Observations from the front lines: Beware these revenue recognition and tax reform financial statement hot spots

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The unprecedented impact caused by the new revenue recognition standard and tax reform is compounding the usual complexities that finance teams face during quarterly and year-end reporting.

With companies still adjusting to these two major financial transitions and with calendar year end fast approaching, it’s time to take a closer look at issues needing remediation along with some key impacts and challenges associated with these new regulations.

Why it matters

Public companies are feeling the effects of the first full year of transactions being subject to ASC 606 – Revenue from Contracts with Customers. The new accounting guidance is proving formidable; changes are beginning to result in some financial reporting restatements, something to prevent if at all possible. Some preparers have also received comment letters related to ASC 606 reporting and the SEC indicates that businesses should brace for more. Key areas that have attracted attention include:

  • Identification and satisfaction of performance obligations
  • Amortization of contract costs
  • Disclosures for the disaggregation of revenue
  • Principal versus agent considerations.
Restatements

ASC 606 application: potential financial reporting difficulties

Judgment issues

The new standard requires more judgment in virtually all areas. Identifying performance obligations and the period over which they are satisfied, and identifying capitalizable incremental contract costs and the associated amortization periods are just a few of the challenges. Some companies are learning the hard way that they may need to seek more guidance and consensus when determining accounting treatment and determining that positions are supportable.

Data capture pitfalls

Many companies are still lacking systems to handle all aspects of revenue reporting under the new standard. Companies still relying on manual processes, instead of automating revenue data capture and calculations, may risk reporting inaccuracies. Human error is often a driving factor for many financial restatements.

Resource deficiencies

Compounding the data capture pitfalls, many businesses face a bandwidth issue – an insufficient number of resident experts needed to report against two different revenue accounting models, which may be required during the transition periods. The labor-intensive application of the accounting guidance may require supplementing even the most well-staffed, dedicated team.

Integration problems

While some companies have a plan to address ASC 606, not all are taking an integrated approach. Business units affecting the quote-to-cash process may need to include deal desks, sales, legal, operations and finance. Cross-functional stakeholders should be on the same page – with common definitions of contract terms and language, go-to-market deal structures, not to mention additional judgments and estimates required by the new standard.

Industry specific changes

Much of the industry-specific revenue accounting guidance has been dropped in favor of guidance that applies across sectors. This exacerbates judgment issues, requiring companies in heavily impacted industries, such as technology or pharmaceuticals, to attempt to seek consensus in applying judgment for a standard whose accurate application is reliant on the particulars of individual contracts.

Tax reform

Tax reform impacts

At the same time, companies should be finalizing their assessments of accounting implications posed by the Tax Cuts and Jobs Act of 2017 – some of the most sweeping changes to U.S. tax law since 1986. With the reporting deadline looming, accounting for complicated tax reform provisions for the first time while preparing year-end financial statements is proving daunting for many. A key issue is how the new tax law impacts a company’s ability to realize deferred tax assets (see diagram).

The realizability of deferred tax assets can have significant financial reporting impacts, and adds a layer of additional complexity in addition to other aspects of the tax law requiring recalculation of the deferred amounts and accruing tolling liabilities for deemed repatriated income. In response to tax reform changes, companies may need to modify their systems, processes, and controls to deal with the new complexities. Additionally, corporate restructurings that are starting to take place, driven in large part by tax reform (e.g., check the box elections, transfers of intellectual property, etc.), could pose some unique accounting challenges.

Potential action steps

To help avoid comments or worse yet, a potential restatement from these sweeping changes, here are a few things you may want to consider addressing now:

  • Identify and reexamine issues requiring judgment. Do you have enough documentation supporting your conclusions?
  • Review – and where possible, automate – complex or critical calculations dependent on manual processes.
  • Rework accounting procedures and internal controls where more assurances are needed.
  • Tighten and consolidate recordkeeping from functional areas within the company affecting the quote-to-cash process and resulting recognition of revenue.
ASC 606 restatement

How PwC can help

PwC offers a team of accounting, investigation, controls, analytics, systems, and data knowledge professionals, combined with powerful technology solutions to help companies quantify and resolve their potential financial reporting issues and develop solutions to remediate the underlying triggers. Our professionals help you use technology enabled accelerators to bring cost effective solutions to your immediate reporting challenges as well as longer term business needs. Contact us to learn how we can assist you with a range of remediation and restatement solutions.

 

Observations from the front lines provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues.

Contact us

Michelle Krupa

Partner, PwC Deals, PwC US

Tel: +1 (646) 818 7807

Shane Foley

Principal, Digital Risk Solutions Leader, PwC US

Tel: +1 (646) 471 0516

Darren Tapp

Partner, US Regulatory Enforcement Leader, PwC US

Tel: +1 (646) 818 7156

Brett E. Cohen

Accounting Services Group Partner, PwC US

Tel: +1 (917) 693 4801

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