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A substantial number of U.S. public companies are having trouble getting set for their first use of broad revenue reporting rules—even at this late date.
“The lack of readiness is just about universal”—meaning it cuts across commercial sectors, Tony Sondhi, a financial analyst and head of A.C. Sondhi & Associates LLC, of Safety Harbor, Fla., told Bloomberg Tax. “It’s pervasive,” said Sondhi, a consultant for developers of software for revenue reporting and lease accounting.
For many companies, the rules promise a change in the timing and amount of revenue to be reported at a particular time—important elements in quarterly and annual reports on earnings.
The Financial Accounting Standards Board issued the revenue standard, ASC 606, nearly four years ago. The International Accounting Standards Board issued similar rules, IFRS 15, at the same time. The rules took effect Jan. 1.
U.S. public companies that report on a calendar-year timetable are required to apply the FASB’s one-stop revenue guidance to results for the current quarter. They will reflect the new accounting in reports issued in April and May.
Revenue is deemed the most important line in the financial statements. It serves as a gauge for not only stock analysis and valuation, but also plays a role in figuring executive compensation. It also can affect accounting for taxes and costs of obtaining customer contracts, say CPAs and analyst groups, such as CFA Institute, of Charlottesville, Va. The chartered financial analysts group issued a revenue accounting Q&A for investors Feb. 26.
The new revenue rules likely will improve the financial results of many life science-sector and technology companies in first-quarter earnings reports, accountants at the financial reporting research firm Audit Analytics wrote in a March1 blog. The brighter pictures would stem from product licensing.
Securities regulators are monitoring first use of the revenue rules.
Last year, Securities and Exchange Commission accountants flagged some companies, including Ford Motor Co. and Google-parent Alphabet Inc., about disclosures on revenue that the SEC staff regarded as problematic.
Revenue accounting specialists at two of the Big Four firms said that while some companies appear to be behind in preparing to comply with the sweeping standard issued in 2014, many are on track to apply the rules effectively and reflect the new accounting in their first-quarter reports.
“Many companies have largely completed their implementation activities” in revenue accounting, said Eric Knachel, a Deloitte LLP senior consultation partner.
At the same time, Knachel said Feb. 27, “a significant number of companies” haven’t finished their preparation for reporting under the new regime as of Jan. 1.
Those companies continue to wrestle with how to treat revenue from what he called “non-systematic transactions.”
Those transactions are “one-off,” less routine deals for goods or services with customer-specific contract terms, Knachel said. The extra elements—items such as up-front fees charged by telecom companies and variable payments, common in the biopharma sphere—prevent a company’s systems from handling such transactions.
The “big surprise,” Knachel said, is “the extent to which these one-off, or non-systematic, transactions remain open for resolution at this stage of the game.”
“This is the big issue” in pending revenue work, he said. “This is what I think is causing concern and anxiety for companies.”
Analysts and accountants predict that many companies will see an acceleration of revenue from use of the new rules. Other companies might not see much change in practice.
In addition, some types of revenue that previously were reported earlier in reporting cycles will be deferred, Anthony Burzinski, a managing director for accounting advisory services at KPMG LLP, told Bloomberg Tax March 1.
“There’s a wide spectrum of readiness,” Burzinski said of the outlook among companies for use of the new rules. A lot of companies “are going to be working very hard up until the finish line,” he said.
Determining who the principal or agent is in revenue-generating contracts, which has big impacts on whether revenue is booked on a gross or net basis, is still a challenge for companies, Deloitte’s Knachel said.
The gross-versus-net issue figures in drop shipments of drugs, medical devices, computer hardware and software, telecom gear, and retail items such as household appliances, he said. With drop shipments, the customer places an order from a distributor and the distributor places the order with the manufacturer.
“That’s a big area, probably one of the biggest we’re seeing right now,” Knachel said of gross-vs.-net display issues.
For all public companies, footnote disclosure tasks will be bigger under the newly effective revenue rules.
New disclosure requirements—particularly those on “backlog,” or deferred revenue—are proving problematic for companies, Sondhi told Bloomberg Tax March 1.
CFA Institute is “a little worried” that at least some of the new revenue-related disclosures “will be qualitative and boilerplate,” the institute’s head of financial reporting policy, Sandy Peters, said.
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