February 23, 2017
Is the Impact of Revenue Recognition Real?
Do you have “revenue recognition paralysis?”
If you’re a finance executive, you know that the requirements for recognizing revenue have changed, but determining what that means for your organization may still be in question. The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have issued new requirements for recognizing revenue from customer contracts, which go into effect for many public companies in 2018.
With the SEC already requiring companies in their public filings to provide shareholders with a definitive answer regarding the expected impact of the new revenue recognition standards, companies of every size, in a variety of industries, need to be considering today how to effectively manage under this new standard.
For several years, the pending revenue recognition changes have nearly been talked to death. Now that the 2018 deadline is upon us, it’s almost anticlimactic. Is it real? In fact, it seems that some companies are experiencing “rev rec paralysis” as they wait and see how others will address the new standards.
While the jury is still out on the level of material impact of revenue recognition on companies, we’ve been keeping an eye on some of the initial market responses.
A recent Price Waterhouse Coopers survey on revenue recognition found that while most companies have begun looking at the new standard, only about half (48%) have taken action toward implementation.
As of last October, the date of the survey, most hadn’t finished assessing the impact; still others are concerned about cost, resources, and adoption methods.
Some entities are saying in SEC filings now that they believe the new revenue recognition standard will present little to no impact on their financial results.
For example, Apple, noted in its most recent 10-Q, that it “does not expect the adoption of the new revenue standards to have a material impact on its consolidated financial statements.”
Austin-based Bazaarvoice, in its September 2016 10-Q, said, “We… do not believe [revenue recognition] will have a material impact on… financial position or results of operations.” Raytheon was the first to fully adopt the standard and concluded it did not result in a material change to financial results.
Other organizations are still in the assessment phase but recognize that revenue recognition changes will result in a material change to financial results and will require significant planning, budgeting and implementation processes.
In Microsoft’s January 10-Q, the company said “we anticipate [revenue recognition] will have a material impact on our consolidated financial statements.”
Why are some of these companies reaching the conclusions they are reaching?
While there’s probably not one consistent answer, here are some items to consider:
- The new guidance changes revenue recognition criteria from a “rules-based approach” to a “principles based approach” which may accelerate revenue recognition for some companies. For example, computer manufacturers and other companies that sell through distributors likely will book more revenue upfront.
- More management judgement is involved in the new principles based approach. For example, can management estimate the variable consideration associated with a distinct performance obligation in a contract?
- Contracts with multiple performance obligations may be significantly impacted under the new 5-step approach.
Bridgepoint Consulting believes that with proper contract categorization and grouping, attention to performance obligations and sound management judgments and documentation, companies can successfully implement the new standard well ahead of schedule.
How will revenue recognition affect your company?
To avoid having to scramble toward the end of the year, now is the time to find out.
- Under the new standard, organizations across many industries will need to carefully consider existing contracts, business models, company practices and accounting policies.
- Keeping pace with regulatory change is never without its uncertainties. Revenue recognition changes may affect EBITDA, net income, EPS, earn-out payments, forecasts, valuations, bonus plans, valuation multiples and more.
- One of the biggest changes occurring is that companies will need to identify all performance obligations in a contract that are distinct, regardless of whether they are explicitly stated in the contract. Revenue will be recognized as each performance obligation is “satisfied,” which is different than the previous method of looking at completion, delivery and timing milestones. Companies will thus be working to adjust procedures to accommodate for some period-to-period variability in accounting revenue and expense.
- In general, companies that currently operate under a SAAS model will be less affected than companies that license software. Also, companies that sell direct to customers will generally be less affected than companies that sell through distributors.
- How an entity chooses to adopt the revenue recognition standard dictates the years during which revenue, and the direct effects of changes in accounting principles associated with contracts, will need to be restated.
While there’s still a little bit of runway, the time to address revenue recognition is right now. Significant management judgment on accounting for revenue recognition will now be required, and the changes will have pervasive impacts on people, policies, processes and systems.
As the Q1 2018 revenue recognition deadline nears, boards and investors as well as regulators will need to know what’s ahead during 2017.
The good news is that making the move to the new standard can be a smooth and relatively painless transition, but that requires starting early and having a solid plan and process in place.
If you have questions about revenue recognition, I’m happy to chat. At Bridgepoint Consulting, we can help your company with any of the activities/approaches mentioned above. Get in touch.
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