Running Through a Dynamite Mill: Frank Words on Applying the Revenue Rules


 

The really frank talk came at about 4 pm on the second day of the three-day conference. That’s about the time when a hearty lunch manifests itself in temptations of golden slumbers in the big, softly lit hotel ballroom.  

Eyelids may droop. And no surprise, amid the scintillating talk of the modified retrospective form of transition to ASC 606 (the new revenue recognition rules),  contingent revenue caps and applying SAB 104 up until new GAAP kicks in—, to be applied “without a SAB 104 bias.” (An old editor friend calls such doings “IBD,” for “important but deadly.”) " 

Josh Paul, technical accounting chief at Alphabet Inc., the holding company that holds a concern known as Google, offered the first set of words that made inroads against collective sleep Dec. 6 at the annual conference of the American Institute of CPAs in Washington. Then KPMG’s Brian Allen delivered the even plainer punch line —kind of a reverse coup de grace— that served to wake up the CPA masses.

 The question from an audience member—evidently a public company accountant—went like this: “In our most recent filing, we disclosed that we don’t believe that the revenue standard will affect us materially. Are we crazy?”

 “It’s hard to say whether you’re crazy,” said Paul, whose one-year-old company was founded by Google creators Larry Page and Sergey Brin. “I’d be interested to know what justification you have for making the assertion that it’s not going to have a material impact.”

 After all, the far-reaching revenue recognition standard, issued by the Financial Accounting Standards Board in 2014, likely will cause at least a fairly significant impact on financial reporting at many thousands of companies, large and small. The degree of change and amount of necessary prep for it led FASB to prescribe a one-year deferral of the original 2017 effective date.

 Accountants refer to that as a long runway.

 “I’ll give you the benefit of the doubt that you went through a full assessment” Paul continued. He was referring to a gauging of what changes probably are in store for the company, including a study of all revenue-generating contracts with customers. “You wrote the white papers. You looked at varying views, and then ultimately concluded that it’s not going to have a material impact.

 “If You’re Winging It – Big Trouble”

 “If I’m wrong in that assertion, and you’re winging it,” he said, “you’re probably in big trouble, because it’s complex, it’s difficult and it take a lot of time to work through and really understand the issues.”

 Cue Brian Allen of KPMG. He’s a member of FASB’s Transition Resource Group for Revenue Recognition. The TRG is a key advisory group aimed at helping companies cross the bridge to the new revenue rules.

 “There is an adage that maybe these people could still cling to,” Allen said Dec. 6 at the AICPA gathering on developments at the SEC, FASB and Public Company Accounting Oversight Board.  

 “And that is, you can run through a dynamite factory with a lit match, and you might survive, but you would still be an idiot,” he said, drawing some hearty laughter.

 Counsel to Heed.

 Revenue is commonly thought to be the most important line in the financial statements, and companies should get it right —or they might face consequences. Restatements or a letter from the SEC’s Division of Corporation Finance— or, worse yet, a probe by the agency’s enforcement arm – likely means lower stock value (or more damaging actions).

 The premature recording of revenue remains a significant issue in financial reporting and a leading area of activity by the SEC’s vice squad.

 At their Dec. 6 conference session, Allen and Paul, together with Lara Long and James Dolinar, served up practical advice for companies as they plan to apply the new, all-important revenue standard.

 Long, the vice president for accounting at agricultural equipment maker AGCO Corporation, stressed the importance of documenting the detailed assessment and other tasks required across a company’s departments – from human resources through IT to financial and investor relations -- as it prepares for the advent of the revenue standard.

Dolinar, a partner at accounting firm Crowe Horwath and chief of the AICPA’s Financial Reporting Executive Committee, urged companies to not delay in preparing to apply the new set of rules. “Get started” is the mantra that gained volume as 2016 drew to a close.

Special AICPA task forces are drawing up detailed sector-specific guidance on revenue recognition. And the Center for Audit Quality, an AICPA affiliate, issued a tool kit on the revenue rules for audit committees Dec. 13.

Dolinar added that companies shouldn’t forget about internal controls on financial reporting, with a new focus on situations posed by the revenue recognition standard.

He also stressed, as did other speakers during the busy autumn conference season, the importance of getting set for the ample list of enhanced footnote disclosure requirements in the new rules.

The FASB standard calls for no small degree of judgment, as rulemakers, auditors and corporate financial executives say— and which SEC staff accountants readily acknowledge. Explaining those judgments—why what was being done — will be a key task in companies’ accelerated preparation for the revenue standard as the calendar flips to 2017.

At many companies, there’s a lot to be done. Still.

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