As the effective date of the Financial Accounting Standards Board’s new revenue recognition standard approaches, there’s increasing pressure on companies and/or their audit committees to assess their companies’ implementation efforts. For the very large publicly traded companies, the new standard will apply to annual reporting periods beginning after December 15, 2017 (including interim periods) whereas it is effective for calendar year private companies on January 1, 2019. However, understanding the new standard and evaluating its impact is a very complex undertaking in order to understand the over 1,000 pages outlining this new standard.
The Center for Audit Quality (CAQ) has published Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees to help committees fulfill their oversight responsibilities. The publication is organized into the following four sections:
1.) A new revenue recognition model
Accounting Standards Update No. (ASU) 2014-09, Revenue from Contracts with
Customers, established a new core principle for revenue recognition “to depict the
transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or
services.” It created a model for recognizing revenue:
-Identify the contract (s) with the customer.
- Identify the contract’s separate performance obligations.
- Determine the transaction price, using extra scrutiny if a contract calls for variable consideration, such as bonuses, incentives, rebates or penalties.
- Allocate the transaction price to the contract’s performance obligations, if there are multiple performance obligations.
- Recognize revenue when (or ad) the entity satisfies a performance obligation (that is, when the customer obtains control of the good or service).
The need to identify separate performance obligations — distinct promises to transfer
goods or services — is critical. To make the transition to the new standard, companies
may elect full retrospective application — which requires prior-period financial
statements to be recast — or modified retrospective application — which doesn’t require
recasting, but does require the cumulative effect of initially applying the standard to be
recorded as of the initial application date.
2. Impact assessment
This section assists audit committees in evaluating management’s assessment of how the
new standard will affect the company. For some companies, the amount and timing of
revenue recognized under the new standard won’t differ significantly from their results
under current U.S. Generally Accepted Accounting Principles. But audit committees will
still need to make the analysis under the new standard’s requirements to reach that
conclusion. In addition, all companies will be affected by the new standard’s disclosure
requirements, regardless of its impact on revenue. The new rules expand disclosure
requirements and require qualitative and quantitative disclosures intended to provide
information about a company’s contracts with customers. The disclosures must include
information about revenue and cash flow stemming from such contracts.
The audit committee should look at how the standard’s impact was assessed and who was
involved in the assessment. In addition, determine what company-specific factors were
considered and when management will provide pro-forma financial statements that
illustrate the expected impact. Finally, review how the company’s external auditor views
When making the assessment, it’s important to seek input from a wide range of
departments, including accounting, tax, financial reporting, financial planning and
analysis, investor relations, treasury, sales, legal, information technology and human
resources. The CAQ also urges audit committees to ask management about the standard’s
potential impact on specific aspects of the company’s business. (See “How will the new
standard affect your company’s revenue?”)
3. The implementation plan
This section helps audit committees understand and assess management’s implementation
plan. It provides detailed questions audit committees should ask on such subjects as
project milestones, progress reports, external auditor and third-party vendor views,
adequacy of resources, qualifications of the accounting team, accounting policy and
significant accounting judgments, systems and controls, and company culture.
4. Other implementation considerations
The final section covers other considerations, including deciding on a transition
approach, handling dual recordkeeping requirements for retrospective application,
determining whether to consider early adoption and complying with new disclosure
The publication also includes a list of articles, technical guides and other resources for
navigating the implementation process.
By now, public companies should have made substantial progress toward implementing
the new revenue recognition standard. The CAQ’s publication can help audit committees
evaluate the status of their companies’ implementation efforts and, if necessary,
accelerate the process. Please reach out to H&M with any questions or concerns you may have.