As the effective date of the Financial Accounting Standards Board’s new revenue recognition standard approaches, there’s increasing pressure on companies and/or their audit committees to assess their companies’ implementation efforts. For the very large publicly traded companies, the new standard will apply to annual reporting periods beginning after December 15, 2017 (including interim periods) whereas it is effective for calendar year private companies on January 1, 2019.  However, understanding the new standard and evaluating its impact is a very complex undertaking in order to understand the over 1,000 pages outlining this new standard.

The Center for Audit Quality (CAQ) has published Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees to help committees fulfill their oversight responsibilities. The publication is organized into the following four sections:

 

1.) A new revenue recognition model

Accounting Standards Update No. (ASU) 2014-09, Revenue from Contracts with

Customers, established a new core principle for revenue recognition “to depict the

transfer of promised goods or services to customers in an amount that reflects the

consideration to which the entity expects to be entitled in exchange for those goods or

services.” It created a model for recognizing revenue:

 

-Identify the contract (s) with the customer.

– Identify the contract’s separate performance obligations.

– Determine the transaction price, using extra scrutiny if a contract calls for variable consideration, such as bonuses, incentives, rebates or penalties.

– Allocate the transaction price to the contract’s performance obligations, if there are multiple performance obligations.

– Recognize revenue when (or ad) the entity satisfies a performance obligation (that is, when the customer obtains control of the good or service).

 

The need to identify separate performance obligations — distinct promises to transfer

goods or services — is critical. To make the transition to the new standard, companies

may elect full retrospective application — which requires prior-period financial

statements to be recast — or modified retrospective application — which doesn’t require

recasting, but does require the cumulative effect of initially applying the standard to be

recorded as of the initial application date.

 

2. Impact assessment

This section assists audit committees in evaluating management’s assessment of how the

new standard will affect the company. For some companies, the amount and timing of

revenue recognized under the new standard won’t differ significantly from their results

under current U.S. Generally Accepted Accounting Principles. But audit committees will

still need to make the analysis under the new standard’s requirements to reach that

conclusion. In addition, all companies will be affected by the new standard’s disclosure

requirements, regardless of its impact on revenue. The new rules expand disclosure

requirements and require qualitative and quantitative disclosures intended to provide

information about a company’s contracts with customers. The disclosures must include

information about revenue and cash flow stemming from such contracts.

The audit committee should look at how the standard’s impact was assessed and who was

involved in the assessment. In addition, determine what company-specific factors were

considered and when management will provide pro-forma financial statements that

illustrate the expected impact. Finally, review how the company’s external auditor views

the assessment.

When making the assessment, it’s important to seek input from a wide range of

departments, including accounting, tax, financial reporting, financial planning and

analysis, investor relations, treasury, sales, legal, information technology and human

resources. The CAQ also urges audit committees to ask management about the standard’s

potential impact on specific aspects of the company’s business. (See “How will the new

standard affect your company’s revenue?”)

 

3. The implementation plan

This section helps audit committees understand and assess management’s implementation

plan. It provides detailed questions audit committees should ask on such subjects as

project milestones, progress reports, external auditor and third-party vendor views,

adequacy of resources, qualifications of the accounting team, accounting policy and

significant accounting judgments, systems and controls, and company culture.

 

 4. Other implementation considerations

The final section covers other considerations, including deciding on a transition

approach, handling dual recordkeeping requirements for retrospective application,

determining whether to consider early adoption and complying with new disclosure

requirements.

 

The publication also includes a list of articles, technical guides and other resources for

navigating the implementation process.

By now, public companies should have made substantial progress toward implementing

the new revenue recognition standard. The CAQ’s publication can help audit committees

evaluate the status of their companies’ implementation efforts and, if necessary,

accelerate the process. Please reach out to H&M with any questions or concerns you may have.