Revenue recognition: A complex effort Implementing the new standard requires careful judgment. By Ken Tysiac Sponsored by IMAGES THESEAMUSS/ISTOCK IMAGES BY Workiva • Thomson Reuters How do I spend less time on tedious admin tasks and more time advising my clients? Thomson Reuters UltraTax CS® You’re the expert on what your clients need — and you need more than just tax software. With UltraTax CS, you join a collaborative community where tools, resources and ideas help you better serve your clients in less time. You can use UltraTax CS to: • Automate your tax workfl ow across all your clients • Address tax law changes faster to serve all clients better • Identify your most profi table clients and grow your fi rm • Give clients what they need before they know they need it Contact us at 800.968.8900 or visit tax.tr.com/ultrataxcs ©2017 Thomson Reuters UltraTaxCSJOA_Print.indd 1 1/27/17 11:58 AM SPONSORED REPORT rian Allen, CPA, jokes about the five cess to include a clear governance structure, a steering stages of grief when he explains the committee, and executive sponsorship across all the key groups, including finance, IT, investor relations, and potential for change inherent in the im- tax. Individual working groups move forward with clear Bplementation of the new revenue recognition directions and responsibilities, and meticulously docu- standard by financial statement preparers. ment their work. This careful process and the documentation sur- The standard developed jointly by FASB and the Inter- rounding it are important internal controls in themselves. national Accounting Standards Board (IASB) does away Groups that are working to implement the revenue with the industry-specific, rules-based guidance under recognition standard can maintain minutes of meetings which U.S. companies have prepared financial state- and document views considered and views rejected, ments. The new guidance is principles-based and over- and why decisions were made. In addition to preparing arching, with a goal of promoting comparability across white papers describing the reasoning behind techni- industries and global jurisdictions. cal assessments, Paul advocates putting together a Financial statement preparers who are deep into their white paper describing exactly what the implementation implementation processes describe a complex effort. process was. When management goes through later and Implementation may require an organizationwide exami- assesses internal controls, company leaders will be able nation of impacts, the attention of personnel in various to look back at documentation from meetings to arrive at functions, an updating of internal controls, some difficult a level of comfort that preparers made sound decisions. judgments, and a lot of new disclosures. “I think all of that lines up and provides a clear picture Depending on the industry and the company, the of a robust implementation and control framework,” level of change and the amount of work involved may Paul said. be so substantial, Allen joked, that some preparers may Internal controls will need to be updated as changes need to experience the grieving stages of anger, denial, are made to processes and procedures, and perhaps IT bargaining, and depression before ultimately arriving at systems, and new data are gathered. And in a sepa- the final stage of accepting the change. rate speech at the conference, SEC Chief Accountant “The FASB didn’t spend 12 years [developing the Wesley Bricker stressed the importance of properly standard] so that everyone’s accounting would stay developing internal controls (see the sidebar, “What the the same,” said Allen, a KPMG partner who served on SEC Says”). the joint FASB/IASB transition resource group for the “Over the next several years, updating and main- revenue recognition standard. taining internal controls will be particularly important Allen joined a panel of experts who provided per- as companies work through the implementation of the spective on the new standard at the recent AICPA significant new accounting standards,” Bricker said. Conference on Current SEC and PCAOB Developments “Companies’ implementation activities will require care- in Washington. The panelists conveyed a message of ful planning and execution, as well as sound judgment urgency with the date of implementation approaching at from management.” the beginning of 2018 for public companies that report on a calendar-year basis (private companies have an MOMENT OF TRUTH extra year for implementation). Some preparers who have delayed their implementation The standard may require significant judgment to be process have cited questions about the standard as well applied in many areas because it is principles-based. as clarifications by FASB and the IASB. They may have And preparers may find that they need to collect a sig- been reluctant to begin implementing because they nificant amount of new data to comply with new disclo- viewed the standard as not quite finalized. sure requirements. Allen said he doesn’t expect FASB to make any more “It’s complex,” said Josh Paul, CPA, director–tech- meaningful revisions to the standard. But what may be nical accounting for Alphabet Inc., which is Google’s holding back preparers now is a hesitation to make dif- parent company. “It’s difficult, and it takes a long time to ficult judgments. work through and really understand the issues.” “It’s the moment of truth, and you’ve got to use your best judgment in an unbiased, objective way to reach UPDATING INTERNAL CONTROLS the best accounting answer,” Allen said. This complexity is why organizations that haven’t Some preparers are belatedly arriving at that mo- already started implementation are facing a significant ment of truth. Almost one-fifth (19%) of respondents challenge. Paul described a robust implementation pro- to a KPMG survey of 515 corporate financial reporting journalofaccountancy.com March 2017 | 69 SPONSORED REPORT executives in December said they had not even begun Sources of information that preparers also can con- implementing the new standard. An additional 62% of sult include the AICPA Revenue Recognition—Audit & the participants in the survey, conducted at the firm’s Accounting Guide and literature produced by account- annual accounting and financial reporting symposium, ing firms that describes best practices with respect to were just working on their assessment of the account- common judgments encountered while implementing ing impacts of the standard. Just a few respondents the standard. The AICPA guide includes the observa- reported that they were actually implementing the tions of 16 industry groups that are working through standard (13%), developing systems requirements implementation issues specific to their respective indus- (4%), selecting software vendors (2%), or finished with tries. Meanwhile, the basis for conclusions in the stan- implementation (1%). dard itself can provide insight on the board’s intentions But there are many ways for preparers to gain as it created the new rules, and documents prepared by comfort as they attempt to make the best choice when the boards’ joint transition resource group also can help faced with difficult judgments related to the new revenue with challenging judgments. While this is not an exhaus- recognition standard. First, preparers in many industries tive list of information sources, these resources may be have banded together in working groups to arrive at a helpful for preparers. consensus on difficult areas of judgment in the standard If necessary, preparers can discuss judgments with that are common in their industries. This careful, col- their auditors, who are able to provide advice if the audi- laborative work helps them arrive at similar accounting tors are careful not to compromise their independence. treatments for similar transactions. Finally, preparers may wish to consider preclearing a “You don’t want to be an outlier in your industry,” said judgment with the SEC or inquiring about the judgment Lara Long, CPA, vice president for corporate accounting through FASB’s technical hotline. and reporting for farm machinery manufacturer AGCO Eventually, though, the preparer will need to make in Atlanta. a judgment, and documentation is a critical step in the process. Auditors and regulators will scrutinize whether a judgment is well-reasoned and well-supported, and documentation of the different approaches consid- WHAT THE SEC SAYS ered—and why a certain decision was considered most appropriate—can help preparers provide important SEC Chief Accountant Wesley Bricker offered the perspective about their decisions. Bricker, the SEC chief following thoughts on the new revenue recognition accountant, said it is important for companies to clearly standard during a speech at the AICPA Confer- articulate the basis for their accounting under the new ence on Current SEC and PCAOB Developments in standard. Documentation helps with that articulation. December in Washington: “We’re in an environment of not being rules-based, ■■ “Revenue impacts key analytical ratios and it’s principles-based,” Long said. “It feels awkward. It bottom-line earnings. Although often a complex feels weird. That’s why maybe there’s some consterna- area, companies cannot afford to get the ac- tion out there. Make a decision, document it, support it, counting wrong.” get your auditors on the same page with you if you can, ■■ “Investors and OCA [Office of the Chief Accoun- and move forward.” tant] staff will be looking for increased disclo- sures in