SEC, GAAP RULES COLLIDE
June 14: The Financial Accounting Standards Board’s new revenue recognition rules allow private companies a year longer than public companies to adopt the standards. In some circumstances this may conflict with Securities and Exchange Commission rules.
“If a public company owns a significant amount—usually about 20 percent or more—in a private company and accounts for the investment using the equity method because it has significant influence, the relationship with the public company would require the private company to adopt the new revenue standard,” Beth Paul, a partner in PwC’s National Professional Services Group, told Bloomberg BNA.
“You might think you’re a private company because you have no public equity, no public debt, but the FASB defines a public business entity as an entity whose financial information is in an SEC filing,” Paul said.
SEC’s Deputy Chief Accountant Sagar Teotia, speaking at the Practising Law Institute’s financial reporting conference in New York, June 12, said that “We’re aware of the issue.”
UPDATE INTERNAL CONTROLS
June 16: Companies need to begin updating their internal control systems to prepare for the landmark changes of the revenue recognition rules.
They will have a bigger impact than the Sarbanes-Oxley Act of 2002 (SOX), Gabriel Zubizarreta CPA, CEO, told Bloomberg BNA at the Institute of Management Accountants (IMA) conference in Denver.
Public companies that haven't started assessing the impact on their business risk falling foul of current compliance rules, he said.
Both SOX and the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework of 2013 require companies to anticipate and adequately prepare for risk, Zubizarreta said.
ADOPT PLAN “B”
June 18: Adoption of the revenue recognition rules is a business issue, not just an accounting exercise, Jane Altman, Deloitte's managing director, and Derek Bradfield, the firm's audit partner told the IMA conference.
Unlike most rules, which affect only one or two line items in the financial statements and can be taken care of by the accounting division, these are “transformational” rules, affecting business practices throughout the company. It could take “many months or up to a year and a half” to make the company-wide changes, Bradfield said.
Altman and Deloitte advised companies implementing at this late stage to prioritize contracts that produce the highest percentage of overall revenue and to develop a plan to make sure they are in compliance by the deadline, even if the solution is interim, manual, and cumbersome.
June 21: Data quality, not which IT system to select, is the main hurdle companies will experience in readying for the shift to the new recognition rules.
Recognizing revenue under ASC 606 reflects a “fundamental shift in methodology,” PwC's Bob Woods said at the IMA conference. He described the change from “billings and invoicing system to contracting, and from delivery to obligations.”
A company making an initial assessment of the impact of the revenue recognition rule might have to sift through “thousands of contracts” to find the typical revenue transactions for each revenue stream of its business, PwC's Bob Woods told Bloomberg BNA.
Woods said that about half of their clients are “sticking with Excel,” especially now that there isn't time to implement an automated system before the adoption date.
June 22: The financial reporting system is ready and poised for a smooth shift to the rules on revenue, FASB Chairman Russell Golden told Bloomberg BNA.
“From what I can tell right now, the system is ready and I think we're going to have a good implementation on the effective date,” Golden said.
Asked about the recent surveys from the Big Four firms and other organizations that suggest many companies are substantially unprepared, Golden said that the board has talked to its Small Business Advisory Committee, composed of delegates from small public companies.
That committee told the board that “they're on track to be in a good position to implement” the revenue standard on the effective date, Golden said.
TAX LEFT OUT IN THE COLD
June 27: Some companies transitioning to ASC 606 are forgetting tax ramifications, Jeffrey Levy, a principal in the Atlanta office of Deloitte Tax LLP, said in a speech at a Financial Executives International conference in Philadelphia.
Tax and accounting report revenue differently, Levy said. In general, tax recognizes revenues when there is “cash in hand” while accounting may report revenues using different data based on specific terms in contracts.
When companies adopt the new revenue recognition standards, tax will need to make changes from what they've done in the past, and may find it difficult to get the appropriate information from the new financial accounting systems, Levy said.
CONCURRENT WITH LEASES
June 28: The SEC’s Teotia, speaking at the FEI conference in Philadelphia, advised companies to submit their questions “now” on revenue recognition implementation issues. Teotia also advised companies to try to evaluate the leases standard, which takes effect 2019, at the same time they're analyzing the rules for revenue.
Composed and Compiled by Laura Tieger Salisbury, Accounting Policy and Practice reporter and editor
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