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Almost 90 companies in the S&P 500 say that new revenue accounting rules might leave a deep imprint on their financials, with many companies predicting that they will record revenue earlier than they do today, Morgan Stanley analysts say.
Technology, telecom, aerospace and defense, retail, and industrial companies seem to show “the most potential sensitivity” to the 2014 revenue accounting prescriptions, which become effective in three months, Todd Castagno, executive director at Morgan Stanley & Co. LLC, said in a Sept. 28 study of companies’ second-quarter financial statements.
In January 2018, most U.S. companies and thousands of companies globally will apply the new revenue rules issued by the Financial Accounting Standards Board or the virtually identical blueprint by the International Accounting Standards Board.
The standards establish new, single-source accounting regimes for what is widely viewed as the most important line in the financial statements—revenue. The FASB rules portend major changes in financial reporting for many companies, if not material impacts on the timing of recording revenue and on companies’ bottom lines.
The computer software sector “is likely to be the most impacted due to relatively conservative revenue recognition rules currently in practice,” according to the Morgan Stanley research study led by Castagno.
Amazon.com Inc. and IT company Juniper Networks Inc. are only two companies that indicate they will accelerate their reporting of revenue under the FASB standard.
Castagno said it’s difficult to pin down the degree of effect of the accounting rules “given that the vast majority” of company disclosures are qualitative, and not quantitative.
“However, we estimate the new rules could conceivably result in a mid-single digit base shift in higher revenue for the market,” said the Morgan Stanley analyst-accountant.
In his own report on second-quarter filings to the Securities and Exchange Commission, Jack Ciesielski, a security analyst-accountant and publisher of The Analyst’s Accounting Observer,cautioned that the disclosures so far are “vague” and ”sparse.”
Among the 88 U.S. companies in the S&P 500 that Castagno said identified “material” or “potentially material” impact from the rules in second-quarter filings, 15 labeled that effect “material,” according to Castagno.
Those companies are American Airlines Group Inc., Arthur J. Gallagher & Co., Alaska Air Group Inc., ANSYS Inc., Boeing Co., CA Inc., CBRE Group Inc., Electronic Arts Inc., Juniper Networks Inc., L Brands Inc., Laboratory Corporation of American Holdings, Lockheed Martin Corp., Southwest Airlines Co., Marsh & McLennan Companies Inc., and Monsanto Co.
Along with Amazon, General Motors Co., Starbucks Corp., United Parcel Service Inc., and Verizon Communications Inc. are also some of the companies listed by Morgan Stanley as declaring a potentially material effect of the revenue rules.
Ciesielski and his staff at R.G. Associates Inc. studied the second-quarter reports of 391 of the Standard & Poor’s 500 companies. They found that “only a smattering of them disclosed whether” the pending use of the FASB rules “would result in a material impact on the financial statements.”
About 38 percent of the sample of 391 companies declared they don’t expect a material impact, Ciesielski found.
“Most surprisingly, with the effective date so close at hand, about 60 percent of the firms were mum on the issue of whether it would have a significant impact on them,” he wrote.
SEC staff accountants have said for months that “transition disclosures”—gauging of likely impacts of shifts to new accounting rules—required by the commission should be more “robust” as 2017 goes on.
Ciesielski wrote that only with 2018 reporting will readers of financial statements know what reasons lie behind the meager reporting—and the silence in disclosures.
“If the standard lives up to its advance billing as a major accounting event, then firms are being delinquent in informing investors,” the Sept. 26 issue of The Analyst’s Accounting Observer said.
“If they’re incorporating those effects in their 2018 earnings guidance, they shouldn’t be shy about putting it into print,” Ciesielski wrote. “If they’re disclosing very little” because FASB’s rules on revenue “won’t affect them significantly, then the standard is over-hyped and over-feared.
“The year 2018 will show which premise is correct.”
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