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(Corrects the effective date for public companies in the first and third paragraphs: 2018 instead of 2019)
By Steven Marcy
May 27 — Many public companies are falling far behind in their ability to implement the forthcoming revenue recognition standard (10 APPR 525, 6/6/14) when it takes effect in 2018 and might not be aware of their situation, a Deloitte and Touche partner told Bloomberg BNA.
They continue to operate under the figment that 2018 remains in the future when the next three to nine months “is critical” to understand the magnitude of the effort they face and to put in place transition procedures to avert something approaching a last-minute catastrophe, Deloitte partner Eric Knachel said in phone interview.
Many companies haven't started what Knachel says is the most crucial step towards making the transition: creation of a project management team that combines accounting, information technology, legal, sales, process and controls personnel that will all be needed to devise the strategy and methods that can assure compliance with the standard (11 APPR 26, 12/18/15).
Knachel, who leads Deloitte's revenue recognition subject matter team, said that “the complexity of the exercise is more than people envision.”
Companies and their product management teams need to identify their different revenue streams, Knachel said. “From those revenue streams, they need to make a sample collection of contracts from each one, and then evaluate the impact of those sample contracts to determine the accounting tension points and open questions” about how they might mesh with the new standard—or need to be modified to fit it.
“Companies have not done that, and not looked at individual contracts and assessed the impact,” Knachel said. “Some are trying to do a back-of-the-envelope assessment, and that is not going to be effective.” Not until they analyze the standard and compare their individual contracts can companies begin to gauge what they need to do to comply with the standard, he said (11 APPR 1064, 11/20/15), (11 APPR 298, 3/27/15).
“Implementation issues typically surface as they analyze the contracts and apply the guidance,” Knachel said. “There could be a number of implementation issues they haven't contemplated and then find themselves in a fire-drill situation without the resources to do it.”
Companies must perform the contract analysis revenue stream-by-revenue stream, Knachel said. It could be a particularly complicated exercise for companies with multiple and diverse business segments, he said, all the more reason to begin intensifying implementation efforts.
Once a company has analyzed a particular revenue stream it can work through technical accounting questions. the new standard poses, Knachel said. Different contracts can require different system requirements. Companies can't take a “cookie-cutter approach”; one revenue stream doesn't predict will occur with another revenue stream, he said.
The new standard will have broader implications beyond just the accounting, Knachel said.
The IT department must analyze its current systems of gathering and reporting data against the new standards, both for financial reporting and disclosures, Knachel said.
The legal team should analyze the terms of its contract-arrangement changes, especially termination provisions, pricing and enforcement, Knachel said.
The human resources department must determine if the company has sufficient resource and adequate people to implement the standard, Knachel said. Some companies have compensation arrangements tied to revenue, which recognition of revenue under the new standard could profoundly affect, he said. Some compensation is based on absolute revenue, and others can be tied to revenue trends that could affect how much an individual employee will receive. The standard could have major effects on both situations, he said.
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