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Why You Should Prepare for New Revenue Recognition Rules Now

In a modern office where changes to procedures, personnel and even products can happen overnight, new accounting regulations that don’t take effect until 2017 might look like something to relegate to the bottom of the to-do list. But if you’re talking about the new revenue recognition rules that U.S. and international regulators released in May, that could be a big mistake.

That’s the message Jeff Tchir, Director of Revenue Accounting for Silver Spring Networks and the instructor of a Proformative online course on the new regulations, wants to send to CFOs.

“This is the most major thing that has happened in accounting, in my career anyway,” says Tchir, who calls himself a “hard core rev rec guy” on his LinkedIn profile.

The changes are a long time coming. The Financial Accounting Standards Board and the International Accounting Standards Board spent more than a decade reconciling and updating their standards into this one tidy set of rules. These rules will affect the timing of when and how companies in all sectors recognize revenue. Some may see big swings and others may experience minor adjustments, but all companies will need to consider how their current practices and revenue reporting will change. Publicly traded entities will need to disclose the impact, at least in a generalized way, to investors soon if they haven’t already.

Where to Begin
As Phil Bolles, a former CFO turned managing consultant with Global Commercial Strategies Group, notes, at first glance U.S. companies might think they don’t have a lot to contend with in the new standards—the way they’re written looks a lot more like the current U.S. system than the one IASB uses now. But the reality is more complicated. Bolles says a huge swath of business practices will be affected by the rules. For example, a simple purchase of a loaf of bread at a grocery store can get tricky if the store has a loyalty card. Under the new standards, the retailer will need to keep track of the value of the “points” that customers get when they swipe their card and pay their $2.99, and put off recording the full amount of revenue for such a purchase.

The new system also shifts from a “rules-based” to a “principles-based” approach. In theory, that means U.S. companies may have more leeway in deciding how to report revenue. But in practice, de facto rules are likely to develop as accountants and the courts interpret the new standards in the years ahead. As it is, the Big Four accounting firms are filling their clients’ inboxes with highlights and overviews of the new rule. The literature will eventually evolve into deeper dives of how companies should actually apply it. For now, their message is: get started. “I’m hearing a real sense of urgency from those people,” Bolles says. “They’re putting out information now, trying to get clients to avoid pitfalls that can occur in 2017 if they don’t deal with it now.”

So, what do finance teams need to do to prepare for the new standards?

Tchir suggests starting by actually reading through the document put out by FASB and IASB. It is 699 pages long, but the standards themselves—including examples—takes up just 150 pages. “So it’s not that bad,” he says. Lean on some of the materials put out by the Big Four firms for a better understanding as well, Tchir adds.

Transition Trouble
Among the key issues to look at are the timelines for implementing the new standards. They take effect for financial-reporting periods beginning in 2017 for publicly traded firms but a year later for private companies. Waiting a few years isn’t an option, though, because when companies start using the new rules, they need to be able to compare their results under the new and old system. There are a couple of ways of doing that. Public companies can either offer parallel financial reports going back three years—meaning they have to start in 2015—or create doubles for any contracts that are current when the transition happens. (Private companies have it a little easier—they only need to go back two years if they choose the latter method.)

Tchir says the choice of how to handle the comparative numbers isn’t just a matter for accounting. “One of the considerations is how it will look to the investor community,” he says. “That’ll be a major consideration.” Which means, he says, that anyone who talks to investors and the media need to be involved in the decision over the transition method. And it also means waiting to see how the investor community will react as analysts continue to decipher what companies are telling them and understand the full implications of the standards.

Consider Contracts
Beyond the investor aspect is the sales aspect. Contracts, whether written or verbal, will need to be scoured for potential issues. Any advance payments (like a deposit paid to an architectural firm) as well as any performance obligations (like a warranty on a delivered product) are likely to be treated differently. How differently depends on a number of factors, including the type of company that is involved. The new standards eliminate existing industry-specific rules.

In some cases, Bolles says, it could make sense to ditch a contract clause entirely if it’s only included in the deal as a sweetener. “It’s a case of weighing the business benefits versus the financial reporting costs,” he says.

Set Up a Team
During this transition time, experts suggest setting up an internal team that can explore how the changes will affect the company, educate clients and departments outside finance that may be affected, and come up with the language for explaining how the company is moving forward (public entities need to disclose how the new rule will affect them in their next quarterly filing).

This is not a project that can be offloaded entirely to a third party. “The best way to resource a project is have both internal people focused on it and external,” Tchir says. “Don’t just hire an expert and think they can finish this in a vacuum.”

Ultimately, for many companies, the transition will involve changes in policies and in systems. And that means it will need funding, so another piece of the preparation will be finding space in the budget to make it happen.

“This will cost money in terms of people and systems,” Tchir warns. The best advice? Be proactive, plan ahead, and move this up in your to-do list—2017 is right around the corner.

 

Livia Gershon is a freelance writer in Nashua, N.H.

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