We’ve hit the one-year mark since the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced the newly converged standards for revenue recognition and, as you’re likely well aware, a lot has happened.
Wheels are in motion for both governing boards to delay the effective date by a year as many facets of the guidelines themselves get ironed out. In addition, FASB is expected to join IASB in offering the option of early adoption.
As you’ve also probably gathered, we take the effort needed to properly adopt such a massive accounting overhaul very seriously. Not just because of our team’s own devotion to develop a new version of our product compliant with the new guidelines, no. It’s also a result of our constant communication with our partners in the accounting community, industry experts among the ‘Big 4’ accounting firms and elsewhere who are on the front lines, as it were, working with companies in preparation of the new guidelines.
According to these experts, many organizations have yet to mount any serious planning efforts and among the few who have given the issue consideration, there’s a wide disparity in budgeting for the implementation.
“What I’m hearing from many organizations is that most have not really started their project yet,” said one expert who’s been out in the field, noting companies spent last year trying to educate themselves on the changes and the resulting impact to their accounting.
This matches feedback from a Leeyo webcast late in 2014 in which nearly 60% of the audience targeted between mid 2015 and mid 2016 to implement new processes in response to the updated guidelines. Only 19% of that same audience had already started their implementation efforts.
“We are working with many companies to help them understand the impact of the new revenue rules and to assess the changes in processes and systems that will be required,” said Stephen G. Thompson, Revenue Recognition Change Services National Lead with KPMG, who assists firms in implementing new guidance, policies and other technical accounting matters. “For many companies, the cost of making these changes can range from $1 million, for less complex situations, to many millions for those companies with significant changes or a desire to fix existing weaknesses in processes and systems.”
Shauna Watson, RGP’s Global Managing Director of Finance and Accounting, said the proposed delay highlights the amount of work involved in implementing the new standard, “and some of it needs to happen chronologically.
“For instance, an impact assessment and gap analysis must be done before one can determine the extent of the impact, not only to accounting and financial reporting, but also to people, processes, data, controls, contracts and documentation,” she said. “Companies who have completed assessments have found there is more work to do than they had anticipated, even if changes to the amount or timing of revenue and margin are minimal. Identifying the impact, at least on a high level, will help companies develop a comprehensive project plan and budget. Those who start earlier will be able to maximize the use of internal resources, but those who delay may be caught scrambling and paying a premium for external help.”
Watson said they’ve seen a lot of companies who were trying to do the implementation in-house now need external resources.
“The effort involved is overwhelming for many companies, particularly those whose internal resources are already stretched with projects such as system implementations, acquisition and disposition activity, and special projects,” she said.
Another industry professional noted the likely one-year extension will give companies a new opportunity “to pursue a thoughtful approach to understand the impact of complying with the new guidance”.
“As many companies have discovered,” he said, “one of the causes for the extension is correlated with the widespread impact that the new standard has on the organization, processes, systems and data. Companies that view this as not only an ‘accounting change’ but rather an enterprise initiative that presents a process transformation opportunity will be those that realize the benefit from complying with the new revenue standard.”
As Gregg Nelson, IBM’s Vice President of Accounting Policy and External Reporting, noted in the Journal of Accountancy article titled, “Don’t Lose Momentum on Revenue Recognition Standard,” the delays for the standards proposed by the governing bodies should be seen as an opportunity to forge full steam ahead, not slow things down. His company plans to do just that.
“This will ensure that we maintain momentum and existing resource levels,” said Nelson during a PwC webcast referenced in the article, “and will provide flexibility for us if we have problems or the standard changes further in the future.”
Added Nelson: “The implementation of the new revenue standard, as we all know, will represent a significant and complex effort for most entities. Even if you don’t expect a material change in your financial results, the new model likely will involve new processes, revised internal accounting policies, new control points, new disclosures, and likely new systems that you will be employing in your revenue accounting model.”
One expert estimated as much as 80% of companies today plan to put a budget together in the 2015 fiscal year for the 2016 fiscal year and start their implementation work, in the form of a post accounting impact analysis, in fiscal year 2016.
“Those that are contemplating the implementation of a new tool understand they will have a capital and an expense budget,” he said. “Those assuming they will use Excel to calculate the cumulative effect and perform the accounting their ERP system does not do will have to expense their entire budget.”
As Watson noted, one of the most lengthy and cost-intensive elements of revenue recognition implementation is system-related. This, of course, depends on the magnitude of changes to accounting policies which have been identified through a company’s impact assessment as well as the sophistication of the firm’s existing systems in place.
“For instance, a company must determine whether the extent of the required accounting changes can be handled by a manual solution (i.e. Excel), minimal changes to the existing system, or implementing an entirely new system,” she said. “If the decision is made to invest in a new system, which I think many companies will find preferable to control the process and minimize time in closing each quarter, that’s just the beginning of a lengthy process. Capital budgets for new systems and internal IT resources often need to be secured months or years in advance. The process from approval to design to implementation and user testing is not something that can be accomplished in a short time.”
Based on indications from some of the early movers so far, our experts estimate that implementation budgets are generally falling into a range that equates to 0.5 to 1.0 percent of their revenue.
A fairly blunt breakdown, based on feedback we’ve received, alarmingly indicates where companies stand in their planning efforts to date: Approximately 20% have engaged an accounting firm to help them work through impact analysis as early as last year while another 60% are currently underway or have plans to do sometime this year. The remaining 20% fall into one of three categories: They are in industries that truly have minor impact; they are completely naive in believing there is minimal impact; or they are simply ‘kicking the can down the road’ thinking they have two and a half years before they need to respond.
Take it from the experts: You do not want to be included in that last group.