Painful Side Effects of New Accounting Standards


Drug commercials all follow a predictable routine—after extolling the benefits of the drug, a soft voice adds what we refer to as the “fine print” that the side effects may include headache, nausea, upset stomach, death, etc. They are words we don’t like to hear, but honesty requires that we be aware of the fine print. Unfortunately new accounting standards arrive without the “fine print.” New standards do not disclose the potential side effects of implementation.

The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.  

“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.” Click here to see the full story (subscription required).


The FASB did provide some relief by creating a Transitional Resource Group (TRG) to provide additional guidance with implementation. The FASB also delayed implementation of ASU 2014-09 for one year. But, for some entities this was not enough. Starbucks Corp., Oracle Corp., Apple Inc., each disclosed in recent quarterly reports, that they won't adopt the new revenue recognition rules until 2019.  

The same scenario is playing out with companies implementing ASU 2016-13 Measurement of Credit Losses on Financial Instruments. The benefits the FASB expect to be created with this standard include providing financial statement users with more useful information about expected credit losses. Even though the deadline for implementation is a full year later than the revenue recognition standard, companies should already be well into their preparation. The FASB vigorously stressed this point at a recent American Institute of CPAs banking conference. “The clock is ticking,” Shayne Kuhaneck, FASB assistant director of technical activities, warned at the conference. Click here to see Laura Tieger Salisbury’s full story on the conference (subscription required).  

Difficult implementation is nothing new. FAS 96 Accounting for Income Taxes created the perfect storm of implementation issues. It was originally issued to supersede Accounting Principles Board Opinion No. 11 Accounting for Income Taxes with an effective date of Dec. 15, 1988.


The FASB subsequently issued FAS 100 Accounting for Income Taxes extending the effective date an additional year to Dec. 15, 1989, in order to provide preparers and auditors more time to study, understand, and apply the provisions of FAS 96. It soon became apparent, however more time was needed. Many began to feel the guidance was too complex and difficult to understand.


Along came FAS 103 Accounting for Income Taxes which extended the effective date two additional years to Dec. 15, 1991. Altogether, the three additional years were expected to provide the time for everyone to fully comprehend the requirements of FAS 96 and provide the FASB time to consider requests by preparers to amend certain provisions. But, once again more, additional time was needed.


Next FAS 108 Accounting for Income Taxes extended the effective date to Dec. 15, 1992, four years later than the original effective date of FAS 96. The “fine print” had proven to be a pill too hard to swallow. FAS 96 was simply too difficult and controversial and soon it was superseded by FAS 109 Accounting for Income Taxes in order to reduce its complexity.


As seen by the complications with FAS 96, no one can predict the problems that will be encountered when a new standard is issued. It may be best for entities to expect the unexpected and start early to identify all areas where the entity may be affected by the standard, particularly taking advantage of all the guidance provided by the standard setter. Remember that with a new accounting standard there is no fine print or soft voice to provide warnings.


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