The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued their long-awaited converged standard on revenue recognition. The rule governs how and when revenues can be recognized in different industries. In essence, the new rule will do away with current industry-specific accounting practices and instead apply a single set of principles to all revenue transactions.
Mary Driscoll, senior research fellow at APQC, interviewed Gabe Zubizarreta, CEO and founding principal of Silicon Valley Accountants, about the impact of the changes to revenue recognition within finance and beyond its walls. The following is a summary of their interview.
At first glance, the new rule seems to apply to companies that sell software. But you maintain the new rule applies to all business sectors. What are some examples of how the rule will impact sectors beyond business software vendors?
Every company will have new more detailed disclosure requirements—all companies that sell multiple elements in a single contract will be affected. The method of estimating bad debts will be altered. Contingent revenue will change from “until assured” to “estimate at inception.” The guidance in all areas is going to become more subjective. Certain sales and fulfillment costs may need to be capitalized. There are also tax implications for most accrual-based corporations.
Can you give a few examples of how this change in an accounting rule winds up impacting people in functional areas outside of finance?
New sales contracts; new definitions of products, services, and SKUs; new evidence of delivery or acceptance; new estimation methods; new tracking and allocations of certain selling and fulfillment costs; potential amended tax filings.
Why the strong sense of urgency in your thought leadership message?
If you wait until there is certainty, it will be too late, very expensive, and may result in reporting risk. There are many potential unintended consequences and secondary effects. And because there are so many resource demands, late changes will be expensive. Also, there will be COSO, SOX and audit implications.
Do you believe the typical CFO/controller of a publicly traded company has been thinking hard enough about cross-functional impact of this?
Very few of them have, and every survey we see says the same. Most of those who have been thinking hard about the impact are not considering outside limitations such as IT resource constraints. Few tax departments have been considered.
How might the new revenue recognition rule impact spending, priorities, and activity within the IT group?
New software, upgrades to existing software, additional consultants, and more data.
Can you explain why it’s important to keep an eye on how your competitors are responding to the new revenue recognition rule?
Revenue reporting by competitors may change. If they report better numbers, then pressure will increase to change accounting to match the most aggressive comparable competitor.
How is the new revenue recognition rule connected to COSO 2013 Framework?
Principle 9 of the new 2013 COSO framework pushes organizations to identify and assess changes that could significantly impact the system of internal controls. A change like this—one that is likely to have a material impact on financial reporting—usually spreads widely across the business. In fact, the same process that should have been used on the COSO change could be recycled for the change in revenue recognition.
Why do you believe that the finance group needs lead the effort to develop cross-functional response?
Revenue recognition is primarily finance’s responsibility. The people in this function will need to make the initial critical determinations and decisions about implementing this new rule.
By Mary Driscoll, EPM Channel Contributor.
Mary Driscoll is APQC’s practice leader for financial management. In this role, she is responsible for identifying and disseminating best practices and metrics used to improve the effectiveness of the office of the CFO. Driscoll has been researching and writing about the evolving role of the CFO—and the corporate finance function—for many years. She is the author of ‘Cash Management—Corporate Strategies for Profit.’ See Mary’s articles on EPM Channel here.