Maybe you’ve heard about it. Maybe you’ve studied it. Maybe you’ve lived through it.
We’re talking about one of the biggest changes in corporate finance since the passage of Sarbanes Oxley: the introduction of new accounting rules for recognizing revenue. The rules, known as ASC 606, have been in the works for more than a decade at the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which worked jointly on the rules that change GAAP for the recognition of revenue associated with customer contracts. Given the large percentage of businesses across all industries that have customer contracts, it’s hard to overstate the impact of this rule change. (We’ve previously discussed it here and here.)
It’s so important, in fact, that we decided to dig deep into the Intelligize platform to extract some insights on how public companies and the SEC are adapting to it. Based on our findings, we produced a report, Impact of Revenue Recognition Standards on Public Companies, which will be available Monday, November 5th on the Intelligize website. We’re going to avoid major spoilers for now, but we can’t help but give our blog readers a few hints at what’s to come.
We combed through Intelligize’s database of public company filings, SEC comment letters, and other documents for insights on how the new standards (which went into effect on January 1, 2018 for public companies) are being implemented. We found that a substantial majority of S&P 500 companies adopted the “modified retrospective” method of implementing the accounting change—a choice that is less onerous from an accounting perspective, but presents greater risks, than the alternative “full retrospective” method. Interestingly, a far greater percentage of companies that became early adopters used the “full retrospective” method.
Intelligize’s report also found that, to date, the SEC has been true to its initial word in working cooperatively with companies facing the challenging transition to the new revenue recognition standard. In May 2018, Kyle Moffatt, chief accountant for the SEC’s division of corporation finance, noted that, “We aren’t planning to beat up on companies in this first year.” While the SEC did issue revenue recognition-related comment letters to nearly one-third of early adopters, only three companies – Alphabet, Commvault Systems, and General Dynamics– received multiple rounds of comments. Also, many of those letters were directed to the measurement of performance obligations, a topic that the SEC signaled would be a primary area of focus.
For more data, detail and in-depth insights, check out the full report on Monday. And if you like it as much as we hope you will, you’re in luck. We’re planning to release a follow up study in Q2 of 2019.