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Corporate Compliance Insights

Don’t Wait to Comply with New Revenue Recognition Standard

by Warren W. Stippich
October 17, 2014
in Uncategorized
Don’t Wait to Comply with New Revenue Recognition Standard

“Sooner rather than later” is tired advice for adopting new accounting regulation — even for a significant rule such as the revenue recognition standard.1 It won’t be effective until January 1, 2017, for calendar-year public companies and 2018 for non-public firms, but these seemingly distant dates are no excuse for delay. Successful adoption of the standard may require that new processes be in place as early as next year. It is, indeed, time now for audit committees to begin work on implementing this wide-ranging accounting standard.

An audit committee should discuss with management its assessment of the impact of the standard — not just on financial statements, but also on company operations, policies and procedures. Will it have an effect on debt covenants? On incentive compensation programs? Sales contracts? Make sure the right people are being included in the implementation effort. Because of the standard’s potentially broad, multifaceted impact, Grant Thornton LLP recommends that a cross-functional team — comprised of representatives from accounting, tax, IT, legal, sales and compensation and benefits — be pulled together to adopt the new standard.2

In implementing the standard, here are some key items to consider:

Choices in selection of significant accounting policies and estimates

The new standard is more principles-based than the current rules, thus requiring more judgment calls by management. Many companies will need additional oversight of accounting judgment as management uses more estimates in revenue recognition. Audit committees should also monitor the issuance of additional interpretation guidance of the standard. Right now, there are a lot of implementation questions, and we expect that the implementation landscape is going to evolve.

Importantly, management needs to decide soon whether to use the full retrospective method, which requires companies to restate two comparative years before the effective date.3 The audit committee needs to determine whether the method management wants is the best alternative for shareholders and other users of the financial statements — which may not be the same as the easiest method to implement.

Appropriate communication of company’s financial position to shareholders

Audit committees of public companies will want to make certain that all regulatory requirements for disclosing the impact of new accounting rules are met — including the firm’s responsibilities to make interim disclosures before the standard becomes effective.4 Private companies may decide to communicate directly with shareholders. In addition, companies need to be prepared to discuss with analysts prior to adoption how the rule will affect revenue and reported earnings per share.

Oversight of external auditors

Discuss with your auditors how they will be involved and how much help they can offer in adopting the new standard, given their requirement to maintain independence. You should determine with management whether internal resources will be sufficient for adopting the new rule for financial reporting purposes or if external accounting services are required.

REVIEW OF INTERNAL CONTROL SYSTEMS

Oversight of internal audit

In transitioning to the new rule, companies can use internal audit to help their accounting departments determine which transactions need to be reviewed. Once the new systems and processes are in place, internal audit should verify whether the processes and controls are functioning as needed and how the transactions are being treated. Audit committees will want to assess whether sufficient resources are being allocated to internal audit for these activities.

Oversight of risk management

Additional exposures from the new rule should be identified and addressed. As with any significant new accounting standard, there is added risk of material misstatement and failure to make required disclosures. For example, given the various opportunities to recognize income sooner under the standard, pay plans could be exploited to accelerate executive compensation.

Don’t wait until the period of adoption to take an interest in this new standard and understand its implications for the company, management’s plans to handle its implementation and the need for resources to get it done. Also, for public companies, the committee should expect robust discussions with the external auditor regarding the new standard, the allowed options and the accounting policy choices that management is considering and has made. Whether the company needs to begin tracking revenue in January 2015 under both the existing and new standards, or it has more time to prepare, the audit committee should know the plan.

1 More specifically, on May 28, 2014, the FASB and IASB issued converged guidance on accounting for revenue from contracts with customers. The FASB publication is ASU 2014-09 — Revenue from Contracts with Customers (Topic 606).

2 The AICPA has published a guide to adopting the new standard titled, “New Revenue Recognition Accounting Standard — Learning and Implementation Plan.” See http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/2014-09_LIPlan.pdf for details.

3 The need to choose a method soon is discussed in “Revenue recognition: No time to wait,” by Ken Tysiac, Journal of Accountancy, July 2014.

4 SEC Staff Accounting Bulletin (SAB) No. 74 (Topic 11: M). See http://www.sec.gov/interps/account/sabcodet11.htm#M for details.


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Warren W. Stippich

warren stippich grant thornton Warren is the National Governance, Risk and Compliance Solution Leader and the Market Leader of the Chicago Business Advisory Services Group at Grant Thornton LLP. He has over 20 years experience working with multi-national, entrepreneurial, and high-growth public companies, including boards of directors and audit committees. Warren brings experience to the business risk consulting and internal audit services areas from both the public accounting firm and industry perspectives. He leads many Sarbanes-Oxley consulting, internal audit services and SAS 70 projects for a wide-array of publicly traded and private businesses with international operations. He has worked extensively with international internal audit, Sarbanes-Oxley and business consulting assignments in Europe, Russia, China, Southeast Asia, Central and South America and Canada. He has lectured on governance, risk and compliance. Experience Warren began his career with Arthur Andersen in the external audit practice and later in the internal audit services practice. Later, he joined DEKALB Genetics Corporation, a $500 million multi-national public company, as the Vice President of Internal Audit and Worldwide Consulting. Subsequent to DEKALB, Warren was a Managing Director at American Express Tax and Business Services and a Partner in the related attest entity of Altschuler, Melvoin & Glasser LLP and worked in the attest and business consulting areas. Professional certifications

  • Certified Public Accountant (Illinois)
  • Certified Internal Auditor
Memberships
  • American Institute of Certified Public Accountants; Illinois CPA Society
  • Institute of Internal Auditors
  • Board Member and Audit Committee Chair of Gateway Foundation, Inc., Chicago, IL
  • Advisory Board Member of CIBER (Center for International Business Education & Research) at University of Illinois at Urbana-Champaign
  • Board Member of the College of Business Alumni Association of the University of Illinois at Urbana-Champaign
Education Bachelor of Science in Accountancy -University of Illinois at Urbana – Champaign. Warren writes a regular column, Internal Audit Revolution, for CCI.

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