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By Denise Lugo
Investors in some of the most well-known Fortune 500 companies will have to wait longer than they expected to see the effects of new revenue rules that change the accounting for earnings companies report from customer contracts.
Starbucks Corp., Oracle Corp., Apple Inc., won’t adopt the new revenue accounting rules in 2018, but will wait until 2019, the companies disclosed in recent quarterly reports. Most public companies are set to adopt the rules next year.
“Apple was supposed to do so by FY ’18; they were trying to early adopt, but since they have the choice to wait for a year because their FY ’18 started in October, they will wait until 2019,” Jagan Reddy, senior vice president of RevPro at Zuora Inc., told Bloomberg BNA. “Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.
“Another reason is companies want similar companies in their vertical to adopt first so they can use them as a guide.”
The new rules change how companies report revenue—a key line item for investors to measure the ongoing profitability and growth of a company. Among the biggest change for companies could be differences in timing of when to recognize revenues earned from sales to customers. That might make a difference for a company’s quarterly results, practitioners told Bloomberg BNA.
“I do think it’s harder to address the standard than many believe it to be,” Betsy Meter, audit partner at KPMG LLP, told Bloomberg BNA. “Implementation takes more time than companies have suspected, and the process of looking at their business model and underlying contracts has definitely taken more time than many have expected. Companies have got to get moving to ensure timely adoption of the standard.”
Starbucks said its year delay is due to how its fiscal year runs. “The Starbucks 2018 fiscal year will begin October 2, 2017 therefore, it’s not requiring adoption until Starbucks fiscal year 2019, which begins October 1, 2018,” a company spokesperson told Bloomberg BNA in an email.
Oracle declined to comment.
Apple’s decision is a switch from its earlier plans to adopt the rules in 2018. The company will now wait until 2019, the company said in its August Securities and Exchange Commission filing.
The rules, Revenue from Contracts with Customers, ASC 606, can be adopted as early as this year, but it is mandatory under securities law to be adopted by public companies whose annual reporting periods begin after Dec. 15, 2017—this means starting Jan. 1, 2018. But some public companies’ annual reporting periods start later in the year.
The companies’ decision to wait won’t matter too much because next year’s disclosures will likely bring more clarity regarding the types of impacts the rules would have, practitioners said. In the meantime, those companies can look at what their competitors have done and learn from their mistakes.
Starbucks’ main retail coffee competitors, for example—Dunkin’ Brands Group Inc. and McDonald’s Corp.—both plan to adopt the rules in 2018. Dunkin’ said it will use the full retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption.
Dunkin’ said the rules will change the timing of when it reports its initial franchise fees, including master license and territory fees for its international business and renewal fees. As a result, the rules will have “a material impact to revenue recognized for initial franchise fees and renewal fees.”
Similarly, Oracle and Apple competitor Microsoft Corp. early adopted the rules July 1 this year. The company said it would record an additional $6.6 billion in 2017 and $5.8 billion in 2016 from adopting the rules.
The revenue rules supersede all current industry-specific accounting guidance. Impacts will vary depending on current contracts and revenue streams. Most companies will have to implement new accounting systems, business processes, and internal controls related to revenue recognition to assist in the application of the new guidance.
“It requires a lot of management judgment, so each company needs to analyze their business which can result in different implementation challenges based on the contractual terms with their customers,” Meter said.
“It’s a different way of thinking of revenue recognition, contracts today are complex and therefore it requires management to assess contractual terms differently,” said Meter, “and it’s just a different way of thinking through it and companies have not traditionally looked at revenue the way they are today under the five step model of 606.”
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Copyright © 2017 Tax Management Inc. All Rights Reserved.
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