Tales from the Revenue Recognition Front

With the clock ticking closer to the witching hour, companies are still all over the map when it comes to implementing the new revenue recognition standard.

A poor implementation risks significant consequences to financial results, stakeholder confidence and reputation.

Lessons are emerging that can help point companies toward new best practices and outcomes.

I’m worried. In meetings and discussions, our BlytheTeam^® revenue recognition experts are hearing exactly what the accounting media are reporting – that a lot of companies aren’t prepared to implement the new worldwide revenue rules. Because we at Blythe Global Advisors are in the midst of helping several companies implement the new standard, I thought I’d use this newsletter to summarize some of our early observations from the revenue recognition front – real-life examples of why some companies are having difficulty getting out of the starting gate and progressing to reporting compliance. I’ll also offer suggestions for how to remediate each situation. Here are three scenarios that are impeding companies.

• Lower-Level Delegation of a Strategic ImperativeAlthough the directive for a single worldwide standard represents one of the biggest accounting changes in years, both clients and auditors are underestimating the amount of work and level of commitment a compliant implementation will require. We’re seeing a lot of companies delegate responsibility for developing what is essentially a mission-critical imperative to earnest but less experienced staff. The result is conversations that only scratch the surface of requirements. The new standard impacts systems, processes and culture. It affects results depending on companies’ legacy reporting procedures and the contractual framework within their respective industries. A comprehensive implementation needs to get down to the nuts, bolts and studs of the business and then needs to be followed up with a companywide plan to change and adapt every affected policy, procedure and process. Put another way, it all starts with the right decision makers – or, perhaps I should say, change managers. I’m talking about the CFOs, controllers and senior accounting and finance managers who hold the following keys to successful implementation in the face of an ever louder ticking clock:
  • The experience to understand the full scope of the new rules’ potential impact on strategy and business results.
  • The knowledge to decide how the company will proceed – whether on a prospective, retrospective or modified basis.
  • The portfolio to marshal the necessary resources.
  • The power to make things happen quickly across business units, functions, etc.
  Lacking this approach, companies could find themselves starring in their own version of a story that a former EY partner related to me: The auditor sent a recommendation memo to the accounting staff person who sent it to the business unit controller who replied that he wasn’t taking the staffer’s recommendation.

• Underestimating the Impact of the New Standard on Revenue ResultsIt can’t be said enough: The new rules are complicated. We’re seeing companies glossing over the new rules and coming to quick conclusions regarding material impact – usually coming down on the side of little or no materiality. The new rules require deeper analyses of key drivers including:
  • Revenue streams – activities that might not have been significant in the past that could be very significant under the new rules.
  • Deferred revenue – issues including large amounts of deferred revenues that will likely be reported on an accelerated basis going forward and/or previously deferred monies that might never be reflected as revenue – either of which could look like “holes” in results and cause perception problems among shareholders and other stakeholders.
  • Business changes – the kinds of normal, incremental changes that occur over time outside the realm of requirements that might have reached a cumulative point of materiality and now must be included in regular reports accompanied by documentation, analyses, judgments, etc.
  In response to the new rules, many accounting advisory firms (of which Blythe is one) have developed services to help companies identify the activities and associated revenue streams that are material under the new rules. At Blythe Global Advisors, we offer a comprehensive four-phase process. It starts with a detailed impact assessment and strategy that examines every revenue stream and its associated practices, policies, etc. The process then moves on to the implementation, year-end close and ongoing maintenance phases.

• Not Anticipating the Impact on Internal ControlsWe’re finding that even those companies that are making committed efforts to upgrade processes are getting caught short when it comes to the impact of the new rules on their previously best-of-breed internal controls. The tentacles of the new rules increase the chances of internal controls deficiencies rising to a level of material weakness – which would require communication to shareholders. To ensure internal controls are compliant, companies need to develop an implementation plan that’s as deep and as it is broad – examining the impact of the new standard on the entire organization.

The above three scenarios are only the tip of the iceberg of what companies are facing. To repeat, the new standard is really complicated. The confusion and inertia the media are reporting are totally understandable. But, the clock can’t be stopped. So, my first piece of advice – above all others – is to call your preferred, trusted accounting advisor. Successful implementation depends on a depth of professional knowledge that most companies don’t possess and that audit firms are restricted from providing. If you’d like to call us, we’d be honored to work with you. At Blythe Global Advisors, we have a proven track record of helping clients of all sizes resolve revenue recognition issues of all 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.