Revenue recognition is not over yet: takeaways from first quarter reporting

Q1 2018 is the first reporting period for calendar year-end public companies since their revenue recognition effective date. After years of preparation, planning and careful implementation, it is now time to see live financial statement reporting generated through companies’ updated accounting processes.

Even though most companies are beginning to report, revenue recognition adoption is not over. Companies may want to monitor SEC comment letters issued to early adopters and their peers and incorporate any applicable lessons learned into their own reporting. Companies should continue to engage with analysts and investors in order to inform them about changes to the financial report and possible fluctuations to not only revenue but also costs – especially if a company has long-term contracts. Organizations may also want to evaluate their accounting processes and look for ways to make them more efficient and effective in the long term.

Based on information we have gathered from working with our clients, as well as from paying close attention to companies that have already released their reports, here are three takeaways after the first quarter of reporting that can help businesses now that the standard is in full effect.

Let early adopters be your guide

The biggest unknown in the implementation of the new standard has been how the SEC will interact with companies. Luckily, early adopters—companies that decided to implement the revenue recognition standard early and have already reported under the requirement—have acted as test cases. From these filings, we have seen the SEC issue comment letters on a variety of topics—focusing on judgments such as capitalizing contract costs and determining the timing of revenue recognition. These comment letters are an excellent resource to help companies anticipate the SEC’s focus areas.

Early adopters can also serve as examples for the disclosure requirements—the element of the standard where companies have to explain certain supplementary quantitative information as well as significant judgments and estimates made in applying the new standard. Companies may know what they want to disclose, but they may also want to be consistent with peers. Companies can look to early adopters in their industry to get a sense of how others are reporting under the standard.

Consider improvements to manual workarounds – but be careful not to rush automation

Even though companies have focused on reaching implementation, the new revenue recognition standard will continue to affect reporting on an ongoing basis. While the manual workarounds designed to meet the effective date might have served companies well the first quarter—they may not be the best long-term solution. Revenue recognition still poses a number of challenges to companies, including collecting the required data, adjusting to changes in business models and maintaining effective internal controls. Automated solutions can help companies overcome these obstacles. They may be more efficient and accurate than manual workarounds and could be an end-goal for many companies who did not have the time or resources to implement automated solutions before the effective date.

That said, faster is not necessarily better when it comes to implementing automation in the revenue recognition reporting process. Companies working towards adopting automated solutions need to ensure the adoption is done properly. Even if manual workarounds are not perfect, rushing to implement an automated solution without fully understanding the data complexities and need for customization could make the system implementation process even more difficult and time consuming. Creating a detailed implementation plan to help phase out manual workarounds and incorporate digital approaches into accounting processes is an integral part of the process.

Maintain transparent communication with key stakeholders

Much attention has already been paid to informing investors about any changes revenue recognition might have on a company’s bottom line. But the standard impacts more than just the revenue line item, and investors are not the only ones that need to be kept in the loop about potential changes. The disclosure requirements will represent change for all companies– and analysts may take time to understand how to compare this new information across companies. Analysts will be looking at these disclosures to understand why there was or was not an impact to revenue and to learn more about a company’s business and revenue line. Company leaders should be ready to answer questions about the disclosures and provide additional requested information.

The end of the first quarter brings with it the first big test for most companies in revenue recognition reporting. Though the implementation deadline has passed, there is still plenty of work ahead to fine tune processes and ensure accurate reporting. Through automation and continued collaboration with both internal and external stakeholders, companies can create a seamless and efficient process for reporting revenue recognition.