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Making the transition: Industrial products sector assimilates accounting changes

11 September, 2018

Kathy Nieland
Industrial Products Assurance Leader, PwC US
Jeff Sorensen
Industrial Products Industry Leader, PwC US

A wave of new accounting regulations has kept financial executives busy at industrial and manufacturing companies. From revenue recognition (ASC 606 & IFRS 15) and lease accounting (ASC 842 & IFRS 16) to new hedge accounting guidance, among others, companies have been taking steps to ensure compliance with these changes.

PwC recently surveyed finance executives across the industrial and manufacturing sectors to gauge their transition experiences and how they are preparing their organizations to adopt the regulation. Key highlights include:

A majority (51%) of respondents said they were undergoing the process of implementing the new lease accounting guidelines, with none saying they had completed the process. In assessing the most difficult components of the regulations, respondents pointed to identifying the lease population, data abstraction, system implementation and human capital/resource requirements as being the most arduous tasks in the adoption process.

Highlighting the significance of the lease accounting regulations, 56% of respondents confirmed their companies were making significant system changes to accommodate the new standard. Moreover, 51% of respondents indicated they expected transition costs to exceed $500,000, with 24% seeing costs as high ($1-3 million). These are major cost outlays that require careful budget planning and close coordination of external and internal resources.

Conversely, with regard to another significant accounting change, revenue recognition, 63% of public company respondents indicated they had already completed the adoption process, while 25% confirmed the process was underway. On the private company side, the story was very different, with only 14% of non-public companies completing the adoption process and 14% confirming the transition was under way. This left 55% of non-public companies still in the stage of assessing the impact of the revenue recognition accounting change on their operations.

In terms of the most difficult aspects of the new revenue recognition guidelines, respondents pointed to contract reviews, human capital/resource requirements and IT systems as having a high level of difficulty in the transition process. Given the significant investment forecasts pertaining to adopting the new revenue recognition, it’s no surprise that executives pointed to capital intensive components of the process, including hiring and IT costs. Similar to lease accounting, adopting the new revenue standards requires a concerted execution plan supported by a commensurate budgeting process.

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