Companies struggling with new FASB revenue recognition rule

What is being called the biggest FASB rule change ever is challenging companies of all sizes.

The cutoff for complying with the Financial Accounting Standards Board's (FASB) new revenue recognition standard is less than three months away and companies are struggling to meet the Jan. 1 deadline, a new survey says. The new rule is meant to streamline the way companies report transactions with customers, bringing accounting consistency when possible.

It is complex to put in place because of the magnitude involved. “Arguably, this is the biggest accounting change ever by FASB,” said Steve Thompson, KPMG’s Advisory lead for Revenue Recognition.

In the KPMG survey, 60% of public companies said they are facing challenges in applying the standard by their internal deadline. Many of the 245 responding companies reported challenges stemming from competing priorities, a lack of internal resources and struggles with interpreting the new rule, among other issues.

The survey found that private companies face a similar challenge in meeting the 2019 FASB deadline for private companies. In fact, 22% of private companies have yet to begin the process of adopting, KPMG found.

“It’s a very complicated task; more complicated than realized,” Thompson said. “Those still in the assessment phase are likely to find themselves saddled with a manual solution in the near term, leading to internal control challenges and added costs.”

Thompson called it an "all hands on deck" situation, but said companies are now galvanized to meet the deadline.

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The process has proven to be more complex, time-consuming and costly than initially anticipated: 57% of public companies cited the total expected implementation costs had increased from the prior year. According to executives, the top two unexpected costs were the increased need for outside advisers due to time and internal resource constraints (31%) and the time needed to complete a comprehensive assessment, which is greater than anticipated (22%).

“While private companies have an additional year to complete their implementation, our survey showed these companies have a much greater awareness of how complex the implementation of the revenue recognition rules can be,” Thompson said. “Private companies will hopefully heed the lessons learned by public companies and prioritize their own efforts.”

“Our recommendation is to have already started training your revenue recognition personnel,” said Pete Graham, director of Finance Solutions and Mobility at SAP, in a white paper. “From my experience, it takes a U.S. GAAP-trained accountant about 6 to 12 months to really get comfortable with a principles-based standard such as this. We also recommend using an accounting advisor to help accelerate this process and provide your organization with a broader set of experience.”

The new standards for revenue recognition “are considered by many the biggest accounting change in years,” Graham said. “For a smooth transition, early-as-possible preparation is not only recommended by experts, but crucial for successful compliance.”

Lease accounting challenges surprising companies

In addition to new revenue recognition standards, FASB’s lease accounting changes go into effect in January 2019 and will impact financial reporting for companies in all industries. While 52% of companies have started to assess the impacts of the new lease standards, most have not gone beyond establishing a program management team.

“Due to a focus on implementing the new revenue standards, the amount of time companies have to implement the new lease standard is compressed,” said Marybeth Shamrock, KPMG’s Advisory lead for Leasing, in the survey.

Executives most frequently cited identifying embedded leases (49%) and selecting and implementing an adequate leasing system (48%) as the most significant challenges associated with putting the lease standards in place.

Nearly 50% of respondents also admitted little to no involvement of key executives, audit committees, external auditors, the M&A group, and the investor community in new lease implementation efforts.

“The January 2019 deadline is very real, and there is much work to be done for companies to comply,” Shamrock said.