One of the most pressing questions brought about by the issuance of ASC 606 for numerous accounting professionals and CFOs is: “How will the new Revenue Recognition standard impact MY company?”
As we discussed in our prior blog, the new standard will not only impact the current processes of your business from re-examining contract negotiations, infrastructure of existing information systems , internal control procedures, and forecasting and budgeting processes, but also how the company communicates this information to investors.
According to an article published by KPMG in May 2017, the new standard provides investors with additional information such as revenue backlog, and the increased transparency is generally welcomed. Investors also rely on the companies to communicate the most important metrics to evaluate their business. Fortunately, for those companies that are still reviewing how the new standard will impact both their internal processes and communication to investors, they will have the benefit of learning from the experiences of the early adopters of this new standard.
In this blog, we look at a few early adopters and how they have disclosed their adoptions of this new accounting standard.
Raytheon (NYSE:RTN): A Multi-Year Cross-Functional Team Implementation
In the 2016 10-K disclosure, off to a flying start, Raytheon indicated that they established a cross-functional team across all business segments in 2014 to assess the impact of the new standard on their revenue contracts, business processes, systems and controls to support the recognition and disclosure requirements of the new standard.
The new standard requires companies to disclose more information about their current revenue-generating activities and related transactions. As such, in order for companies to adequately assess the impact of the new standard and prepare for its adoption, lead time is needed to implement and test the processes, internal controls, disclosure controls, and data-gathering processes. In some cases, this might be costly for a company. For instance, the increase in General and Administrative expenses for Box Inc in 2017 Q1 (YoY) was primarily due to the costs incurred to invest in the processes (including outside consultants’ fees) related to Topic 606.
R1 RCM (OTC:ACHI): Reassess Revenue Streams
R1 RCM indicated in the 2016 10-K disclosure that the new standard required them to reassess their revenue streams. This resulted in the company identifying two main revenue streams.
Also, in response to the new standard, R1 RCM changed its non-GAAP disclosures. Now, R1 discloses Adjusted EBITDA as their non-GAAP measure instead of the non-GAAP measures the company previously disclosed in its earnings releases - gross cash generated from customer contracting activities and net cash generated from customer contracting activities.
R1 pivoted away from the previous non-GAAP disclosures because, under the new standard, these two measures were rendered less informative and no longer applicable. For instance, the company defined gross cash generated from customer contracting activities to be GAAP net services revenue, plus the change in deferred customer billings. In particular, the deferred customer billings include both: (1) invoiced or accrued net operating fees; and (2) cash collections on incentive fees, which in both cases do not met the revenue recognition criteria. This reduces how informative the measure of gross cash generated from customer contracts is to readers of the financial statements.
General Dynamics (NYSE:GD): Impact on Identifying Different Performance Obligations
For companies like General Dynamics, the new standard has a significant impact on how companies identify the different performance obligations within a single contract. As a result, this could potentially increase the variability of the contract estimate adjustments.
From the General Dynamics example, you can see that adoption of Topic 606 precludes the company from reallocating (‘smoothing’) adjustments in estimated profits on contracts. The company will recognize the total impact of an adjustment on estimated profit in the periods in which it is identified. This means that companies like General Dynamics, with larger contracts that stretch over a longer performance period, may experience larger volatility between periods related to the contract’s cash flows.
Lifeloc Technologies (OTCMKTS:LCTS): Contradictory disclosures
Clearly, much time and resources are required to assess the impact of the new rev rec standard on a company. However, after expending all of this effort to ‘get it right’ with the implementation of the new standard, don’t stumble during the ‘last mile’! Here is an example of a company that early adopted the new standard but provided contradictory disclosures within the same filing.
However, You can also view the Recent Accounting Pronouncements footnote, Lifeloc Technologies indicated in its 2017 Q1 filing that it has “not determined when (we) will adopt the new standard”. But, note that in its revenue recognition policy footnote, the company clearly stated that it has adopted the new standard… in the same filing.
Just from a few examples of these early adopters of the new revenue recognition standard, we can see that companies are changing:
- How they analyze their revenue contracts and the obligations under those contracts,
- How they reassess their business processes, systems, and controls,
- How to change the format of their revenue recognition disclosure,
- What they choose to disclose as non-GAAP measures.
If your company is still assessing the impact of the new standard on your current processes, it may be worth a few minutes (using idaciti, that’s literally how long it would take) of your time to search and examine how companies have actually been impacted by their adoption of this new standard. This valuable research could save you a lot of time and help streamline your processes. And, along the way, help you learn from the ‘lessons’ of others.
After all, Raytheon started this processes more than two years before adopting the standard. At this stage, your company does not have that luxury. You need all the efficiencies you can pick up to comply with this new standard.
|Our Co-Founder and Chief Research Officer Christine Tan, Ph.D. has published an eBook titled "Revenue Recognition (ASC 606): Lessons Learned from the Early Adopters". With years of experience working at the FASB and SEC, Christine believes that doing some research to identify ‘early adopters’ of the new standard, especially those in your peer group, can be used as references for your own implementation of the standard and give you a great start.|