Corporate accounting teams have no shortage of regulatory issues to worry about at the moment. From the looming implementation deadline for the Financial Accounting Standards Board’s revenue recognition standard to regulators’ close scrutiny of disclosures, accountants are under a lot of pressure to balance the work of reducing compliance risk and minimizing disruption to their company and to financial processes.
While most companies have taken important steps to improve their financial statements (e.g. eliminating redundant information and emphasizing what matters most), many haven’t made significant progress when it comes to implementing revenue recognition or assessing the impact of the lease accounting standard.
The below summarizes the views and advice shared by senior accountants and other experts at CEB’s recent accounting conference, and should help accounting teams in handling three critical regulatory challenges: revenue recognition, lease accounting, and disclosure effectiveness.
With only eighteen months left to implement the new revenue recognition standard, companies should have hit significant milestones (like completing their impact assessment) in their plans. Yet, many are still waiting for outstanding questions to be resolved — for instance, waiting for guidance from the FASB/IASB joint Transition Resource Group — before they take decisive steps. Discussion of the revenue recognition centered around four pieces of advice.
Time to end the ‘wait and see’ approach: Attendees agreed that companies shouldn’t underestimate the resources and time needed to complete the transition to the new standard even if they think their industry will not be extensively affected.
They must make decisions about IT investments and the transition approach by the end of this year to avoid significant delays and last-minute hurdles. For instance, implementing a new enterprise resourcing planning (ERP) system can take time, so if your team starts the process too late, it could miss the adoption deadline.
Don’t cut corners: The overall consensus was that, if companies hadn’t adopted the full retrospective approach yet, they’ll soon be out of time and need to opt for the modified approach, which could carry additional risks.
Go beyond the function: Panelists recommended that teams should engage and involve key stakeholders (e.g. colleagues in IT, Tax, and Marketing) outside of Finance to fully assess the impact of the new standard.
Use the change as an opportunity: Attendees agreed that Accounting should take this chance to revisit some of its current processes and make changes that it has been delaying. Teams should also make use of the urgency around revenue recognition to get the funds to upgrade outdated reporting systems.
Current status: Out of the 175 conference attendees surveyed, only 8% have picked the full retrospective approach to implementing the new revenue recognition standard (see chart 1 for more).
Chart 1: Has your organization decided on a method of adoption? n=118 Source: CEB analysis
Accounting teams might be tempted to jump to implementing new technology to support the standard, but before they do so, the function should conduct a thorough assessment of its data needs.
Understand your data needs: Participants agreed that Accounting should first understand where the company stores lease data and then figure out how to collect and manage data in the future.
If a team outside Accounting manages the data, Accounting needs to work with these stakeholders to make sure that the data is readily available. And Accounting will also need to establish a data governance policy for lease data to make sure the data is consistent, regularly available, and transparent.
Be candid about the cost of the new standard: Participants agreed that Accounting needs to define the story it will tell internal and external stakeholders. This is because implementing the standard will require new controls or system updates, which can be costly for the organization and with no visible benefit.
Current status: Out of the conference attendees surveyed, 56% haven’t taken any steps to plan for the new standard yet (see chart 2 for more).
Chart 2: Which of the following best describes the actions your organization has taken to prepare for the new standard? n=102 Source: CEB analysis
With the increased levels of regulatory scrutiny surrounding the use of non-GAAP measures in financial reporting, and the pressure to make financial disclosures concise and transparent, companies should rethink some of their approach to reporting on their performance.
Communicate business drivers clearly even if that means using non-GAAP measures: Participants agreed that Accounting shouldn’t hesitate to communicate non-GAAP measures to investors as long as they are truly valuable (meaning they help investors understand business performance better).
The function might have to reconcile non-GAAP and GAAP measures consistently, but that will get easier over time.
Take it one step at a time: Attendees agreed that teams looking to improve their financial statements should start small (e.g. by considering only the first three paragraphs of their statement).
Current status: Out of the 175 conference attendees surveyed, 75% undertook efforts to improve their financial statements in the last two years.
Chart 3: Has your company undertaken efforts in the past two years to improve its financial statements? n=103 Source: CEB analysis