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Jan 31, 2019

Early Adopters Confront the Challenges of Revenue Recognition

Implementation of new revenue recognition standards was always going to be a challenge, no matter the timing. Hopefully, those companies who come later can learn a little bit from those brave souls who are showing the way: the early adopters. Rob Peters, senior director of Intelligize, discusses the findings of his company’s report on revenue recognition early adoption trends, Impact of Revenue Recognition Standards on Private Companies.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

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Podcast Transcript

Implementation of revenue recognition is going to be a challenge, no matter the timing. But hopefully those who implement the standard going forward can learn something from those who were on the front line of the battle: the early adopters. To talk about issues that have been experienced by early adopters of revenue recognition as well as what the SEC is doing to address these speed bumps, we are talking to Rob Peters, senior director at Intelligize and author of the Intelligize report, Impact of Revenue Recognition Standards on Private Companies.

What have public company early adopters of revenue recognition said about implementation time? Was the time or resources it took more or less than they imagined or about what they expected?
[Peters] I think it was more. I think a lot of people were surprised that even though the SEC and FASB and a lot of the other groups out there, the task forces, were really warning them about the amount of resources and time it would take. And a lot of the speeches leading up to it really were saying, "Hey, this is coming up. You've really got to be prepared." And I think a couple of companies particularly got caught unaware of what it was really going to take to implement the new standard.

Have there been issues that have been revealed by the implementation struggles that still need to be addressed or worked on?
[Peters] I think what's going to happen really is, it will be interesting to see with the lease standard upcoming and the SEC going through the second round of comments on the revenue recognition for next year. I think that'll be really eye-opening to a lot of issuers. The SEC also sort of took it easy this year, if you will, on the issue, and also even taking a look at the comments that have been done so far of the issuers that have done the regular implementation. They definitely stated ahead of time what they were going to focus on and it seems they pretty much kept to that as far as the types of issues that they were asking questions about within the comments.

How would you say the SEC is reacting toward the thoughts that have been coming back on these struggles? Have they been addressing the issues well?
[Peters] I would think so. It's been interesting. There's some issues where they've got some pushback from companies. One of them, for instance, is desegregated revenue and how companies, or I should say why certain companies that did not desegregate revenue, in particular Alphabet was a famous one for the early adopters in which the SEC was focusing on particularly the online advertising revenue by product, and really focused on YouTube and Alphabet's argument was, "Well, hey, are we basically looking at online advertising revenue across all platforms to really doesn't matter because it's all online advertising revenue." And the SEC finally just sort of let them go with that. And then they did something similar with Amazon in particular, the sales of their Prime members and they wanted to see if they would break that out or why they had not broken it out.

And Amazon's argument, similar to Alphabet's, was basically our sales are our sales. We don't really consider sales to Prime members versus sales to other people. It's all sales at the end. And then conversely, they also look at segregated revenue for Del Monte or Fresh Del Monte. And this was sort of funny, they asked to break it out based on their different fruit products and the argument the SEC made was because you do that in your earnings releases and in the beginning of your 10K you should probably continue to do that within your 606 disclosures. And so on, that one Del Monte said basically the next report that they actually would break it out in that manner. So they actually did give in to the SEC on that.

First of all, before I even go into this next question again, just a great report you guys did, it's again titled The Impact of New Revenue Recognition Standards on Public Companies. A lot of the trends we'll discuss here came from that report. The trends have shown that there have not been a lot of companies that have chosen to early-adopt. What can that be attributed to? Is it just a hesitance to be the guinea pig for the process?
[Peters] I think that has a big, big issue with it. I think a lot of companies were afraid of being that first one and possibly getting slapped by the SEC or how investors may react to it because you're also putting out those numbers. Particularly if you did the full retrospective, which would make some changes to what that revenue looks like and theoretically could impact the investor side and potentially your stock price. We were even seeing it with the lease adoption as well. There's very few early adopters for the new lease standard and I think it's the same sort of principle. It's very time-consuming to implement. I don't think anyone really wants to be the first person to jump in, if you will. If you noticed there was a decent amount of big names that were early adopters, but then there were a lot of small names and the reason they did it was certain happenstance that happened. Either they had a merchant bankruptcy and so they had fresh-start accounting. It was a lot easier for them to do it then for a normal company.

I can remember back to my school days, you know, I was a pretty big procrastinator for the big projects, too, so I can't really blame some of these folks, but have there been differences between early and standard adopters and how they've chosen to work their transition and, if so, what do you think that can be attributed to?
[Peters] The transit center we saw that was the most popular was the modified because it's the easiest to do versus the full retrospective. From an investor standpoint, they are not as pleased because it's not an apples versus apples or oranges versus oranges type of comparison, but because of the ease of it and the amount of time that it would take, most of them seem to have taken that. Some of the early adopters did the full retrospective and basically said one of the reasons that we're doing that was particularly for their investors so they could see what those numbers would look like and the impact. I know General Dynamics, for instance, did a very good job when they did their presentation and there was another one that did a fairly good job as well of really laying out what those numbers look like pre-transition and post-transition.

You talked a little bit there about the different transition methods. Companies have a choice between using the full or modified retrospective transition method when adopting. So what are the pros and cons of those methods and has one proven so far to be more successful?
[Peters] I don't know if we would say successful per se as compared to popular. From the company's perspective, probably the modified would be more successful in that it was a lot easier to implement from the investor side. Obviously they would look at the full retrospective because it did give them a much better picture. And, in the end, if you think about it, the full retrospective requires a restatement. And anytime you hear the term restatement it automatically sets off the alarm bell for a lot of people, when in reality it just has to be done to implement that particular transition method.

Now you mentioned this a little earlier and obviously for a lot of CPAs and CPA firms, lease accounting and revenue recognition, they've been seen as these two big obstacles that are down there on the horizon. How does the fact that implementation of the lease accounting standard will follow pretty quickly on revenue recognition's heels effect the need to get going on this implementation of rev rec, but also the frustration some companies are feeling as they go through the process.
[Peters] A lot of companies feel very frustrated by it just because it's really back-to-back. If you look at it the way FASB had set it up. It's very difficult from an expense standpoint. I mean, you've just gone through expenses you had to do to implement rev rec. You had to work with your auditors. You may have had an advisory company come in and help as well, and now you're doing the whole thing over again. If we really think about it, this has been going on probably for a year, maybe a year and a half prior to the implementation where they really had to do the planning. Then there's other companies that may have really complicated leases. They may even have a tougher time as far as trying to navigate through those new transitions or the new standards.

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Podcast transcripts are provided as a summary of the conversation and have been lightly edited for the written medium. The transcript is not a verbatim representation of the interview.
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