With the clock ticking down on a 2018 effective date for the new revenue recognition accounting standards, are companies ready? What areas of concern do finance executives have and how are they gearing up for the transition?
To find out, PwC and Financial Executives Research Foundation (FERF) updated our revenue recognition survey. The results of our 3rd collaborative survey – summarized here, and detailed in our online data explorer – reveal the state of readiness and key challenges that remain.
While the majority of companies have started analyzing the impact of the new standard, few have taken the next steps toward implementation. For those that have not yet started or completed their initial assessment – including private companies that have an extra year to comply – the time to act is now.
Revenue recognition is a critical and often complex accounting area that companies can't afford to get wrong. Many boards and investors will want to know what to expect. Regulators will be looking for increased disclosures in 2016 10-Ks and during 2017 as adoption draws closer.
In our experience, the first movers have been companies in highly impacted industries, including technology and software. Certain of these companies are reaping benefits from an early start by approaching the required changes in a way that will help improve their operations beyond financial reporting.
How are companies managing the resources needed to implement the revenue recognition accounting changes?
Most companies indicate that they are primarily leveraging internal resources. But we've heard from companies that determining (and finding) the right level of dedicated resources can be difficult.
As the effective date gets closer, this situation may become more acute and available outside assistance may be limited. Time will tell.
Companies can choose one of two adoption methods to transition their financial reporting to the new standard. A surprising number in our survey (52%) still haven’t concluded on which method they will use.
The dilemma is understandable, given the potential pros and cons of each model:
The decision becomes more complicated for private companies that may be considering an initial public offering as regulators and potential investors are likely to scrutinize revenue policies and impacts on projections of adopting the new standard.
We asked companies to rank the difficulty of different revenue recognition implementation issues. A significant majority saw all of the issues as somewhat or very difficult, suggesting: “None of this is easy.”
Contract reviews topped the list of concerns overall. This is an important element of transition activities and it becomes more time consuming for companies as the number of individual and non-standard contracts increases. We’ve seen more than a few instances where companies are surprised by their volume of non-standard contracts, leading to more effort than expected as well as challenges determining the right amount of "coverage" for documentation and audit purposes
In our experience, the “devil is in the detail” as many issues don’t become evident until companies begin applying the new guidance to specific contracts and transactions.
Revenue is fundamental to all businesses and the implementation challenges of the new standard extend well beyond accounting. For many organizations, the new guidance will impact processes, systems, and internal controls, as well as other areas of the business, such as income taxes.
An initial assessment can help the organization evaluate the potential impacts that may require modification to process, systems, or controls. The outputs of the assessment can provide a roadmap and the resource requirements for implementing the changes needed.
Disclosures may prove to be a sleeper issue for many companies, even if revenue recognition changes are not expected to materially impact financial statements. See our online data explorer for details on the perceived difficulty of revenue recognition accounting issues.
With revenue being one of the most important financial metrics, many have been concerned with how the change in revenue recognition could impact a company’s reported financial performance. The effects vary by industry with sectors that significantly rely on licensing or complex revenue arrangements being most impacted.
However, many companies are finding that the efforts needed to adopt the new standards are not proportional to financial statement impact. Even for companies that see no material impact, policies and processes may change as a result of the new standards.
Regardless of the dollar impact to financial statements, the new standard will almost assuredly require additional quantitative and qualitative disclosures beyond what has been typically provided.
Other industries included (<5%): aerospace and defense; automotive; engineering and construction; forest, paper, and packaging; healthcare; hospitality and leisure; mining; oil and gas power and utilities; professional services; transportation and logistics.
PwC suggests applying a phased approach to this transformational change, but the time to act is now. You’ll need to consider program management, organizational change management, potential systems modification and/or implementation, and accounting oversight. PwC can advise and assist with the entire conversion process, and we have developed a suite of project enabling tools to help facilitate that process. Contact PwC today to learn more about how we can assist with your revenue recognition implementation challenges.