With public companies now operating under Accounting Standards Codification (ASC) 606, the new revenue recognition standard, their efforts to implement the standard hold lessons for private companies adopting the standard beginning January 1, 2019.
To better understand these lessons, FEI spoke with Glenn Richards, an audit services partner, and Bill Watts, a risk consulting services principal, of Crowe LLP about the standard and the steps public companies have taken to implement its requirements.
FEI Daily: In general terms, what were some of the major lessons from the 606 implementation process that registrants can apply to other standards?
Glenn Richards: I think the first point is obviously to start early. It seems everyone we’ve worked with expected this would take time, but it has generally exceeded their expectations. Companies find that revenue affects them in ways that can surprise them. Certain revenue streams or contracts that they thought might be easy to analyze or work through can end up taking a few more steps or can have some surprising results that affect other areas of the business, such as systems or debt covenants.
And I think it’s important to get different people involved. Implementing this standard or other major standards isn’t an exercise that just can be done in a back room with accounting and some spreadsheets. It generally involves aspects of legal and operations, and IT, and other folks to provide input, get data, and understand contracts so the standards can be applied appropriately.
Bill Watts: We’re starting to see a general theme across many of the revenue recognition engagements that we’ve done around what we call the three C’s: completeness, clarity, and control. And as Glenn alluded to, this goes beyond what companies have been used to in the past, where they get a new standard or pronouncement and may decide to write a technical white paper on it, share it with their external auditors, and use it for additional support as they develop disclosure; 606 goes from a technical perspective all the way through to the processing of transactions.
With the three C’s, the first is completeness. In the scoping of revenue recognition streams, some companies aren’t seeing all the revenue streams. Companies have struggled with understanding revenue streams, performance obligations, and the related contracts in those areas. And this can apply to other standards as well — the idea of making sure that the process is complete around what would be in scope for this new standard.
The second C is clarity, and that’s ensuring that all the specialty activities that a company may do with their customers or clients are properly vetted and assessed against the standard. And we find that some organizations and industries are providing some services and solutions that may not be very standard, either across their industry or in business in general.
They’re creating niche markets that others aren’t by providing very specialized services to clients. Because of this, it may not be very clear how the standard should be applied, and so companies are struggling with making sure they provide that clarity. Sometimes that goes beyond the standard to looking at regulatory pronouncements, getting input from external auditors, or looking at AICPA task forces’ industry guidance.
Finally, the last C is control, and this is an area many companies really hadn’t considered until the 11th hour. It includes internal controls around not only processing revenue, which all companies would think about, but also implementing controls and ensuring that they are looking beyond just the impact to the right competency, the right review, and the right monitoring around these controls as well.
And so, we’re seeing broad aspects applying to these engagements that we wouldn’t typically have seen in the past when implementing other accounting standards.
FEI: When you talk about those aspects with revenue implementation that you wouldn’t have seen previously, what’s driving that?
Watts: I think some of it is the complexities or the variations in the new standard, as the FASB and IASB have tried to converge and provide more consistency across reporting standards globally. They’re bringing some new ideas to organizations that hadn’t either worried about international standards or had to deal with those in the past. In addition, there just hasn’t been a very deep and broad complex standard like this in some time.
Also, from a public company perspective, with the PCAOB involvement in SEC reporting, there’s more emphasis on companies to be thinking about all types of new impacts. They must consider not just the technical application of standards but also the impact on people, processes and controls, and, as Glenn mentioned, systems.
Richards: My opinion is you have a perfect storm here. You have this standard that’s coming out that’s comprehensive, and it’s also principles-based. We’ve had principles-based standards in the past, such as the one on derivatives. But that wasn’t so comprehensive, and not every entity has derivatives. We also have comprehensive standards, like leases, but those are more structured transactions. Here, you have a principles-based standard, and it’s applied to something like revenue that doesn’t fit into a neat box.
Companies’ revenue streams come from so many different sources, and contract terms can be so different. You’re applying a principles-based standard to something, and you’re affecting almost all entities. There’s very little that’s scoped out of 606. And you’ve got such a dynamic process to apply those principles to. That presents a lot of challenges.
To learn more about the new revenue recognition rules that have been challenging for some of the public company adopters, we invite you to attend the Crowe LLP webinar event: ASC 606 Implementation: Lessons From Companies that have Adopted the New Revenue Recognition Standards at 2:00 pm Eastern on December 11, 2018.