Revenue Recognition and Lease Accounting: The Clock Is Ticking.
- News Tidbit #1:
- Reports show that most companies continue to underestimate the impact of the new revenue recognition and lease accounting rules.
- News Tidbit #2:
- Delaying implementation of the new standards risks significant consequences to financial results and stakeholder confidence.
This is probably not the first – or even the second or third – news brief, tweet or letter you’ve received on the impact of the new revenue recognition and lease accounting rules. There’s a reason why my colleagues and I as well as the financial media 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 the perceptions of stakeholders.
At the same time, we all 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 time and costs.
The Challenges Companies Face in Implementing the New Revenue Recognition and Lease Accounting Rules
The new revenue recognition rule — with its directive for a single worldwide reporting standard — has turned accounting on its ear. It demands more management judgments, assumptions and estimates in financial statements as well as explanations of the processes, procedures and controls used to gather, document and test all information and conclusions. It requires changes to how companies conduct finance, sales, internal controls and IT functions, among others. It can affect results depending on companies’ legacy reporting procedures and the contractual habits within their respective industries. At the point when audit firms enter the process, they’ll be expecting clients to produce updated, audit-ready documents that can pass escalating oversight.
The central tenet of the new lease accounting rule requiring that substantially all leases be recorded on the balance sheet means businesses will need to revamp how they negotiate leases and how they report them. More management judgments will be required to arrive at accurate values of every lease’s asset and liability and, again, more detail as to how numbers were arrived at. When audit firms enter the picture, the opportunity to structure leases that optimally support company goals will have passed.
Three Quick Examples of Potential Fallout From Delayed Implementation
- Companies that historically have had large amounts of deferred revenues will likely see accelerated revenue recognition in the future. However, initial adoption will also result in previously deferred amounts that will never be reflected as revenue. In my estimation, 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.
There are many other negative consequences of delaying implementation, but you get the picture.
An Interim, Pre-Emptive Step to Mollify Some of the Fallout From Delayed Implementation
In my newsletters and online articles, I’ve returned time and again to the importance of early communications with stakeholders. This is no exception. If contracts are already in place that defer significant amounts of revenues or the company’s not in a position to renegotiate leases – in other words, if you’re stuck – pre-emptive and full communication with stakeholders is essential. Simply put, companies that don’t adopt early implementation must manage their messages so that readers of their financial statements understand the true health of the company and future expectations under the new rules. If your company hasn’t yet grown to the point of having in-house communications staff, hire a professional communications consultant. Getting this message right is that important.
The Resources and Skills Needed to Implement the New Rules
These new rules are really complicated and have 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. In short, companies will need outside help.
How Blythe Global Advisors Can Help
At Blythe Global Advisors, we have a proven track record of helping clients – from startups to brand-name entities, U.S.-based and international – resolve both revenue recognition and lease accounting issues. Our experts have completed dozens of engagements, and our clients can attest that we hit the ground running and always leave companies ready to meet their reporting obligations and better situated to reach their strategic objectives.
We achieve our consistently high results through BlytheTeamSM, our alliance of former Big Four partners/executives, current industry entrepreneurs, and former corporate finance and accounting senior executives/professionals. These experts bring extensive knowledge of U.S. and international accounting principles and regulations, seasoned leadership, project management skills, and expertise across a wide range of industries to every engagement.
For both revenue and lease accounting, we offer a soup-to-nuts approach that features turnkey implementation; customizable, flexibly priced solutions; knowledge transfer and measurable results.
Our Revenue Recognition Services.
- Assessment of current capabilities and the impact of ASC 606 on the organization.
- Evaluation of the new rule’s effect on revenue timing and results.
- Preparation of a blueprint for compliance.
- Implementation of updated or new systems, policies and procedures.
- Production of audit-ready documents.
- Liaison to the audit firm – anticipating needs, reducing costs and providing value up and down the reporting chain.
- Companywide training as needed.
Our Lease Accounting Services.
- Assessment of existing leases to forecast their impact under ASC 842.
- Evaluation of the leasing strategy going forward – including the impact of ASC 842 on processes, workloads, systems and culture within and beyond the general accounting and financial functions. We also analyze prospective new leases to help structure leases that maximize EBITDA.
- A blueprint for compliance including implementation of updated/new systems, policies, procedures, etc.
- Production of audit-ready documents.
- Liaison to the audit firm – anticipating needs, reducing costs and providing value up and down the reporting chain.
- Companywide training as needed.
If you need to bring your revenue recognition and/or lease accounting practices up to snuff, call me. We’d be honored to help you.
To discuss this important topic further or if you’re looking for general accounting advice and counsel, contact marc@blytheglobal.com.