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Reprinted from Compliance Week, July 2014
COMPLIANCE WEEKTHE LEADING INFORMATION SERVICE ON CORPORATE GOVERNANCE, RISK, AND COMPLIANCE
By Tammy Whitehouse
A
fter a month of pondering the
brand new approach for how to
recognize revenue in financial
statements that the Financial Account-
ing Standards Board issued at the end of
May, companies are starting to recognize
the enormity of the undertaking. They
are also beginning to ask questions about
how to get it done.
The new accounting standard repre-
sents an “extreme makeover” for how
companies recognize revenue, says Brian
Markley, a partner at consulting firm
SolomonEdwards. “This is going to rep-
resent significant change for U.S. GAAP-
compliant companies,” he says. FASB and
the International Accounting Standards
Board published their new standard for
how all companies would arrive at their
revenue numbers in late May, putting to
rest hundreds of historical rules in U.S.
Generally Accepted Accounting Princi-
ples to instead require a five-step method
that is steeped in judgments and disclo-
sures. The standard takes effect for public
companies in their first reporting period
that begins after Dec. 15, 2016.
Kenny Bement, director of financial
reporting and corporate accounting at
Raytheon, is deep in
the trenches helping
operationalize the
new requirements.
He was a staff mem-
ber at FASB on the
team that developed
the new standard
before joining Ray-
theon, and now he’s
chairing a working
group through Financial Executives In-
ternational to help steer implementation.
“One of the biggest challenges stems
from the level of interpretation that will
be required—the level of judgment and
the time required to work through the
various industry groups to make sure we
have consistent and reasonable interpreta-
tions,” he says. “As a company, we want to
be proactive and do the right thing, but we
don’t want to be out on a limb. We want to
be consistent with our peers in the indus-
try and engaged in discussions with cross-
industry groups. It takes time for specific
issues to bubble up in those discussions
and to get a common understanding of
the new words.”
The FEI working group is one of sev-
eral that will be exploring implementation
problems and concerns. The American
Institute of Certified Public Accountants
has formed 16 separate industry-focused
task forces to explore implementation is-
sues, and FASB and IASB have formed
a transition resource group to serve as a
sounding board for implementation con-
cerns. The joint group meets publicly for
the first time on July
18, although letters
sent to the group will
not be made public.
Kim Kushmerick, se-
nior technical manager
at the AICPA, says its
industry groups are
asking for input by the
end of July.
You Make the Call
“The new standard requires a signifi-
cant infusion of judgment,” says Mar-
kley, and companies are already asking
questions about how to arrive at some of
the new judgments that will be required.
“The use of estimates, the determination
of probability with respect to collectabil-
ity, what performance obligations there
are and whether they’ve been met, wheth-
er contracts should be combined, whether
an ongoing relationship with customers
could represent modifications of previous
transactions—these are all very judgment
laden.” Public companies in particular
need to determine not only how they will
arrive at such judgments, but also how
they will layer internal controls over them
to remain compliant with the Sarbanes-
Oxley Act, he says.
The new standard requires companies
to make some difficult judgment calls,
agrees Brian Marshall, a partner with
McGladrey. He points, for example, to
new requirements on variable consider-
ation, or situations where the payment a
company might receive under a particular
contract with a customer isn’t set in stone
at the outset of an arrangement. Variable
consideration might include terms like
commissions, bonuses, milestone pay-
ments, rebates, and others. Under most
existing GAAP, revenue isn’t recognized
under variable terms until the amount is
earned and fixed he says.
“Now you’ll have to estimate that,”
Marshall says. “You will have to figure
out how to come up with the estimate of
how much you expect to be entitled to, or
the most likely amount. Are you going
to get the bonus or get nothing?” Within
those extremes, there are possible ranges
as well. If there are multiple potential out-
comes, they can be probability weighted
as a starting point, he says. “But you can
only include the amount if you think it’s
probable it won’t be reversed.” Arriving
at hard numbers will be difficult, to say
nothing of the auditing challenge, he says.
Peter Bible, a partner at audit firm Eis-
nerAmper, is concerned about the judg-
ments on performance obligations, how
they are defined, how they will appear on
the balance sheet, and how the judgments
and estimations around them can become
a target for gaming. If there are problems
with the process, it can lead to material
weaknesses in internal controls, or it can
lead to “cookie jars,” he says. “It gives
people another lever to pull,” he says.
Majority Reports
The extent of disclosures is another
area of early concern, says Scott
Lehman, a partner with Crowe Horwath.
Under existing GAAP, you have several
sentences or a paragraph in your signifi-
Companies Seek Help, Guidance on New Revenue Standards
2. Reprinted from Compliance Week, July 2014
WWW.COMPLIANCEWEEK.COM » 888.519.9200
cant accounting policies,” he says. “Under
this new standard, there’s a laundry list of
disclosures that need to be made. It’s an
extensive list of quantitative and qualita-
tive disclosure requirements to get into
the specifics of how estimates were made
and to disaggregate some of the revenue
information.”
FASB member Larry Smith said dur-
ing a recent Webcast the board believes it
has struck a middle ground with respect
to the disclosures. “No one seems to like
the disclosure requirements, which means
we’ve probably provided some decent in-
formation to users but not at undue cost
to preparers,” he said.
New judgments, new controls, and new
disclosures likely will mean new systems
needs for many companies. Jagan Reddy,
president and CEO Leeyo Software, says
his firm is preparing
and is already see-
ing increased interest
due to new guidance.
“The sheer amount
of work to adopt this
new revenue standard
is making many com-
panies panic,” he says.
The scope of the
implementation is-
sues is already starting to put some pres-
sure on the effective date. For companies
that will need to provide a full retrospec-
tive view of three years worth of data un-
der the new standard, that means resolving
those issues and running parallel systems
beginning in early 2015, only six months
away. “That’s what everyone is freaking
out about now,” says Kushmerick.
Smith acknowledged the time line and
said FASB anticipated there would be calls
for a delay in the effective date. “At this
point in time, neither board to my knowl-
edge has any immediate plans to extend
the effective date,” he said. “Really, we’re
going to take a wait-and-see attitude.”
Myles Corson, a partner with EY, says
companies can’t rush to a call for more
time until they’ve done a thoughtful anal-
ysis and can provide reasons. “Just saying
it’s too difficult isn’t going to work,” he
says. “Companies need to bring specific,
detailed reason why it can’t be achieved.
To do that, you have to go through a ro-
bust evaluation process first.” ■
Below FASB and the IASB provide details on how stakeholders should submit potential implementa-
tion issues.
Questions submitted to the TRG should meet the following criteria:
1. The question is a potential implementation issue related to the Accounting Standards Update -
Revenue Recognition (Topic 606) / IFRS 15.
2. The issue indicates that the new guidance can be applied in different ways resulting in diversity in
practice. The submission should include a detailed description of the possible ways in which the
new guidance can be applied.
3. The potential implementation issue is expected to be pervasive, that is, the potential issue is ex-
pected to be relevant to a wide group of stakeholders. A description of why the issue is expected
to be pervasive should be included with each submission.
SUBMISSION
Once you have determined that your question meets the criteria for submission, please complete the
submission form and e-mail it to revenue@fasb.org revenue@fasb.org. In addition to the form, at-
tachments (such as memos) may be included with the submission.
Submitted forms will remain private. However, the issues raised in the forms may be discussed in
public without the identification of the submitter’s name. Although the submission forms will remain
private, please do not include any confidential information in your submission.
Source: FASB.
GUIDELINES
