Where Are We With Revenue Recognition?: A Q&A With KPMG's Betsy Meter

The revenue recognition standard adoption day is fast approaching for public business entities, but companies appear to be making slow progress. What can organizations do if they've fallen behind? Olivia Berkman, Managing Editor of FEI Daily, spoke with KPMG Audit Partner Betsy Meter on how early adopters are faring, lessons for the business line, and how the new standard will change the audit. A transcript of the discussion is below the video.


Financial Executives International: What are some of the issues that the early adopters are facing right now when it comes to revenue recognition?
Betsy Meter: We haven't seen a lot of companies actually early adopt. There have been a few. When we do surveys, and KPMG did a survey just a few months ago, only 2 percent of the respondents said they had actually early adopted. There's not a lot of experience yet with the new standard.
For the public companies, we're only eight months away from adoption day. There's a lot of companies that are still in that early assessment phase who were a little bit delayed in getting rolling and looking at the new standard. We're seeing them have some challenges. They don't have enough resources in-house to get through the process. They've got to really aggressive here. The runway is shrinking and they need to be on top of it.
This is the first time we've had a standard where there's a lot more judgment involved for revenue. Companies struggle with that. They're looking at how do they make those judgments and assess those and document that process. Those are things that are new to companies. We've spent a lot of time at KPMG educating our clients. I think that's critical within the organizations to make sure that they're getting sufficient education.
It affects a lot of groups within a company today and it's not just the CFO office that's responsible any longer. They’ve got sales and investor relations and internal audit, a lot of stakeholders that need to understand what the company's impacts are to the standard. That changes it. It's a new thing for companies and I think we see that with our clients that they face a number of challenges.
FEI: When it comes to the education, what can some of these companies learn from the early adopters? What are the lessons learned?
Meter: I think the lessons learned are to get in front of it early and really come with a good plan and well-thought out process for milestones to see that you're actually achieving it. It's the thing in an organization that gets put on the side burner when all of the other projects come up. I think this is one where companies really need to stay dedicated to it.
As we get through this process, resources get tight and a lot of companies don't have the bench strength to be able to internally address some of the things that need to get covered. We're certainly out there in front of that with our clients, but it's a challenge they all face today.
FEI:  If you have fallen behind, what recommendation would you give to get back up to speed?
Meter: I would say, obviously, start today. It's pretty critical. It's making sure you're partnering with the right group. If you don't have the internal resources, find a provider that can help you through that process. It really has to be something where you work very closely with your editor to ensure that you don't have surprises at the end.
There are aspects about just implementing the standard, but there is also the internal control aspect that companies tend to forget about. As you think about transition, your audit firm is going to be looking at controls over that and controls over the go-forward processing of revenue transaction.
It needs to be more holistic and a more robust process. I think the concern of audit partners that I talk with is that we want to make sure our clients are in front of that. We don't want them to get here come 2018 and feel like they didn't have enough time to really plan adequately. It's pretty critical that they get on it today but actually have a well thought plan.
FEI: When can we start to expect more from SAB 74 disclosures?
Meter: You didn't see much come out with Q1. I think with Q2, you'll start to see more transparency and companies disclosing it. The SEC has come out and said, "We expect you to be able to tell the investor community and the uses of your financial statements what the impacts on your business are going to be.”
I think by Q2, you'll see that. I think by Q3 for sure, you're going to see a lot more disclosure around what companies believe the impact to be. The standard does require a lot more disclosure, so come 2018, the disclosures are much more robust. That's an area a lot of companies are spending time on is how do you gather the data. It's a different animal for many companies.
Just having systems in place and working with IT to make sure you're getting the appropriate data that can be subject to audit procedures and ensure that your disclosures are sufficient and meet the requirements of the standard. There are a lot of other pieces beyond implementing the standard itself.
FEI: As far as transition goes, are you seeing more companies go the full retrospective route or the modified retrospective route?
Meter: I would say the majority are the modified. We've done a couple of recent surveys at KPMG. In the most recent survey which was done last month, 80 percent are saying they're going with the modified. I think that will hold. I don't think many have the ability now to change and go back and do the full retrospective. I think at this point, that's probably a fairly locked in number.
FEI: Is that something that you expected to see?
Meter: I did. I think the industries where they believe the impact is more significant are the ones that have thought that going back and doing the full three years makes sense to their investor community. I think for a lot of the companies that felt that the impact may not be as significant, it still changes the process of how they recognize revenue, but the actual financial statement impact is not as significant. Those are the ones that are looking at the modified.
FEI: Can you explain a little bit about the value of each and why you might choose one over the other for those I don't know?
Meter: I think a lot of companies that it has a significant impact on their revenue streams are looking at going back and doing the retrospective. That provides a three year comparative to the investor community.
Other companies or maybe the impact isn't as large, there will still be disclosures that will be able to help companies or users understand the differences, but they have concluded that going back the three years doesn't really make that significant of a difference. I think those are the companies where you're seeing the modified approach come forward.
FEI: How challenging is it going to be for the auditor under these new rules?
Meter: I think every new standard creates challenges but it creates opportunities too. There are more judgments involved with the standard. As you know, the standard really is more of a principles-based standard where, historically, we've thought of more of a rules-based approach to revenue.
With that, management makes judgments. Wherever there are judgments involved, the auditors need to spend the quality time to ensure that they concur with those judgments. I do think there will be a more robust audit approach around it. Clearly here in this year with transition, there will be additional work that needs to be done to ensure that the companies are thinking about the standard correctly and implementing it. Going forward, there will be a little more judgment involved and I think that always increases the auditor's attention.
FEI: From the revenue recognition process, what are the lessons that can be applied on the business line?
Meter: It's interesting. I think companies need to think about when they implement the standard. Part of that is a time element. As I said, we're here in the critical juncture of getting this done. For the companies that have spent time thoughtfully thinking about how the new standard impacts their business operations, many of them have looked at alternative ways of contracting with their customers.
Particularly as a global company today, you're contracting in multiple jurisdictions that have different laws. Think about how you're actually running your business, what you're focused on day in and day out, whatever your business is. No matter what your industry is. That's what drives it. I think companies really need to take a thoughtful view as to how they transact and then how does that impact their revenue recognition under the new standard.
FEI: Okay, great. Betsy, thank you so much for taking the time.
Meter: Thank you Olivia. I enjoyed being with you. Thank you.