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Wesley Bricker is the deputy chief accountant for the office of the chief accountant for the U.S. Securities and Exchange Commission (SEC). In a recent phone interview, Bricker spoke with SearchFinancialApplications about the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB). The revenue recognition standard must be adopted in 2018 for public companies and 2019 for private companies. The SEC has a direct role in enforcing the standard for public companies.
What is the goal of the new FASB revenue recognition criteria?
Wesley Bricker: First off, I need to mention that the views expressed in this interview are my own and not necessarily those of the commission, the individual commissioners, or other colleagues on the commission staff. The aim of the new standard is to improve on existing revenue recognition rules and principles through the development of a comprehensive revenue standard. The existing rules and principles are numerous and detailed, but they tend to be done on an industry-by-industry basis. The new standard brings a unifying set of principles to that disparate guidance, and applies it across industries and makes it available globally.
Is an overriding goal of the new FASB revenue rules to require companies to recognize revenue when a performance obligation in a contract is performed, or when the service is performed?
Bricker: That is an overriding goal. I would also note that the new standard describes the elements of arrangements with customers as essentially being individual obligations or promises, whether it is a delivery of a good or whether it is delivery of services. A company will record revenue as it completes its obligations to provide those goods or services. I encourage companies to apply each step outlined in the new revenue standard with a view toward how the enhanced reporting could be used by investors.
Will the new standard affect the bottom lines of companies?
Bricker: The new standard may impact the timing of revenue recognition for some companies. Accordingly, it could have an impact on the bottom line, though the magnitude and direction will vary across companies and will depend on the specifics of a particular revenue transaction.
How would the revenue recognition criteria affect software companies?
Bricker: Software companies tend to bundle multiple software services or goods. For example, you might buy a license to use software but also get support services related to the use of the software. As is the case for all companies, software companies will need to revisit their analysis of what they have promised to provide for accounting purposes. If they promise to provide a combination of software, as well as related services over time, they may well have two items, or performance obligations, for accounting purposes. To contrast with existing software guidance, if a software company does not have so called "vendor specific objective evidence" of fair value of the individual items that have been bundled, it may be required to record revenue earlier after the effective date of the new revenue standard than currently required under the existing guidance. The company would evaluate the amount of consideration they expect to receive in relation to the several individual goods and services they agree to provide, and recognize revenue as control over each individual performance obligation is transferred to the customer.
Software companies will also have to revisit their existing accounting framework for post-contract support, or how they provide ongoing activities for things such as bug fixes, unspecified upgrades and phone support. Depending on the facts and circumstances of an arrangement, those post-sale activities could be impacted by the new accounting framework.
What advice can you provide for organizations on complying with the new revenue recognition rules?
Bricker: Companies should spend time reading and understanding how the standard will apply to their revenue arrangements. They should take a fresh look at all their transactions to understand how the new standard would apply to those transactions.
What is the SEC staff’s role in enforcing or overseeing the new revenue recognition criteria?
Bricker: We work closely with the Financial Accounting Standards Board in its accounting standard-setting process, which includes activities after the issuance of the final standard. We participate as an observer to meetings on the new revenue recognition standard among preparers, auditors, and users across a wide spectrum of industries, geographical locations, and public and private organizations. This helps us anticipate how companies will apply the standards in their financial statements when the standards are effective. We believe the standard is enforceable, and we believe it will result in useful information for investors.
As I understand it, companies can apply the new revenue recognition criteria using a "full retrospective" approach or they can do it using a "modified retrospective" approach. What is a retrospective adopter and how would the new revenue recognition criteria affect full retrospective and modified retrospective adopters?
Bricker: Generally speaking, retrospective adoption refers to the application of the new principles to all historical periods presented in a registrant’s financial statements as though the new standard were applied in all periods presented. Under the full retrospective approach, a reporting entity will apply the new revenue standard as though it were in effect to all contracts with customers that are presented in all periods in its financial statements. Under the modified retrospective approach, a company will still apply the guidance to all periods presented in its financial statements, though limited only to contracts with customers that are still open at the date of adoption of the new standard. For example, if a calendar-year-end public company were preparing its financial statements for 2018, on Jan. 1, 2018, the effective date of the new standard, it would inventory all its open contracts at that point and apply the new revenue standard to the entirety of those contracts.
What is the SEC staff encouraging companies to do when it comes to the new revenue recognition criteria?
Bricker: We’re encouraging companies to start now and to not underestimate the comprehensive nature of the effort involved. Planning for the transition will include taking a fresh look at all contracts with customers and considering what new information will be needed to form high-quality judgments and estimates for the information in the financial reports. This may include enhancing accounting policy roles, designing systems, and establishing appropriate controls to support the preparation of their financial statements in relation to the new standard. The SEC staff is also reviewing the disclosures that companies may currently be providing about the anticipated effect of adopting the new revenue standard.
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