Perspectives

Heads Up — The new revenue standard — Adoption and transition observations

This issue discusses certain considerations related to implementing the FASB’s and IASB’s new revenue standard, "Revenue From Contracts With Customers." The discussion centers on the results of a Deloitte-sponsored survey in which respondents were asked various questions pertaining to their readiness to adopt the standard’s provisions.

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Introduction

Since the May 2014 release of the FASB’s and IASB’s new revenue standard (issued as ASU 2014-09 by the FASB and IFRS 15 by the IASB), the boards have been working to identify issues related to the standard’s implementation. The boards’ joint revenue transition resource group (TRG), which was formed to provide feedback on the standard’s implementation, has held six meetings thus far. These meetings have resulted in a one-year deferral of the standard’s effective date and certain other proposed clarifications to the new guidance.

The standard replaces almost all current revenue guidance (including industry-specific guidance), greatly enhances the related disclosure requirements, and requires entities to use significant judgment (e.g., in determining variable consideration in a contract with a customer or whether collectibility from a customer is probable). Therefore, entities will need to establish appropriate processes, systems, and internal controls to account for contracts with their customers under the new standard. These activities are expected to require significant time and effort.

While the deferral gives entities more time to implement the new standard, for many entities — particularly public entities that will adopt the standard on a full retrospective basis — the first annual period to which they will need to apply the standard is fiscal years beginning on or after January 1, 2016.

The following are some key takeaways related to implementing the new revenue standard:

  • We understand that many companies have decided to implement (or continue to consider implementing) the new standard by using the full retrospective transition method.
  • Many investment analysts have expressed their belief that the new standard should be adopted on a full retrospective basis, contributing to companies’ thinking about whether to use that basis to adopt the new standard.
  • Most companies are in the early phases of assessing the effects of the new standard on revenue contracts with their customers, and many companies have not begun a formal assessment process — in part because of recent clarifications to the new standard that have not been finalized.
  • Regardless of whether additional clarifications are made to the new revenue standard, companies will most likely be expected to provide information to investors, analysts, regulators, and other stakeholders about expected impacts related to their implementation efforts. Therefore, entities will need to track such information.
  • It will take time for companies to develop and test appropriate changes to their systems, processes, and internal controls related to accounting for contracts with customers and tracking information. Complexities due to an entity’s size, the number of geographical regions in which it operates, and the nature of its revenue streams could add considerable time to these efforts.
  • For public entities (or nonpublic entities that may elect early adoption) that elect to implement the new revenue standard on a full retrospective basis, the annual period beginning on January 1, 2016, is the first reporting period for which revenue will need to be reported under the new standard.
  • We believe that implementation of the new revenue standard should be a priority for companies in 2016.

Editor’s Note: At the 2015 AICPA Conference on Current SEC and PCAOB Developments, Wesley Bricker, deputy chief accountant in the SEC’s Office of the Chief Accountant (OCA), highlighted the importance of the revenue metric to investors and suggested that a successful implementation of the new revenue standard is critical for the financial reporting system. He shared some recent survey results suggesting, however, that implementation efforts are lagging (i.e., a significant majority of responding companies had not completed their initial impact assessment and, of those, a third had not begun at all). In addition, informal polling results at the conference indicated that the majority of respondents were either still educating themselves about the standard or still performing their initial assessment, while a minority had completed their initial assessment or were making process and system changes necessary to implement the standard. For additional information about the 2015 AICPA Conference, see Deloitte’s December 15, 2015, Heads Up.

 

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Volume 23, Issue 2 | January 14, 2016

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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.

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