The overwhelming majority of U.S.-based public companies are choosing the less onerous – but riskier – of two possible methods for complying with the transformative new accounting rules for recognizing revenue from customer contracts, known as ASC 606. This according to a new report from business and regulatory compliance analytics company,Intelligize. The report,Impact of Revenue Recognition Standards on Public Companies, uses public company filings, SEC comment letters and other data from the Intelligize research platform to examine how both companies and the SEC have handled the adoption of the new revenue recognition standards on public companies.
These rules have been in development for 12 years, but, given that this is the first complete overhaul of these standards in a decade, they are still bringing a lot of uncertainty with them, said Rob Peters, the reports lead author and a senior director at Intelligize, whose research platform provides news,regulatory insights, and powerful analytical tools for accounting, compliance and transactional professionals. Our findings suggest that for most public companies, the advantages of taking a more cautious approach did not outweigh the burdens they imposed.
The new revenue recognition rules, which went into effect for public companies on January 1, 2018, cut across all industries and have been called the regulatory change with the most profound impact on corporate finance since the Sarbanes-Oxley legislation at the start of the century. Intelligizes report found that 87 percent of S&P 500 companies have opted to use the modified retrospective transition method for complying with the new rules, rather than the full retrospective transition method, which requires companies to restate revenues back to fiscal year 2016.
The modified retrospective method does not require companies to recast past revenue and is widely thought to require less effort. By offering less historical context, however, this method increases the risk that the market will misinterpret reductions in revenue numbers caused by the accounting change. The aversion among S&P 500 companies to the rigors of the full retrospective method is consistent with another finding from the report: fewer than 32 of nearly 4,000 public companies chose to become early adopters of the new accounting standard.
The huge disparity in S&P 500 standard adopters electing to use the modified transition method, while nearly half (46.9 percent) of early adopters chose the full retrospective method, may be attributed to several factors, Peters said. These may include the time cushion afforded early adopters compared to their later adopting peers, and/or the relative size of the S&P 500 standard adopter companies, which makes using the full retrospective method more challenging.
Intelligizes report also found that to date, the SEC has been true to its initial word in working with companies facing the challenging transition to the new revenue recognition standard. In May 2018, Kyle Moffatt, chief accountant for the SECs division of corporation finance, noted that We arent planning to beat up on companies in this first year.
While the SEC did issue revenue recognition-related comment letters to nearly one-third of early adopters, covering 18 different topics, 70 percent of those were directed to the measurement of performance obligations. Only three companies – Alphabet (NASDAQ: GOOG), Commvault Systems (NASDAQ: CVLT) and General Dynamics (NYSE: GD) – received multiple rounds of comments, indicating the SECs desire to more fully understand the judgments and analyses used to determine their approach to recognizing revenue in certain areas of their businesses.
The studys other significant findings include:
- While only 12.5 percent of S&P 500 companies chose the full retrospective method, nearly half (46.9 percent) of early adopter companies did.
- Early adopter companies varied widely in both size and industry; they included Alphabet and Ford Motor Co., as well as a number of smaller issuers.
- SEC comment letters on revenue recognition have focused on areas the agency has cited as its main concerns-most prominently, measuring performance obligations.
- The importance of revenue recognition is reflected in the wide range of filing areas in which companies cite them, including MD&A analysis, risk factors, and proxy issues.
Part II of Intelligizes revenue recognition report is scheduled to be released during Q2 of 2019. It will explore additional insights and considerations exposed through the public reporting and ensuing SEC review process, including but not limited to:
- The latest changes and guidance in key areas associated with the new revenue recognition update
- The impact of the new standard on reporting issuers
- Assessment of the SECs disposition as it relates to the first wave of revenue recognition reporting
