Digging Deeper on Revenue Recognition

Digging Deeper on Revenue Recognition

Earlier this week, we released a report on the monumentally important changes to accounting standards for the recognition of revenue from customer contracts. The new rules gestated for more than a decade at the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) before being finalized and going into effect this year for public companies.

Our report, Impact of Revenue Recognition Standards on Public Companies (Part I: Examining Early and Standard Adopters), leverages the wealth of data on the Intelligize platform to glean insights into how companies have been adapting to the new standards. We were a little coy in previewing our findings last week, but now that the report is out there we can share more.

The Wall Street Journal covered the report, and zeroed in on two of its most significant findings. First, the Journal highlighted the fact that an extremely small percentage of public companies (32 of about 4,000) chose to become “early adopters” of the new revenue recognition rules, according to Intelligize data. Second, it noted an important but less surprising takeaway about SEC enforcement of the new standards. That is, the SEC is focusing on subjective accounting decisions that companies have to make under the new rules, which are more principle-based that the industry-specific rules that preceded them. Our report found that 70 percent of SEC comment letters to early adopters questioned them about their subjective choices in measuring performance obligations.

That, and the fact that the SEC demonstrated patience with companies making a genuine effort to comply with the new revenue recognition standards, are anticipated but significant outcomes. As I put it to the Wall Street Journal reporter: “The biggest lesson is that as long as you can justify your reasoning for whatever performance obligation measurement you came up with, I think the SEC will initially allow them some leeway or provide guidance.”

The fact that less than one percent of companies chose to adopt the standards suggests that they may have been daunted by the challenge of applying the “rev rec” rules. This ties in to another finding from our study, which Accounting Today picked up on: the vast majority of companies chose to implement the “modified retrospective” method of complying with the rules, rather than the more onerous “full retrospective” method. Applying the “full retrospective” method requires companies to restate their revenues going back to 2016. Only 12.5 percent of S&P 500 companies chose that route. The balance chose the modified retrospective method despite the fact that by providing less context, there was an elevated risk that results could be misinterpreted.

Among the study’s other significant findings are:

  • While only 12.5 percent of S&P 500 companies chose the full retrospective method, nearly half (46.9 percent) of early adopter companies did.
  • Early adopter companies varied widely in both size and industry; they included Alphabet and Ford Motor Co., as well as a number of smaller issuers.
  • The importance of revenue recognition is reflected in the wide range of filing areas in which companies cite them, including MD&A analysis, risk factors and proxy issues.

We encourage you to check out the full report here, and stay tuned for Part II coming in 2019.

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