With weeks left before the FASB’s revenue standard becomes effective, the phones at Zuora Inc. are ringing.
Small and medium technology companies — overwhelmed by the work required to comply with the standard — want the company’s revenue software, and they are asking for it at the last minute.
“They’re reaching out to us right now, ‘This is too painful, can we automate?’” said Jagan Reddy, Zuora’s senior vice president of RevPro, the product it offers to simplify the standard’s implementation. “We are hearing that more and more now as we get to crunch time.”
The eleventh-hour requests, coupled with the scope of the new standard, mean that the Redwood City, California, company has to deliver bad news to some of the latecomers: Pull out the spreadsheets and tally revenue manually. Companies that waited until the final months of 2017 to prepare for the revenue standard’s 2018 effective date are being told to wait until the second quarter to install RevPro.
“There’s no way,” Reddy said.
A similar scenario is playing out across the Atlantic, at Aptitude Software Ltd. in London, where companies are also pleading for the software supplier’s Revenue Recognition Engine. A technology company that called Aptitude in mid-November is cited as one of the more extreme examples of the companies that are unprepared for the new standard.
“They were saying, ‘Hey, we’ve Googled and found you. Can we talk about what you offer here?’” said Ross Chapman, the firm’s global marketing director, declining to name the company. “So it’s quite shocking.”
One Big Four accounting firm refers to this mad dash to the compliance date as the “brute force” approach. The job will get done, but it may not be pretty.
The last-minute efforts illustrate the scope and the complexity of the sweeping revenue standards from the FASB and IASB. They also reveal the worries many companies have about the consequences for failing to implement the standards correctly. Revenue reporting is a frequent topic of regulator inquiry and often the most common reason companies have to restate financial results from prior reporting periods. Businesses cannot ask for an extension of time to comply with the new standards, nor can they afford to make mistakes.
The FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, on the same day the IASB released IFRS 15, Revenue From Contracts With Customers, in May 2014.
The standards are the result of a dozen years of work between the FASB and IASB and call for a single method for most companies worldwide to calculate revenue, erasing reams of business- and transaction-specific guidelines in U.S. GAAP. The standards are based on a five-step, principles-based approach to reporting revenue.
The changes will have a larger effect on some industries than others. Retailers, for example, do not expect to see a significant change in how or when they record revenues because most customer receipts, such as a clothing retailer’s sale of blue jeans, are straightforward transactions. Other industries — software, telecommunications, and media are among the prime examples — make heavy use of specialized, long-term contracts with customers, and the companies in these businesses anticipate that they will make major changes to how they record revenues. Many software companies, for example, will record sales sooner than under current GAAP, which will allow them to spread the revenue out over several periods when there is a service component to the sale.
“It’s not like a business combination, where you need to apply this guidance now and then when something happens,” Dusty Stallings said. “This is something you have to apply every reporting period — period in, period out — to make sure you get it right. Because if you get it wrong, you will be scrutinized.”
Before the ink was dry on the largely converged 2014 accounting standards, financial reporting professionals warned about the work complying with them would require. The process and the questions about it were considered so significant that the FASB and IASB agreed to scrap the original 2017 public company effective date and offer an extra year.
Regardless of the accounting outcome, however, the workload involved in assessing the impact of the new standards and gathering new data has universally been described as significant across all industries. Even sectors that did not think they had to brace for big changes find themselves asking implementation questions with the effective date approaching.
“There were certain industries that clearly jumped on the standard early,” Stallings said. “There were other industries that, quite frankly, felt like it wasn’t going to be a big deal for them. But unfortunately, it’s turning into more of a deal than they thought.”
Disclosures in regulatory filings in the run-up to the 2018 effective date have been offering a peek at the magnitude of the exercise — as well as the last-minute efforts by companies to meet the financial reporting deadline.
Audit Analytics, a Sutton, Massachusetts, research firm, studied regulatory filings for the companies in the Russell 3000 stock market index, and looked for details about how companies plan to adopt the new standard, a disclosure the SEC requires under Staff Accounting Bulletin (SAB) No. 74, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period. In October, the firm reported some troubling statistics: in second-quarter filings, only 90 companies reported their accounting review of the revenue standard as “substantially complete.” The bulk of companies, 2,300, characterized their process as “ongoing.” Other companies did not provide specific details, while 54 said their review was in the early stages.
The research firm is currently studying third-quarter filings for the same companies. Although the research is not complete, the firm has found more companies reporting that they are close to finishing their implementation process.
Questions are continuing to crop up as companies race to finish the task in the final stretch of 2017, said Olga Usvyatsky, director of research for Audit Analytics.
“One question that we receive from some of our users is, ‘What if they implement the standard in a rush or are not prepared? Are we likely to see a spillover effect into areas such as financial restatements, just because companies had to implement the standard at the last moment?’” Usvyatsky said. “We’ll have to wait and see.”
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