Anyone interested in the new accounting standard for revenue recognition and how it intersects with corporate compliance concerns, listen up: we have a podcast mini-series for you.
I teamed up with Tom Fox, who runs the FCPA Compliance Report and is my brother-in-arms for our weekly Compliance Into the Weeds podcast, to cut a five-part series on the new standard— which, incidentally, goes into effect tomorrow. You can hear the entire series on his blog or on YouTube. Each segment is 10 to 15 minutes long for easy listening either alone or all in one sitting.
The segments run as follows:
Introduction. A review of what the new revenue recognition standard tries to accomplish, and its conceptual breakthrough of defining transactions as a series of performance obligations. That means a company can only recognize revenue as each obligation within a transaction is fulfilled, and that means a lot more reliance on judgment to define those obligations. We also talk about implementation dates: you must use the new standard for your first fiscal year that ends on or after Dec. 15, 2017.
Defining a transaction price. The new standard spells out the five steps a company must go through to determine what a transaction’s price really is, and how to allocate that price among the performance obligations a transaction creates. For example, a company will need to know and identify what “non-cash consideration” might be given as part of a transaction. I suspect that part might perk up the ears of compliance officers, since non-cash consideration can also be a way to pay a bribe.
Example: the software sector. Our first two segments deal with a lot of theory. Here, we look at practical consequences for the software sector. Lots of software firms use long-term contracts to license their product, and historically they would recognize that revenue in phases (say, 20 percent of the total per year, for a five-year contract). The new standard can allow software firms to recognize all the revenue from a long-term contract all at once. That shift, in turn, can have big implications for a firm’s compensation to sales executives, revenue volatility, and even the value of the software firm itself. And software isn’t the only sector where these changes might happen.
The audit implications. For all your company’s struggles to implement the new standard, remember: audit firms are struggling to implement it, too. The new standard will require companies to disclose more details about the nature and timing of their revenue recognition; and auditors are likely to review your numbers and supporting data more closely, because the new standard requires everyone to use more judgment. Your disclosure controls and internal controls over financial reporting may experience turbulence for the next few audit cycles.
The picture beyond the finance function. Foremost, the new revenue standard will challenge your corporate accounting and financial planning functions. But the implications of their efforts to digest the new standard will reverberate throughout the whole organization. If the compensation scheme for your sales agents changes, their incentives for fraud might change. If you record non-cash consideration more clearly, auditors might find (and therefore report) evidence of bribery that might otherwise have gone unnoticed. If your disclosure controls aren’t effective, you have a Sarbanes-Oxley violation. If your revenue streams become more volatile, your company’s valuation might be harder to pinpoint, and plans for that private equity investment go sideways.
So yes, the new revenue standard is going to be a change run by the accounting and finance teams. It’s also going to be a huge change, that courses through your whole enterprise. That’s something to think about— while listening to our podcast series, and for a long time thereafter.