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Transition to Revenue Standards May Last Years Beyond 2018 Effective Date

It may take several years for SEC officials to fully evaluate the transition to the FASB and IASB’s revenue recognitions standards. U.S. regulators are especially concerned with the judgments companies in the U.S. and overseas make about applying the standards, and how consistently the judgments are being applied.

SEC officials may not be able to fully evaluate the transition to the FASB and IASB’s revenue recognitions standards until well after the standards’ 2018 effective date, the agency’s chief accountant told a London conference on January 21, 2016.

SEC Chief Accountant James Schnurr said U.S. regulators are especially concerned with the judgments companies in the U.S. and overseas make about applying the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, and the IASB’s IFRS 15, Revenue From Contracts With Customers. Agency officials will want to know whether the judgments lead to a higher than normal rate of inconsistent application of the standards.

“If there is a lot of diversity in practice, we would go back to the standard-setters and ask them to narrow the practice, which could be very costly for some preparers that in good faith made the wrong judgment. They’re now going to have to go through the implementation a second time,” Schnurr said during a panel discussion at the Practising Law Institute’s Annual Institute on Securities Regulation in Europe. “We’re not going to know that answer until probably four or five years down the road.”

The issue is expected to affect U.S. companies, given that the FASB had to erase the industry-specific revenue guidance in U.S. GAAP in order to produce the revenue standard. The result is a standard that encourages companies to rely much more heavily on judgment when reporting revenue.

Schnurr said the SEC’s staff will have a better sense of how consistent companies are in applying the standard once they begin reviewing filings in 2018. In addition, the SEC staffers will be looking at the filings from the more than 500 foreign companies with shares that trade on U.S. markets that report their financial results in IFRS. Regulators will want to make sure that, to the extent inconsistent interpretations arise, they can be justified.

Mary Tokar, a member of the IASB, said it will be important for companies to document their decisions.

“If you’re just looking at my financials, you should be able to tell what the… performance obligations are, what I promised you when I entered into a contract with you,” Tokar said.

Schnurr also said SEC officials will be evaluating how well companies have implemented their internal controls around their revenue reporting.

Shareholders in U.S. and foreign companies can expect to begin noticing some changes because of the standards in early 2017, when U.S. companies release their 10-K filings and foreign companies submit their 2016 year-end 20-F forms to the SEC.

The SEC’s 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, (SAB Topic 11.M), and Paragraph 30 of the IASB’s IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, require companies to disclose in their financial statement footnotes their expectations for how new accounting standards will affect their financial results.

Schnurr said the year-end 2015 filings that are due in the next few months will probably say very little about the effect of the revenue standards because the changes will not be evident for another two years. He expects that to change markedly for the filings submitted to the SEC a year from now.

“Particularly for the big companies, they’re trying to understand what their earnings are going to look like going out in the future, and they interact with analysts and investors,” Schnurr said. “There’s no question they’re going to want to have that information available. We would expect that their disclosure next year is going to be much more on point in terms of what the impact is going to be.”

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: GAAP Critical Issues — Revenue Recognition, also on Checkpoint.

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