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Questions Multiply About Transition to Revenue Standards

June 17, 2014

The FASB and IASB reached a major milestone when they published converged revenue recognition standards at the end of May. Now the hard work is being turned over to the companies that have to apply the standards and the auditors who have to interpret them. In the meantime, the SEC, FASB, and IASB are watching the roll-out process carefully and hoping it confirms the accounting boards’ decision to write principles-based standards and get rid of so much rules-based U.S. GAAP.

The FASB and IASB needed 12 years to write converged standards for revenue recognition, and the accounting boards are giving companies in the U.S. and overseas another two-and-a-half years to implement the new accounting.

The success of the entire switch is riding heavily on what happens in the next six months — companies will need to modify reporting systems and financial controls for the new standards by the beginning of 2015 to adjust their results for prior years in the regulatory filings they send to the SEC in the first quarter of 2017.

“If the standard’s going to have a significant impact on your financial statements, you’re going to need to have the trend information to be able to communicate the changes to your investors,” said Russell Hodge, global controller for General Electric Co.

Companies have two alternatives to make the transition to the new standards. One is described as the full-retrospective method and calls for restating all five periods presented in the financial statements. According to Hodge, companies would prefer to take this approach because investors will ask for it in order compare prior year results to the current year.

It’s more likely that companies will opt for a modified approach, with the results for the current quarter on the face of the financial statements and reflecting the new accounting standard. Results from prior periods will be adjusted for the new standard and disclosed in the financial statement footnotes.

With either approach, companies are almost out of time to modify their reporting systems.

“We joke around internally, it took them 12 years to write, we should get a little more than six months to adopt it,” Hodge said.

Hodge was taking part in a June 16, 2014, conference in New York sponsored by Financial Executives International on the recently published revenue recognition standards. The FASB published its version as Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard was a joint effort with the IASB, which issued its version as IFRS 15, Revenue from Contracts with Customers.

The FASB, IASB, and SEC have anticipated the difficulty companies are facing with adopting the standards, and all three bodies are meeting with companies and auditors individually and in groups to gauge the standards’ effects.

The accounting boards’ efforts to pave the way for a smooth adoption of the revenue standards are, in some ways, the final curtain call for the international effort to converge U.S. GAAP with the IASB’s IFRS. The revenue standards are lauded as the model for what the boards were able to achieve when convergence worked. The boards are still writing a standard on lease accounting. But disagreements have arisen on some important issues, and it’s not clear they’ll write a converged standard. Other efforts to cooperate on the standards for the bank loans and securities and insurance contracts have collapsed because of sharp differences between the boards on some fundamental issues.

But as the panel discussion made clear, even converged standards come with problems. Convergence was started with the goal of making it easier for investors in the U.S. and overseas to compare the financial performance of companies no matter their home market. To some extent, the standard-setters have moved toward that goal. But in making U.S. GAAP more principles-based, and more like IFRS, the FASB produced a standard that’s open to more interpretation and risks leading to inconsistency among companies. As Hodge discussed GE’s challenges in implementing the new standard, it’s also clear that some companies are going to have trouble making it clear to shareholders how their financial performance can be compared from one year to the next.

An advisory panel the FASB and IASB formed is scheduled to meet on July 18 to discuss the transition to the new standards. SEC officials are meeting with auditors and holding internal discussions to keep current with concerns that arise about the new standards.

“We are taking a more proactive approach with this standard and making sure we’re plugged in to the implementation process,” said Jenifer Minke-Girard, a senior associate chief accountant with the SEC. “We’ve already reached out to a lot of the accounting firms, the Big Four, plus the other audit firms.”

FASB member Lawrence Smith said the advisory panel, called the Joint Transition Resource Group, is to some extent similar to other bodies the FASB has used in the past after it published major, complex standards. Unlike some of the other groups, the revenue panel will meet in public and publish its meeting minutes.

Smith said FASB and IASB members are trying to make sure the group’s meeting minutes aren’t transformed into GAAP.

“One of the criteria for bringing issues to the group is that there’s potential diversity in how people are interpreting that,” Smith said. “To the extent that the group coalesces around a certain way to interpret it, one could say, ‘OK that’s standard-setting.’ Or will it be more educational, which is what we’re hoping, in terms of highlighting the important elements of consideration to lead one to different interpretations? If you assume the same things, those same elements going into the consideration, you would both gravitate to a similar answer.”

The boards’ interest in narrowly confining the advisory panel’s mandate is part of their continued effort to shore up their decision to write principles-based standards that are open to a range of interpretations. The FASB amendments get rid of so much U.S. GAAP that was often criticized for being too rules-based and not permitting companies much flexibility. Now that the boards have issued standards that rely on judgment, they want some assurance that the standards are applied consistently, and that during the implementation phase, practices don’t develop that undermine the goal of international accounting convergence.

“We’re starting with a converged standard, and we would hope that over time, we continue to have a converged standard,” Smith said. “It’s going to be a challenge though.”

Hodge said the uncertainty about the implications of the new accounting for revenue is a problem for many companies, given the short window they have to implement changes. The lack of time is aggravated by companies’ need to have some assurance about the answers to their questions before they begin making the system changes.

“If different interpretations are acceptable, is that the best process for setting GAAP?” Hodge asked. “Where do preparers look to for the best source of implementation guidance.”

Minke-Girard said the concerns raised by people like Hodge and companies like GE are behind the SEC’s decision to get involved in the implementation process. At this stage, the SEC hasn’t committed itself to a specific action. Conversations have taken place between staffers in the Corporation Finance Division, which reviews regulatory filings from public companies, and the staff in the agency’s Office of the Chief Accountant.

As a result of the conversations, regulators rejected issuing issue new guidance or updating older guidance like Staff Accounting Bulletin (SAB) No. 74, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, (Topic 11-M).

“It’s going to be the standard considerations that you almost always have with a new standard,” Minke-Girard said. “As companies get closer, and as companies make the more significant decisions about how they’re going to adopt, those are going to be the types of things that investors are going to want to know. We think our existing SABs for disclosures should be able to work in this environment.”

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