Revenue Recognition: A Complex Effort; Implementing the New Standard Requires Careful Judgment
Brian Allen, CPA, jokes about the five stages of grief when he explains the potential for change inherent in the implementation of the new revenue recognition standard by financial statement preparers. The standard developed jointly by FASB and the International Accounting Standards Board (IASB) does away with the industry-specific, rules-based guidance under which U.S. companies have prepared financial statements. The new guidance is principles-based and overarching, with a goal of promoting comparability across industries and global jurisdictions. Financial statement preparers who are deep into their implementation processes describe a complex effort. Implementation may require an organization wide examination of impacts, the attention of personnel in various functions, an updating of internal controls, some difficult judgments, and a lot of new disclosures. Depending on the industry and the company, the level of change and the amount of work involved may be so substantial, Allen joked, that some preparers may need to experience the grieving stages of anger, denial, bargaining, and depression before ultimately arriving at the final stage of accepting the change. "The FASB didn't spend 12 years [developing the standard] so that everyone's accounting would stay the same," said Allen, a KPMG partner who served on the joint FASB/IASB transition resource group for the revenue recognition standard. Allen joined a panel of experts who provided perspective on the new standard at the recent AICPA Conference on Current SEC and PCAOB Developments in Washington. The panelists conveyed a message of urgency with the date of implementation approaching at the beginning of 2018 for public companies that report on a calendar-year basis (private companies have an extra year for implementation). The standard may require significant judgment to be applied in many areas because it is principles-based. And preparers may find that they need to collect a significant amount of new data to comply with new disclosure requirements. "It's complex," said Josh Paul, CPA, director-technical accounting for Alphabet Inc., which is Google's parent company. "It's difficult, and it takes a long time to work through and really understand the issues." UPDATING INTERNAL CONTROLS This complexity is why organizations that haven't already started implementation are facing a significant challenge. Paul described a robust implementation process to include a clear governance structure, a steering committee, and executive sponsorship across all the key groups, including finance, IT, investor relations, and tax. Individual working groups move forward with clear directions and responsibilities, and meticulously document their work. This careful process and the documentation surrounding it are important internal controls in themselves. Groups that are working to implement the revenue recognition standard can maintain minutes of meetings and document views considered and views rejected, and why decisions were made. In addition to preparing white papers describing the reasoning behind technical assessments, Paul advocates putting together a white paper describing exactly what the implementation process was. When management goes through later and assesses internal controls, company leaders will be able to look back at documentation from meetings to arrive at a level of comfort that preparers made sound decisions. "I think all of that lines up and provides a clear picture of a robust implementation and control framework," Paul said. Internal controls will need to be updated as changes are made to processes and procedures, and perhaps IT systems, and new data are gathered. And in a separate speech at the conference, SEC Chief Accountant Wesley Bricker stressed the importance of properly developing internal controls (see the sidebar, "What the SEC Says"). "Over the next several years, updating and maintaining internal controls will be particularly important as companies work through the implementation of the significant new accounting standards," Bricker said. …