$12.8 Trillion. Large number isn’t it? The SEC mentioned this number in a recent speech discussing, among other things, transition to ASC 606. $12.8 Trillion approximates the amount of revenue recognized by S&P 1500 companies in 2014, which covers approximately 90% of the U.S. Market Capitalization. Evaluating the impact of an accounting standard dealing with this significant of a financial metric is, therefore, an obvious task that companies need to conduct before its effective date (2018 for public entities). However, recent surveys conducted by KPMG and PWC, highlight the troubling fact that the vast majority of companies have not yet started, or have only just begun, to adopt the new revenue recognition standards.

So why are companies waiting? There could be a variety of reasons - from the “fluid” nature of the new standards (due to recent amendments and the continued work of the Revenue Recognition Transition Resource Group (TRG)) to the fact that companies have a lot of things on their plates. As a training company that understands the complications of IFRS 15 and ASC 606 (and principles-based accounting standards in general), we implore you to begin transition to the new standards NOW. Here are some reasons why:

The Impacts of the New Standard are Pervasive

For anyone who has read through the new standards and paid attention to the work of the TRG, it is clear that the impact goes beyond the financial statements. In an earlier blog, we explored some of the “non-revenue” impacts of the new standards; but what about the impacts throughout an organization?

This answer isn’t so clear. That is why beginning your transition now is so important. Answers will vary company to company; however, from a high-level perspective, some of the business, operational, and transactional areas impacted could be:

Disclosures, Disclosures, Disclosures

Prior to ASC 606 and IFRS 15, revenue was one of the least disclosed financial statement line items, which is really crazy when you think about it. That will change with the new standards, which require a significant amount of disclosures (both annual and interim) to help financial statement users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This includes both quantitative and qualitative information regarding:

• Disaggregation of revenue
• Significant changes in contract assets and liabilities and costs
• Performance obligations
• How transaction prices were determined and allocation of transaction prices to performance obligations
• Amounts allocated to remaining performance obligations and when these amounts would be recognized as revenue
• Significant judgments and changes in judgments
• Costs capitalized in obtaining or fulfilling contracts

The new disclosure requirements are one of the reasons we inform our customers that ALL companies will be impacted by the new standards, regardless of industry or size.

SEC registrants should also consider what information to provide in SAB Topic 11.M (SAB 74) disclosures (i.e., disclosures regarding the impact that a recently issued accounting standard will have on the financial statements when that standard is eventually adopted). Referred to as “transition disclosures” in the previously referenced SEC speech, the SEC has commented that a company’s disclosures should evolve over time as we move closer towards adoption of the new standard and more information is obtained regarding the impact of ASC 606. Hint, hint – solely disclosing that the company is “currently in the process of identifying the impact of the new revenue recognition standard” won’t cut it.

Data – Can You Handle It?

Going hand-in-hand with the previous two reasons, the new standards will require lots and lots of data gathering. (teaser – the new lease accounting standards do as well).

This is great news if you are in the business of providing enterprise or financial reporting software services. However, if a company has antiquated systems, this is potentially a huge hurdle to overcome to effectively adopt the new standards.

Dual Accounting Required Right Now? Possibly.

If you are planning on applying the full retrospective approach, you will need to apply the new guidance to each period presented in the financial statements filed after the effective date of the new standard. This means companies will have to apply the new guidance as if it had been in effect since the inception of all its contracts with customers presented in the financial statements. As such, SEC registrants applying the full retrospective approach will need to capture dual accounting records beginning January 1, 2016 (yes, this past January).

Some might think that a simple solution to this issue is to use the modified retrospective approach (i.e., recognize a cumulative effect adjustment as of the date of initial application). However, there are further considerations with this approach as this method requires additional disclosures in the year of adoption. Specifically, a company would be required to disclose:

• The amount by which each financial statement line item changed in that year because of applying the new revenue standard
• An explanation of the significant changes between amounts reported under the new standard versus legacy guidance

Additionally, there have been some inklings that investors are looking for companies to apply the full retrospective approach (or the approach with one of the available practical expedients).

Are you considering registration of new securities near the effective date of the new standard? If so, you will also need to consider the potential impact to your registration statement. As an example, SEC registration statements of companies utilizing the full retrospective approach will require recast financial statements that include the adoption of ASC 606 (assuming the impact is material) for statements that are filed or become effective following the first 10-Q that reflects the adoption of the new standard (i.e., Q1 2018 for a 12/31 year-end company).

Key takeaway – time is ticking and the new revenue recognition standards will be effective before we know it. The time is NOW to implement the new guidance. One of the initial steps in this process is getting your company educated on the new standard and what it means for your company. GAAP Dynamics can help.