Tax Impacts Among Major Issues For Implementing New Revenue Standard

By Steven Marcy  

June 9 — Changes in accounting for income taxes could be among the most significant impacts the new Financial Accounting Standards Board and International Accounting Standards Board revenue recognition rules have on companies, accounting and tax professionals said, during a Bloomberg BNA webinar on the new standards.

Need Close Monitoring

Lisa Starczewski, senior tax counsel at Buchanan Ingersoll & Rooney, told attendees at the June 9 webinar, The Final Revenue Recognition Standard: What You Need to Know Now, that “there are number of considerations” in the new standard that tax departments and counsel “need to be looking at closely.”

For example, Starczewski noted that although accounting for financial statement purposes doesn't generally drive accounting for tax purposes, the new rules will still have some major impacts.

The new standard will take effect for U.S. public companies generally after Dec. 15, 2016. For companies using international financial reporting standards, the effective date is Jan. 1, 2017.

She noted that companies who might want to defer advanced payment of taxes could find themselves under the new rules subject to accelerated revenue recognition. To be able to defer advance payments for tax purposes under the new rule, companies might find they will have to change their method of accounting, she said.

Transition Challenges

The panel said that the new, generally converged rules, which the boards issued May 28, also will have major impacts on the technology, entertainment and life science sectors of the economy.

They will also present major challenges in making the transition from the current rules to the new ones—which for U.S. public companies generally will take effect after Dec. 15, 2016 and Jan. 1, 2017 for companies using international financial reporting standards.

“There are going to be tax consequences,” Starczewski said. These might include:

  •  changes in capitalized costs and expenses;
  •  changes in transfer pricing and documentation; and
  •  changes in accounting method. 
  • Specific Technology Sector Issues

    The impacts on the technology sector might be little “or potentially substantial,” said Karen Schwartz, director in EisnerAmper's professional practice group.

    Technology contracts are typically multi-elemental, and the relationships of the elements can mean some contracts will have no variation from current practice while others defer revenue and others will accelerate it, Schwartz said.

    The impact on when revenue is recognized under multi-element contracts depends on whether each deliverable or performance obligation is stated as a separate value or in combination with other elements, she said.

    “All we can say on a broad basis is that there is great potential for revenue recognition to be very different in current practice for any company in this [technology] industry.”Karen Schwartz, EisnerAmper

    The new rules provide far more latitude for each element of a contract to be accounted for independently of the others, and “this impact can be negligible or significant,” Schwartz said. “All we can say on a broad basis is that there is great potential for revenue recognition to be very different in current practice for any company in this industry.”

    Schwartz cited as an example a contract for the provision of technology hardware, software and post-contract support. If the provider can provide these separately with each one recognized as a separate performance obligation, the provider can recognize revenue separately as the customer takes control of each element. However, if the customer could not purchase and use each element independently of the post-contract support for the overall system, then the provider would have to recognize revenue over the life of the post-contract customer support (PCS), Schwartz said.

    Pharmaceutical, Life Sciences

    The pharmaceutical and other life science industries, like the technology sector, can contain long-term, multi-element contracts with variable considerations for how a product vendor can assess the performance obligation, Schwartz said. A single contract can contain the right to use a product or a license to use intellectual property, and the fair value of that product or intellectual property must be assessed, Schwartz said.

    “It will be crucial to ascertain whether those services are distinct from each other, what the allocation of fair value to each performance obligation should be, and when performance of those obligations represent transfer of control to the customer at a point in time over the life of a contract, et cetera, in order to ultimately be able to recognize revenue, ” Schwartz said.

    Transition, Implementation Challenges

    Companies can choose to retrospectively apply the new standards once they become effective to their old financial statements, but that will require that data to be restated, IBM's Chris Gullotta told the webinar.

    Companies can also apply an alternative transition model in which they need not apply and restate the new standards on contracts that are already complete. However, they must apply the new standards to contracts entered into before the effective date but which have not been completed by that date and remain ongoing.

    Gullotta said making the choice between the two transition approaches could prove difficult for some companies. “Companies should make sure as they take a look at these transition methods, they are assessing all of the key implications with their stakeholders,” he said.

    To implement the standard, a company should engage its finance, tax, sales force, audit committees and disclosure personnel, all of whom should be familiar with the implications of the standard for the company, Gullotta said.

    Far Reaching

    He said that the implications of how revenue is recognized under the standard are so far reaching that some companies might want to alter their business models to better accommodate the standard's impact.

    Gullotta said that IBM has determined that the magnitude of the impacts are so large that the company must change its accounting policies and is assessing just how they must be changed.


    To contact the reporter on this story: Steven Marcy in Washington at smarcy@bna.com

    To contact the editor responsible for this story: Laura Tieger-Salisbury at lsalisbury@bna.com