Keeping Pace with Revenue Recognition Changes

Revenue recognition continues to be under the microscope as regulators step up their scrutiny of financial statements. At the same time, businesses, accounting firms and consulting advisors are working to understand the full impact of the coming converged standards.

In this environment, companies can't assume their practices and processes will continue to produce satisfactory reports. To succeed today and be ready for tomorrow, wise companies will walk parallel paths – one to ensure compliance and their good reputation today in the face of escalating oversight and another to ensure the same when the new standards take effect.

One of the most important steps companies can – and should – take immediately is to ensure revenue recognition practices are adequate to current business models and revenue streams. Recently, Blythe Global Advisors has been helping companies who are finding that practices and processes that produced satisfactory reports for years are suddenly coming up short in PCAOB reviews. It's because small, slow changes over time have resulted in a fundamentally different company requiring significantly different accounting treatment. The cost to companies caught in this situation is steep, including post-signoff auditor remediation, late filings, increased regulatory scrutiny on subsequent reviews, diminished image among stakeholders, etc. To remain compliant, companies need to be diligent that all aspects of revenue recognition practices remain appropriate to evolving oversight and rules on the outside and evolving business realities on the inside.

In addition to the above, here are key actions that can help companies ensure continuing compliance and stakeholder confidence.

1. Get comfortable with expanded judgment decisions: Current U.S. GAAP rules provide proscribed guidance. The new rules are more theoretical, requiring more judgment decisions in coming up with estimates that, in turn, must be supported by more accounting documentation, analyses and detailed disclosure statements.
2. Conduct a company-wide contract review: The entire focus of the converged rules is on the application of contracts. Contracts should be reviewed to decide if the company will continue to do business as in the past or make fundamental changes. This review should be cross-functional involving finance, accounting, legal, human resources, sales and marketing – including counterparts around the globe for companies with multiple, worldwide locations and contracts in multiple languages.
3. Review all mission-critical IT systems: Are current IT systems sufficiently robust to accommodate the new rules? Are they flexible enough to calculate revenue under current rules and also perform a multi-year retrospective under the new rules? Are two systems needed? Is ERP adaptable or will Excel become the default process?
4. Re-evaluate internal controls for proper revenue recognition: In addition to regular, mandatory best-of-breed stress tests, companies need to employ highly skilled professionals with sufficient knowledge of accounting rules to recognize when new activities affect revenue recognition or to discern the tipping point when the business model has shifted significantly enough to warrant changes to accounting treatment.

Even though the FASB may ultimately delay the implementation date, companies will need to begin discussing the future impact of the new standards in upcoming quarterly disclosure statements and what the company will do to address the impact. The steps outlined above will enable executives to make more informed statements prior to full implementation and to prepare stakeholders for how future revenue will flow as well as avoid surprises when the first, full report is issued under the new standards.