Let’s continue our conversation on ASC Topic 606, Revenue from Contracts with Customers. The annual financial statements for early adopters and the first quarter 10Qs for public entities are now available! And we can learn a lot from their disclosures related to the adoption of the new revenue recognition standard. Hopefully, these lessons learned will help private companies avoid some pitfalls, as they work through their implementation process.

Lesson #1: Disclosures, Disclosures and More Disclosures

Although the impact of the new revenue recognition standard might not have a significant impact on a company’s revenue line item in the financial statements, based on the guidance and our stalking of the early adopters (Ford, Raytheon, and General Dynamics), it’s clear that the financial statement disclosures will increase significantly! For example, in the General Dynamics 2016 annual report, there was only about a half page dedicated to the disclosure of their accounting policy related to revenue recognition, and a third of a page disclosing information about their contracts in progress. A lot has happened in one year! In the 2017 annual report instead of an accounting policy disclosure, they referenced to the application note for ASC Topic 606, which was over four pages long! They also took another seven pages to discuss the impact of the adoption of ASC Topic 606 on its financial statements.

With this increased level of disclosure required by ASC Topic 606, we can certainly expect that the SEC will be focused on the upcoming quarterly and annual filings and will be sending out comment letters. In fact, they have already started issuing comment letters! This recent article from MarketWatch.com notes that the SEC is not planning to “beat up on companies in the first year”, but that they will “focus on the judgments made by companies regarding revenue recognition disclosure”. Of the comment letters mentioned in the article, the common theme was that the SEC was seeking more clarification on disclosures related to revenue disaggregation and contract terms. Also, where applicable, the SEC raised questions that would help them understand the reconciliation of the segment reporting disclosures to the revenue recognition disclosures.

The lesson learned here is that the level of disclosure will certainly increase when it comes to revenue recognition. We can expect that the SEC will be focused on the disclosures about implementation and how they reconcile to other disclosures within the financial statements. So, prepare now for the tug-of-war between the expectation of more detailed disclosures from external stakeholders and the desire of internal stakeholders to maintain a few trade secrets.

Lesson #2: Make a To-Do List

Now, let’s work on your to-do list! For the private companies that have a little while longer to work through the implementation of ASC Topic 606, there are many lessons you can learn from the public companies that have already went through the fire so to speak. If you are still working on your implementation plan, this resource from Deloitte will provide you with some key items to consider. Accounting Today also had an article with some helpful best practices that are worth considering as well.

The biggest lesson learned here is that the process of implementation will touch multiple departments and levels within an organization. Because there are so many stakeholders, the process may take considerably longer than you might initially anticipate. So, if you haven’t started, get started . . . now! 2019 is only 7 months away, so make sure you have the resources you need in place to ensure a smoother transition.

Lesson #3: Ask Questions!

Much of the focus of what I’ve seen written about the implementation of ASC Topic 606 has been focused towards the accountants and auditors who are down in the details. But what about the board members, analysts, investors, and other external stakeholders? From their perspective a lot of things are changing and not all those changes will be spelled out in the financial statement disclosures. If you are an external stakeholder who follows a specific industry, what you see across the industry regarding the adoption of ASC Topic 606 could widely vary.

So, the lesson learned here is to know what questions to consider. The CFA Institute published a list of the top 10 questions investors should ask. I would suggest that this list is great not only for investors, but for any stakeholder that’s not in the details and trying to understand the impact of this new guidance.

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