Be Proactive in Disclosing Where You Stand on Revenue Recognition

It’s time to face it, the new revenue recognition standard, ASC 606, Revenue from Contracts With Customers isn’t going anywhere, and time is running short for beginning the implementation process.  Shareholders, analysts and other stakeholders have started to be interested in how ASC 606 will impact an entity.  Whether they have started the implementation process (or not) public companies are required to give their shareholders and other financial statement readers a status report, and the SEC is very interested in reviewing disclosures regarding the revenue recognition standard. (By the way, it’s probably a good idea for nonpublic entities as well to consider disclosures similar to those required for public companies.)

As a refresher, SAB 74 (SAB Topic 11.M), Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period , requires that when a recently issued accounting standard has not yet been adopted, a registrant discuss the potential effects of the future adoption in its interim and annual SEC filings. The SAB 74 disclosures are required in both the notes to the financial statements and MD&A. The objectives of the disclosure should be to (1) notify the reader that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The SEC indicated the following disclosures should generally be considered by the registrant:

• A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.
• A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.
• A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.
• Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

Simply stating “management has not determined the financial statement impact of adopting ASC 606” might have sufficed in the early stages, but for the most part we are beyond the early stage. After all, it has been almost two years since ASC 606 was issued. At the December 2015 AICPA National Conference on Current SEC and PCAOB Developments, Wesley Bricker, Deputy Chief Accountant of the Securities and Exchange Commission noted that the SEC staff is looking forward to reviewing more detailed disclosures in the coming months about the effect the new standard is expected to have on financial statements (i.e., SAB 74 disclosures).

Adopting the new standard will necessitate significant lead time due to the impact on accounting policies, information systems and controls.  Also, it will require many significant judgments.  There are two transition methods – (a) the Modified Retrospective method in which only the year of adoption is required to be reported under the new standard, and (b) the Full Retrospective method, in which all financial statement periods presented must be presented under the new standard. If a calendar year-end public company has plans to, or is thinking about, adopting using the Full Retrospective method, it should be gathering accounting data under the new standard beginning in 2016 (i.e., keep a “second set of books”).  In order to do that, it must have made most of the decisions soon as to how the company will implement significant estimates and judgments, accounting policies, and changes needed to information systems to gather data and account for the new revenue recognition standard.

The following questions, not all inclusive, should be considered when deciding the type of disclosures to make under SAB 74. These items are not requirements, but will prompt companies to think about the types of information to disclose.

• What steps the company taking now to prepare for adoption of the revenue recognition standard?
• Does the company have an implementation plan for adopting the revenue recognition standard, and in what stage of the plan is it?
• Has the Company decided whether its transition approach will be the Full Retrospective or Modified Retrospective method, or is it still considering which one?
• What are the key issues the company foresees, i.e., variable consideration, new or different performance obligations identified as compared to the present, impact on recognition of licensing revenue, significant estimates and assumptions that will be required, etc.?
• Has the company quantified the potential impact of adoption of the new standard?

These types of disclosures will be different for every company, and there is no one right thing to disclose. However, the objective is to make meaningful disclosures so financial statement readers can assess the significant expected impacts on the financial statements.