Revenue Recognition Disclosure Requirements: A Challenge That Can't Wait
Treating them as a minor detail that can be quickly and easily addressed once the other requirements have been satisfied is a mistake
|Monday, April 17, 2017|
By Eric Knachel for CFO.com
As companies scramble to implement the FASB’s revenue recognition standard, many are primarily focusing on the revenue and measurement requirements, which have the highest profile. Meanwhile, many companies are largely ignoring the new disclosure requirements, treating them as a minor detail that can be quickly and easily addressed once the other requirements have been satisfied. That’s a mistake.
A common misconception is that revenue disclosures are just like “showing your work” in math class – i.e., simply documenting whatever calculations you made to arrive at your revenue numbers. But the disclosure requirements actually involve much more. Continuing the math class analogy, it’s as if your teacher isn’t just demanding that you show your work, but also that you write an in-depth essay explaining the approach you chose, why you chose it, what assumptions you made, what tools you used, and what processes you followed to ensure nothing would go wrong.
FASB’s new standard significantly increases the amount of information companies are required to disclose about their revenue activities and related transactions. To comply, a company will likely need new processes, procedures, and controls for: (1) gathering data; (2) identifying applicable disclosures (based on relevance and materiality); and (3) preparing/reviewing disclosures and related information. It will also need information systems and personnel to support disclosure-related activities. Establishing and testing all of these elements will likely require significant time, money, and effort.
Although the new disclosure requirements don’t take effect for many companies until 2018, that doesn’t mean they can wait until the end of next year to deal with them. This is particularly true for public companies registered with the Securities and Exchange Commission.
Under normal circumstances, comprehensive disclosures are generally reserved for annual reports, while quarterly reports are viewed as interim updates to the previous year’s annual report and are therefore much less detailed. However, because FASB’s new revenue standard is not currently in effect, this year’s annual reports will not include the newly required disclosures. Instead, those disclosures will need to be covered fully in next year’s first quarter report. This could present some major challenges,since many companies already struggle to meet their filing deadlines. Add in the time and effort required to satisfy the new disclosure requirements – along with the potential for problems and delays in collecting, preparing, and reviewing disclosures and related data – and the result could be late filings, internal control implications, or both.
To illustrate the complexities and potential problems that can arise, here is a quick look at some of the more challenging revenue-related issues affected by the new disclosure requirements:
Tackling the Challenge
As a company analyzes each disclosure requirement, there are a broad range of factors to consider, including: materiality, relevance, the specific information that will be needed (and how to get it), and which controls will be necessary to prepare and review the disclosures and related underlying data.
Some of the information required to comply with various disclosure requirements will likely be similar — or come from similar sources. For example, disclosure information related to performance obligations may overlap with disclosure information related to estimates of variable consideration. As such, companies should strive to develop comprehensive strategies for collecting information without gaps or wasteful duplication. Such a strategy will help a company create disclosures that tell its revenue story both efficiently and effectively.
Public companies with a calendar-year-end have less than 12 months to prepare for all aspects of the new revenue recognition standard — including disclosure. And there is still much work to do. To meet the deadline, companies need to assess and address the disclosure requirements in parallel with their efforts to implement the recognition and measurement principles.
The clock is ticking on revenue disclosures. It’s time to get started.