Know Your Transition Method: If Not Now, When?

By Aarthi Rayapura July 21, 2015

As we mentioned last week in our plea for better understanding of the sweeping revenue recognition guidance changes, governing boards required more than a decade of work to produce them.

Your company doesn’t have the luxury of that time to decide how to transition to the new standard.

Choosing your transition method is one of the key steps – nay, THE key step – along the path toward a smooth implementation of the newly converged guidance.

Again referencing the prescient article published by the Journal of Accountancy, “Revenue Recognition: No Time To Wait,” it is pointed out that each transition option has pros and cons. Companies need to at least consider their options very carefully.

What are the transition options?

Full Retrospective

  1. Under this option, entities must recast all contracts for the two years prior to the implementation date.
  2. Implement dual reporting to account for contracts under current guidance and begin restatement process of prior periods before the effective date.
  3. For public entities and all early adopters, this two-year restatement period could begin as early as December 16, 2015.

Modified Retrospective

  1. Apply new standard only to contracts not completed under legacy U.S. GAAP and IFRS at the implementation date.
  2. No restatement of prior years required
  3. Perform dual reporting (two sets of books) the year of adoption.

The takeaway difference? The starting point. Do you choose to look backward with a full retrospective or look forward with a modified retrospective?

While the idea of no prior year restatement sounds good with a modified retrospective, consider the fact that you will have multiple closing periods in which you’ll be required to close two books instead of one. See what we mean? Pros and cons.

As one CPA notes in the JofA article, “the full retrospective method may be more complicated, but some companies plan to use it to give investors a full understanding of trends.

“Using the full retrospective approach could be difficult because it may require systems to be ready to capture data to perform dual reporting as early as the beginning of 2015,” the CPA states. “That could mean a substantial overhaul in business practices, accounting systems, or both – as well as employee training – in a short time frame.”

When choosing from among your transition options, one trend to carefully consider is decision making within your particular industry. You do not want your company to be the odd one out in your industry in terms of transition option selected.

Stay tuned for the next topic in this series in which we discuss the need to build a team… and a plan.