Earlier postings: Revenue Recognition Changes Could Spur SEC Fraud Probes (Link)
For New Revenue-Recognition Rules, It’s Ready vs. Not
Will Accounting Measure Take Effect as Scheduled? Some Companies Urge Delay
Updated Jan. 26, 2015 7:04 p.m. ET
Call it the $360 billion question: whether to delay one of the biggest accounting changes in decades. The answer isn’t expected until early in the second quarter. The sweeping revisions in revenue-recognition rules “will represent a change for many industries,” said Christine Klimek, a spokeswoman for the Financial Accounting Standards Board, after a joint meeting Monday with its international counterparts. “There are bound to be questions. The answers to most of those questions can be found within the standard itself.” The final draft of the new rules, unveiled last May after years of deliberations, would change the way thousands of companies book revenue. They would affect how auto makers account for car sales and telephone companies account for mobile-phone contracts.The planned changes, part of a broader effort to align U.S. and international accounting standards, involve so-called deferred revenue—money companies have already collected from their customers but which they recognize as revenue over time. The idea is to make it easier for investors to compare companies across countries and industries.
Companies in the S&P 500 index have about $360 billion of such revenue on their books, according to S&P Capital IQ. Boeing Co. , Microsoft Corp. and International Business Machines Corp. have a combined $60 billion in deferred revenue, and the new rules will determine how much of that they will move to the top line—and when.
The accounting shakeup is set to start Jan. 1, 2017, but officials at the FASB received roughly 1,400 comment letters from companies that are spending millions to update computer software, recalculate contracts and rejigger past financial results.
Exactly what deferred revenue will be counted as sales will vary widely between companies and industries. According to the Securities and Exchange Commission, as many as 250 questions linger as to how to implement the rules.
Auto makers such as Ford Motor Co. and General Motors Co. say the rules might force them to account separately for each car sold around the world, rather than group them into comparable transactions. They estimate they might have to spend as much as $300 million each on accounting technology, and they claim new financial figures based on per-car accounting will provide little benefit for investors.
Microsoft signaled investors over the summer that the rules “will have a material impact” on its financial results. A company spokesman declined to elaborate.
“The amount of work that it will mean for an accounting team can be overwhelming,” said Ken Goldman, chief financial officer of Fiksu Inc., a mobile marketing company that is preparing its books to potentially go public. He agrees with the rules conceptually, but said they could be more complicated and costly for companies than the Sarbanes-Oxley financial reforms of 2002.
Moreover, if companies don’t adequately prepare Wall Street, the revenue changes could be jarring.
When Apple Inc. changed the way it accounted for software updates for the iPhone in early 2010, the company’s financial results surpassed analysts’ expectations by billions of dollars. Though Apple was simply complying with new accounting rules that affected the way it booked the sales, the Nasdaq Stock Market had to temporarily halt after-hours trading of Apple’s shares to give investors time to digest the news.
Some big companies say they plan to be ready if the new revenue-recognition rules take effect as scheduled. “We do not need an extension,” said Liesl Nebel, accounting-policy controller at Intel Corp. “If they do allow an extension, we would like to early adopt.”
Defense contractor General Dynamics Corp. said any delay would cause it to spend more time and money to run parallel books with two different standards. “Do not penalize the companies that have moved forward,” wrote Kimberly Kuryea, its controller, in a letter to the FASB this month. “[The] costs will naturally and inevitably grow if the implementation period is extended.” The company declined to comment further.
The FASB needs to consider that argument “very seriously,” said Prabhakar Kalavacherla, a partner at auditor KPMG LLP who was a board member of the International Accounting Standards Board and worked on the project to align global revenue rules.
But smaller public companies with fewer resources generally will have a harder time getting their books in order, even though they wouldn’t have to report comparative figures for farther back than the prior year. Most large companies expect to produce figures for the previous two years.
David Garrison, CFO of Tecogen Inc., a maker of combined heating and power systems, said he would spend this year attending industry conferences and watching how larger companies in the construction field tackle the challenge. “We’re taking the approach to watch similar companies,” he said, and to ask other companies’ executives about their successes and mistakes. “In the financial-executive world, we all share.”