Risk & Compliance

New Accounting Rules Test Companies’ Mettle

Forty-two percent of public companies are either still assessing the impact of the new lease accounting rules or have not even gotten that far, fin...
David McCannJune 8, 2018
New Accounting Rules Test Companies’ Mettle

Companies’ level of readiness for complying with the new revenue recognition standard was a popular topic throughout 2017, leading up to the rule’s effective date for public companies.

As it happens, the talk hasn’t yet died out.

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The rule is effective for public-company fiscal years beginning after Dec. 15, 2017. However, among 442 public-company finance executives surveyed in April and May by PricewaterhouseCoopers, 15% said they were still working on implementing the new rules and related activity.

That 15% broke down to 9% who said they were “remediating issues” and 6% who were “exploring/implementing revenue-automation options.”

About one in five public-company respondents (19%) were still in the process of completing implementation because they had non-calendar-year fiscal years. That left two-thirds (66%) who reported that their revenue-recognition implementation process was complete.

Now it appears that companies may be facing similar challenges in implementing the other big change in accounting rules. The new standard for lease accounting is to be effective for public companies with fiscal years starting after Dec. 15 of this year. However, if anything, that one may prove more difficult to implement than the revenue-recognition standard.

More than half (53%) of survey respondents at public companies said they expected to make “significant” systems changes to accommodate the leasing standard. By comparison, only 18% of such participants said they had done or expected to do the same on the revenue-recognition side.

Still, 42% of the public-company respondents said they either were still assessing the impact of the new lease accounting rules or had not even gotten that far, while 57% reported that implementation was in progress.

Among those who were assessing such impact, a large majority (83%) indicated the assessment was no more than half completed.

For both new standards, a significant minority of public-company finance executives said the effort required to date in addressing or implementing them has been “greater than expected” — 42% for revenue recognition, and 39% for leasing.

“Even though the accounting for the two standards is very different, and different companies and different areas within companies will have different issues, both of them are requiring a level of effort that’s perhaps greater than what companies had earlier anticipated,” Chad Kokenge, a PwC partner, tells CFO.

(In addition to the public-company executives, PwC surveyed 198 executives from nonpublic companies. The next two paragraphs, on difficulties in implementing the new accounting rules, reflect combined responses from the two groups.)

On the leasing side, the most difficult aspect is proving to be data abstraction (68% of the surveyed executives rated it as “somewhat” or “very” difficult). Trailing that were human capital/resources (62%), processes and controls (61%), identification of lease populations (60%), project management (58%), and system implementations (51%).

For implementing the revenue-recognition standard, the most difficult aspect has been contract reviews (64%), followed by accounting policies (58%), business processes (55%), human capital (54%), internal controls (44%), and IT systems (38%).

Predictably, for a number of survey questions private-company executives had different responses than their counterparts at public companies.

For one, they reported that they were not as far along in implementation of the new standards. That makes sense, because they have more lead time — for them, the effective dates are one year later in both cases.

But they also are having, or expect to have, less difficulty in adopting the new standards (see the graphic below). Additionally, fewer private-company respondents saw a need to alter systems to accommodate the new leasing rules.

PwC also asked survey-takers their thoughts about still another change in accounting rules, the upcoming new hedge-accounting standard. It’s slated to take effect for fiscal years starting after Dec. 15, 2019, for public companies and Dec. 15, 2020, for private companies.

Some survey participants said they were already making or expected to make some changes to their hedging strategies in response to the updated standard.

Eighteen percent said they have revisited their overall approach to financial risk management. The same proportion said, “We can now apply hedge accounting to additional risk management strategies.” And 10% said they had already increased their use of hedging instruments.