yes, sales team, you still need to include all of the deal in the contract. We still don’t like verbal side arrangements.)
  2. Identification of the separate performance obligations in the arrangement. (Similar to current multiple-element arrangement rules, these don’t need to have a price spelled out in the contract.)
  3. Determining the transaction price.
  4. Allocating the transaction price to the separate performance obligations in the contract. (This will require significant judgment, thus the need to thoroughly document the basis for your assumptions.)
  5. Recognition of revenue when each separate performance obligation is delivered.

The latest clarifications from redeliberations have added back a requirement for collectibility to be probable—and note that this is the one minor nonconverged compromise point in the standard; there are minor differences in the FASB and the IASB definitions of “probable.”

For those who aren’t yet familiar with how the new rules will roll out, we are expecting the new standards to be effective for fiscal years beginning after December 15, 2016. For most calendar-year companies that means 2017, and one year later for private companies. With a retrospective presentation of prior periods, companies will be considering and evaluating the new revenue recognition rules for 2015, 2016 and 2017 transactions—which gives them 2014 (one year—next year!) to figure out how they’re going to track this. Alternatively, companies may elect to apply a modified retrospective approach by recording the cumulative effect of the change and providing supplemental disclosures for comparability of prior periods.

Whichever approach companies take, it will be a significant endeavor with complex arrangements. This change will require support from more than just the accounting team. For example:

  • Evaluating and refining IT systems to support the new revenue recognition process and considerations
  • Updating sales team tools and legal business forms
  • Enhancing accounting processes to document the basis for judgments made
  • Designing internal control procedures to address new risks under the new rules

At the end of the day, the global convergence of revenue recognition rules should provide more flexibility in how companies do business. But they don’t remove their responsibility to ensure consistency of accounting and reporting across industries.

Editor’s note: ComplianceWeek interviewed Diana for its article on the new rev rec rules in today’s edition. (Subscription required.)

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No crystal ball? No worries—AICPA report crowdsources the future

What lies just around the corner? What skills do you need to be successful tomorrow?

My crystal ball isn’t any less fuzzy than yours, so I turned to the AICPA report, CPA Horizons 2025, which provides excellent advice about current and forecasted trends that will impact the profession. While the report is focused on the CPA profession (it’s based on the comments of more than 5,600 CPAs), much of the subject matter can be applied to keeping your finance department strategic and relevant to your business.

Here are two of the top themes for me.

1. New technology opens doors—and adds to risk.

Changes in technology offer incredible advantages and efficiencies, but they also introduce risks in new areas. The prevalence of mobile technology and the ability to access applications from just about anywhere have increased our expectations for the availability of information and we expect financial reports much faster. (Gone are the days of having to drive to the office to make a journal entry or run a report, thank goodness!) Not only does this quicken the pace at which the accounting team must do its work, but it also opens the door to potential errors and fraud. Electronic documents can be altered in an instant. The security and privacy of information is at risk.

The finance organization has to stay on top of changes in technology to drive efficiencies in the business. Stay alert, assess the technology, ensure your internal controls evolve to mitigate new potential risks and keep a sharper eye on potential fraud—it may be harder to detect.

2. Lifelong learning is a clear advantage.

According to the report, education will remain a cornerstone of preparation for certification and of ongoing activity throughout a CPA’s career. Strong technical accounting knowledge will continue to be a foundational requirement, but it won’t be sufficient on its own.

The AICPA report suggests that we need to devote more time to staying current with regulations and standards, both domestically and globally. At the same time, accountants must have a broad knowledge of business and soft skills and not simply focus on technical accounting.

I think this presents some challenges. How are you planning to keep up with technical accounting and rules and regulations that are evolving at a fast pace? At RoseRyan and other professional accounting organizations I have worked for, we set a goal for a certain number of training hours for the year. If your organization doesn’t provide this type of motivation, try setting a personal goal for continuing education.

What about soft skills? I see accountants placing inordinate value on technical accounting knowledge and ignoring soft skills such as communication. Yet, in my experience, the finance pros with the best-developed soft skills are the ones with the most success. They have an easier time obtaining information and working with others; and they are better able to influence people and have more highly developed leadership skills. All of that is critical in moving your organization forward.

Want to know more about strategic thinking and key finance initiatives to keep you ahead of the curve? Check out our latest Intelligence report, Strategic Finance in Action.

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