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Audit Committees Urged to Oversee Implementation of New Revenue Standard

SEC Chief Accountant James Schnurr urged audit committee members to properly oversee the implementation of the new revenue recognition standard that is expected to usher in significant changes. Some audit committee members have started preliminary discussions with management, but Schnurr said they should do more and evaluate management’s detailed implementation plan.

SEC Chief Accountant James Schnurr urged public company audit committees to play their part in overseeing the implementation of the new landmark revenue recognition accounting standard well ahead of the standard’s 2018 effective date.

“Revenue is one of the single most important measures used by investors, and I believe the new standard—when applied with appropriate professional judgment—will consistently report revenue, regardless of the company’s industry or the capital markets accessed,” Schnurr said in a speech at the Audit Committee Summit at the University of California in Irvine on October 23, 2015. “Even with the recently finalized one-year deferral, the effective date of the standard will be upon us before you know it.”

Schnurr noted that many audit committee members have already started discussions with management on the new guidance, and some even had a preliminary assessment of how the company might be affected.

“But these preliminary discussions are just the first step,” Schnurr said. “As part of its governance role, I encourage audit committees to review and critically evaluate management’s detailed implementation plan.”

After a dozen years of convergence effort, the FASB and the IASB in May 2014 published the new standards that will usher in major changes for reporting revenue, the top line in company income statements. The FASB issued Accounting Standards Update ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). It is largely converged with the IASB’s IFRS 15, Revenue from Contracts with Customers.

The revenue standards erase about 180 pieces of individual, industry-specific revenue guidance in U.S. GAAP and provide a single, principles-based process by which all businesses must calculate the top line in their income statements.

Schnurr said the impact of the new guidance is likely not limited to the financial statements.

“Rather, management’s key actions should holistically consider how the new guidance will impact other aspects of the organization, including information systems, business processes, compensation and other contractual arrangements, and tax planning strategies, just to name a few,” he said. “You may also want to evaluate management’s planned transition method and disclosures as the standard provides for either full retrospective or a modified retrospective adoption of the new guidance.”

Moreover, because of the nature of the changes, Schnurr said new processes and controls may be needed to make sure management has complete and accurate information.

“Investors expect companies to have internal controls in place to reasonably assure the reliability of the financial information reported by management,” he said. “It will be important that management take a holistic view of the potential effects the new standard may have on internal controls.”

Schnurr also encouraged audit committees to challenge the auditors on conclusions that do not reflect the main business of the company.

For example, he said some accountants believe that the new standard requires more separate performance obligations than under today’s standard which will require the company to separately allocate revenue to each of the obligations.

The SEC’s “Office of Chief Accountant has observed this issue with respect to those who suggested that shipping the product was a separate performance obligation,” he said. “The Transition Resource Group of the FASB and IASB has addressed this issue, but I am still concerned there may be interpretations that are overcomplicating the financial reporting of transactions.”