"The New Revenue Recognition Standard: Are you Prepared for Change?" PwC and FERF Announce Results of Survey
Report highlights where companies stand on their revenue recognition implementation efforts
NEW YORK, Nov. 17, 2014 /PRNewswire/ -- A new report released today by PwC US and Financial Executives Research Foundation (FERF), "The New Revenue Recognition Standard: Are you Prepared for Change?" finds that while a majority of companies (54 percent) are familiar with the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), they are still struggling with assessing the full impact of the change, particularly related to its implications for their financial reporting, processes and systems.
The new standard, issued in May 2014, replaces nearly all existing US GAAP and IFRS guidance and will require significant management judgment - in addition to changing the way many US companies recognize and disclose revenue in their financial statements.
The survey finds that a majority of respondents (87 percent) expect to make at least some changes to their company's internal controls in response to the new standard; however, fewer companies (45 percent) expect to make changes to their business models. Additionally, when respondents were asked whether they expect a material impact to the income statement and/or balance sheet, 47 percent say they expect a material impact and 53 percent do not expect a material impact. The responses also indicate that disclosures are, by far and away, the number one area expected to result in increased level of operational effort.
"Although the new standard will affect certain industries more than others, all organizations will feel some impact," said Farhad Zaman, PwC Deals Partner. "Companies do not know what the implementation journey fully looks like yet in terms of implementation processes, costs, timing, contract reviews, IT and systems, operations, quantification and reporting. The 2017 effective date for the new revenue recognition standard may seem far off, but those most affected by the change should start preparing now."
According to the report, there are several key areas where, from a technical accounting perspective, determining the appropriate accounting is expected to be challenging. The top five areas include:
- Applying the variable consideration constraint
- Determining the impact of contract modifications
- Determining whether items are "distinct" in multiple element arrangements
- Estimating the standalone selling price of performance obligations
- Determining the impact of the "collectability threshold"
When asked if companies have enough time to implement the standard by 2017, using the full retrospective method, respondents are generally split: 29 percent say 'yes,' and 25 percent say 'no.' Respondents are also fairly split in their responses related to a planned method of adoption, with 12 percent expecting to use the full retrospective method and 12 percent expecting to use the modified retrospective method.
Other key findings of the report include:
- Extent of IT changes – Seventy-seven percent of respondents say they expect to make some to significant changes, and 23 percent of respondents say they expect to make no changes.
- Costs to implement – When asked about estimated costs to implement the new standard -- whether related to outside service providers or internal costs -- it is clear that respondents do not yet have a budget for the full implementation.
- Impact to other non-revenue arrangements – Forty-nine percent of respondents say that they expect compensation arrangements to be affected and 34 percent say they do not expect an impact to other arrangements. Other respondents say they expect arrangements other than compensation arrangements to be affected. Forty percent of respondents noted they are unsure whether other arrangements would be affected.
As companies may be required to report results under both the current and the new revenue recognition guidance for one year or more, 59 percent of respondents expect to need a parallel reporting system in order to adopt the standard, while 41 percent do not. Responses from the more highly affected technology, information, communications and entertainment industries were higher with 75 percent responding that a parallel reporting system would be needed.
Twenty-eight percent of respondents said they would be more likely to adopt the standard using the full retrospective method if the boards provided one extra year to adopt the standard, while only 18 percent are willing to give up the modified retrospective method in exchange for an additional year to adopt the standard.
"The boards have provided time for companies to adopt a measured approach to implementation, but the pervasive impact of the new standard on data, systems, processes and controls, means companies will need to get started on the transition effort well in advance of the effective date, especially if they choose to apply the standard retrospectively," said Zaman. "The time is now for companies to re-evaluate their business processes and systems underlying the revenue cycle."
Survey respondents include both public and private companies, with approximately one-quarter of respondents having revenue greater than $10 billion.
For a copy of the full survey report, please visit: www.pwc.com/us/revrec
About PwC US
PwC US helps organizations and individuals create the value they're looking for. We're a member of the PwC network of firms, which has firms in 157 countries with more than 195,000 people. We're committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com/US.
© 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
About FEI
Financial Executives International is the leading advocate for the views of corporate financial management. Its more than 10,000 members hold policy-making positions as chief financial officers, treasurers and controllers at companies from every major industry. FEI enhances member professional development through peer networking, career management services, conferences, research and publications. Members participate in the activities of 74 chapters in the U.S. and a chapter in Japan. FEI is headquartered in Morristown, NJ, with a Government Affairs office in Washington, D.C. Visit www.financialexecutives.org for more information.
About Financial Executives Research Foundation, Inc.
Financial Executives Research Foundation (FERF) is the nonprofit 501(c)(3) research affiliate of Financial Executives International (FEI). FERF researchers identify key financial issues and develop impartial, timely research reports for FEI members and nonmembers alike, in a variety of publication formats. FERF relies primarily on voluntary tax-deductible contributions from corporations and individuals, and publications can be ordered by logging onto www.ferf.org.
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SOURCE PwC US
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