March 27 2017
The new revenue recognition standard is going to force many companies to make new disclosures, but they shouldn’t wait until the last minute to get ready, warns a recent report.
The report, from Deloitte, notes that some public companies might put off considering the revenue recognition standard’s new disclosure requirements until early 2018, after the new standard becomes effective as part of the first-quarter reporting process for public business entities. However, that strategy could be risky.
“What we’ve seen is that most companies are scrambling to prepare for the new revenue standard, and most are really focusing the bulk of their time and resources on satisfying the measurement requirements, which are the high-profile elements,” said Eric Knachel, senior consultation partner in Deloitte’s national office. “But in the process many companies are largely ignoring the disclosure requirements, which may seem like a minor detail that can be dealt with later on once the standard goes into effect. But I think that’s a mistake.”
He pointed out that the annual disclosure requirements are effectively required in the interim financial statements in the year of adoption. “What that means is most companies will adopt the new standard in the quarter ending March 31, 2018, but in that quarter they will need to include the more lengthy and burdensome annual disclosure requirements in the quarterly report,” said Knachel.
Incremental information will also be needed, he pointed out, and it won’t necessarily be simply a byproduct of the implementation work a company has already done. The new disclosure requirements could be much broader and more extensive than people realize.
“The revenue standard makes a distinction between those disclosures that are required on an interim basis and those that are required on an annual basis,” said Knachel. “That’s customary with most accounting standards. What’s also customary is that for most accounting standards, the annual disclosure requirements are more involved and more detailed. There’s nothing new there. However, for public companies, there’s an SEC requirement that says when a company adopts a new accounting standard, they need to include both the annual and the interim financial statement disclosures in that quarter, to the extent they’re not duplicative. This is not unique to revenue, but I believe the SEC requirement will be magnified because of the new revenue standard’s broadness and applicability, and its emphasis on disclosure requirements. A lot of companies have overlooked that it’s something they’re going to have to do in the first quarter.”
Some of the disclosures will be difficult for companies to make initially, and they shouldn’t expect the information to be automatically available as a byproduct of implementing the new standard. Knachel compared it to solving a math problem.
“Here the difference is that the disclosure requirements include information that will need to be separately obtained or analyzed, and it’s not necessarily part of work you’ve already done,” he said. “It’s almost like a separate problem, and I think that’s a very significant aspect that people haven’t really focused on. They just assume that when I’m done implementing, I’ll do the disclosure because I must have the work. It’s kind of like if you took a math test. You think you’re done and you’re going to show your work, and all of a sudden there’s another math problem at the end.”
The disclosure requirements may even hold back some companies from implementing the new standard.
“I think it’s certainly something that is going to prove to be challenging and problematic for companies as we get closer to the implementation date,” said Knachel. “Companies are going to run out of time to get this done.”
Accountants can help their clients by making them more aware of the hurdles they may encounter when implementing the standard and preparing the required disclosures.
“Companies can and should be considering the disclosure requirements simultaneously as they’re implementing the standard,” said Knachel. “Some aspects of the disclosure requirements can be addressed in parallel with implementation of the new standard and others can be addressed as separate work streams.”
He believes it’s important for companies to develop a comprehensive disclosure strategy that avoids wasteful duplication of efforts. “In other words, if companies look at those disclosure requirements now, they can evaluate what information is needed and what information from our implementation activities can be used for disclosures, and what’s the most effective and efficient way to do this,” said Knachel. “If companies don’t get on top of this now, it could have an adverse impact on them meeting their financial reporting deadlines. That sounds a bit alarmist, but the point is it shouldn’t be taken lightly and they should be thinking about disclosures as they’re going through the implementation.