November 25, 2018
Revenue Recognition and Lease Accounting Deadlines Looming
The clock continues to tick louder as deadlines get closer
for full implementation of the new rules for
lease accounting and revenue recognition.
At the same time, a new survey reveals that
both private and public companies
continue to delay full-scale implementation.
Delaying implementation of either standard
risks significant consequences
to financial results and stakeholder confidence.
At the risk of seeming presumptuous, I think I know what you’re thinking: “Just what I needed – another article on lease accounting and revenue recognition.” But, at the risk of also seeming redundant – yes, I’m adding my voice (again) to the thousands of communications that have been published this year on these two topics. And, no, I’m not exaggerating. According to Buzzsumo, an online content aggregator, there have been upwards of 700 lease accounting articles and 500 revenue recognition articles published so far this year – not to mention individual company newsletters, brochures, Webinars, podcasts, etc. – covering general advice, specific guidelines, available consulting services, early feedback on what companies are doing right or wrong (see my newsletter on news from the revenue recognition front), reactions of the SEC to initial company reports, etc. You name it, it’s been written about.
And yet, all these articles don’t seem to have had the effect you’d expect. A new report from PricewaterhouseCoopers reveals that both public and private companies continue to delay full implementation of the new standards. Here are a few highlights from this recent survey.
Regarding lease accounting:
- For public companies looking at a January 2019 deadline, 76 percent of respondents are halfway towards completing implementation of the new leasing standard. Only four percent are complete.
- For private companies looking at a January 2020 deadline, 63 percent of respondents haven’t yet completed the initial ASC 842 assessment phase, including 28 percent that haven’t started. Only two percent are complete.
Regarding revenue recognition:
- For public companies where the new standard has already taken effect, only 77 percent of respondents have completed implementing the new standard.
- For private companies looking at a January 2019 deadline, 45 percent of respondents haven’t completed evaluating the new standard’s impact, including 17 percent who haven’t started.
As I said in a previous newsletter, there’s a reason why the accounting media, my colleagues and I are so focused on the issue. We’ve studied the rules. We understand the challenges they pose. And, we’re concerned about the downside that delaying implementation can have on companies’ results and stakeholders’ perceptions.
I’ve also said that all of us pushing out these communications to you get it. You have limited resources, and the requirements of these rules impact everything from systems, processes and culture to workloads, compensation and how results are reported. You’re looking at significant time and costs. The same PwC survey found that of companies with 1,000 or more leased assets or contracts 44 percent expect to spend $1 million or more to implement the lease standard, and 25 percent expect to spend the same amount to implement the revenue recognition standard.
But … as steep as the implementation hills are for these new rules, delaying implementation to the last minute or trying to get along on partial implementation risks significant consequences to financial results and, by extension, to a company’s brand and stakeholder confidence. Here are three quick examples:
- On the revenue recognition front, companies are poised to lose the right to report many billions of dollars of revenue – and the positive perceptions that accompany higher results. More importantly, delayed implementation will limit a company’s ability to effectively communicate these anticipated “holes” in revenue to shareholders and other stakeholders.
- With regard to leasing, delaying implementation will make it difficult to determine the impact on primary financial metrics or to communicate the company’s anticipated value to prospective buyers, bankers, investors, etc. – making the barriers to entering into a merger, acquisition or IPO much higher.
- With regard to IT investments, companies that delay implementation will render portions of their IT investments useless. Using manual processes can work for a short time but are ultimately inefficient and prone to errors – causing lots of rehabilitative work once the upgraded systems are deployed.
In addition, as we at BGA continue to help clients implement the new rules, I’m increasingly concerned that some companies are counting too heavily on their outside auditors to provide the lion’s share of the expanded guidance required by these new rules – calculations, MD&A discussions, footnotes, etc. Regulatory guidelines prohibit auditors from preparing data they’re eventually going to audit. Companies that assume auditors will fill these gaps at the end of the reporting process can find themselves in the lurch – unprepared for how much effort it will take to develop and document the expanded guidance in their final reports.
While the PwC report shows companies making progress, the clock can’t be stopped. Let me summarize by quoting again from previous BGA newsletters:
- These new rules are really complicated with tentacles reaching beyond the accounting and financial functions into IT, sales, procurement, facilities, investor relations, human resources, etc. Development of upgraded, bulletproof practices and processes along with the enhanced skills necessary to deploy them is a steep curve.
- Successful implementation depends on a depth of professional knowledge and resources that even most larger companies don’t possess and that audit firms are restricted from providing.
- My advice continues to be this: Call your preferred, trusted accounting advisor. Make sure they’ve developed upgraded services to help clients identify the activities and associated issues that are material under the new rules. Then, get started right away. If you’d like to call us, we’d be honored to work with you. At Blythe Global Advisors, we have a proven – and growing – portfolio of helping clients of all sizes resolve lease accounting and revenue recognition issues of all colors and stripes.
If you would like to discuss anything in this or any of my newsletters, please contact me. I’d be delighted to talk with you.
- Assisting companies with the assessment and implementation of new revenue recognition and lease accounting rule changes.
- Performing technical accounting assistance to several companies including many that are contemplating IPOs or are in the registration process.
- Providing complete outsourced SOX and internal audit services to several companies.
- Providing part-time controller/CFO services to several private equity- and venture capital-backed companies ranging from startups to $50 million businesses.
- Providing financial reporting, XBRL and technical accounting support to several smaller public companies.
- Providing pre-audit support to several companies preparing for their first external audit.
The newsletters published on this Web site, current as of the dates of publication, are for general information and reference purposes only. They do not constitute specific financial or accounting advice for individual circumstances and/or companies. Such specific financial or accounting advice should always be sought separately.