Companies Unprepared for Revenue Rule as Deadline Threatens

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By Laura Tieger Salisbury

Many companies remain far from ready to switch to sweeping new revenue-recognition accounting rules, barely seven months from the adoption deadline.

An informal poll of companies taken at a May 8 Deloite/Bloomberg BNA conference on revenue recognition showed that none of the respondents had finished implementation.

Eric Knachel, who heads the revenue recognition practice of Deloitte & Touche LLP, told Bloomberg BNA May 8 that the change can be “overwhelming” for some companies. The switch to a judgment-based standard from an industry-specific, rules-based standard seems to be paralyzing some smaller companies, and they are trailing behind in implementing the new revenue measuring method.

The poll also showed that 18 percent hadn’t started implementation; 50 percent were assessing their progress; and 32 percent were in the process of implementation.

Only 30 percent had a budget for implementing the new rules; 54 percent didn’t have a budget; 16 percent were unsure.

‘Revenue Transactions Touch Everything’

Alfred Popken, Deloitte’s national managing director of accounting advisory, told Bloomberg BNA that companies with a “big financial impact” from the rules have generally been preparing for the last two years to adjust their systems and controls.

Telecom companies in particular have been preparing for the standard because it will have a pervasive impact on their industry, Popken said.

Some companies have said that the new standard will have only a small impact. But Popken said that because “revenue transactions touch everything,” there is no such a thing as a small impact.

If a company has hundreds of thousands of contracts or millions of contracts, then that small impact is multiplied by the number of contracts, Popken said.

Conceptual Framework

Some companies are unsure about the correct way to determine the “best estimated sales price” for a contract under the new rules. Knachel suggested it would be less “overwhelming” if companies changed their method of making that determination.

Knachel advises companies to first identify the underlying characteristic that defines a particular class of customer.

An underlying characteristic to start this analysis might be geographic region or industry, Knachel said. After identifying the main characteristic, it becomes easier to determine how to market the product to each class of customer and decide on the price to charge.

Separating Parts of the Contract

Another problem in preparing for the standard is evaluating whether a performance obligation on the part of the company should be accounted for as part of an on-going contract, or as a separate, distinct performance obligation and contract.

Paul Vigil, BMC Software’s senior director of revenue recognition, used a typical example of a software contract that involves both the sale of software and a maintenance or post-customer support service. His company must decide whether the revenue should be accounted for at the time of sale, or over both the sale and the service period.

If either part of the contract can be carried out by someone other than BMC Software, then Vigil recognizes the revenue as coming from two distinct contracts.

Knachel told attendees that the standard has a “bias towards separating” the contracts.

Balancing Judgment and Consistency

Balancing the notion of a principle-based standard, which requires judgment, with the need for consistency and comparability is the most challenging aspect of the standard, Knachel said. He told Bloomberg BNA that companies should consult with industry groups, their peers, and other advisers to get feedback on whether they are making a reasonable judgment.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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