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Companies should be gearing up for new, labor-intensive revenue disclosures due for first-quarter 2018 financial filings, the chief of a Big Four firm’s revenue reporting team told Bloomberg BNA March 30.
Company accountants must jettison a mindset of only reporting disclosures annually. “Many companies are largely ignoring the disclosure requirements” in the 2014 standard on revenue, Eric Knachel, senior consultation partner at Deloitte & Touche LLP said. “Maybe it seems like a minor detail that can be dealt with once the standard goes into effect. I think that’s a big mistake.”
For many public companies’ Jan. 1, 2018, is the effective date of the revenue accounting rules, said Knachel.
The one-stop set of rules issued by the Financial Accounting Standards Board (ASU 2014-09; ASC 606) prescribes reporting for what is widely deemed the most important line in financial statements. The earnings of many companies could be substantially affected by the new accounting—especially as the rules may affect exactly when revenue is to be booked.
Auditors and security regulators will scrutinize revenue-related disclosures that signal how well a company is prepared for the advent of the overall rules. The staff of the Securities and Exchange Commission is hoping for a smooth shift to the new accounting blueprints—without unpleasant surprises for the markets.
FASB members and staff accountants at the board, as well as SEC staff, also have stressed the revenue standard presents enhanced and broad footnote disclosure tasks that go along with potentially different ways of recording and measuring revenue. The prescribed disclosures are quantitative and qualitative.
Knachel made two points about the extensive new disclosures in the Bloomberg BNA interview.
First, he said, “the annual disclosures are effectively required in your interim financial statements in the year” the company’s begins reporting under the 2014 FASB standard.
Second, Knachel said, certain of the disclosures require “incremental information” that doesn’t simply build off or recast reporting that a company already has done.
“It’s actually going to require you, in certain instances, to obtain separate information that needs to be separately analyzed,” he said. “That’s very significant,” he said, and requires advance planning.
Knachel also highlighted another disclosure task prescribed in the revenue rules that may be overlooked: an “out-of-period revenue adjustment.”
He cited a scenario in which a construction company doesn’t expect to get a performance bonus that was specified in the first year of a two-year project. It doesn’t include the bonus money in its estimate of first-year revenue.
However, in the second year of construction, the company believes it will receive the bonus after all. Because it will realize the portion of the bonus stemming from the first year’s work in the second year, when it records the full bonus, the company will have to make a catch-up disclosure showing that half of the bonus stems from work in the previous period.
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