With the new revenue recognition rule now in effect and earnings season in full swing, we are beginning to see how different companies have changed the way they account for revenue.

For some, it will improve fiscal 2018 financial results. However, if a company shows revenue improvements, it could be difficult to deduce what portion is organic growth (for example, due to an increase in the customer base and number of subscriptions sold), and what portion is attributable to the new rule.

The rule, “Revenue from Contracts with Customers” (codified as ASC 606), standardizes and simplifies how companies record revenue in customer contracts. Effective for fiscal years beginning after Dec. 15, 2017, it covers how businesses report the nature, amount, and timing regarding contracts with customers.

Audit Analytics’ preliminary analysis of recent earnings releases identified about 70 companies that noted ASC 606 in the context of their 2018 guidance. Among those, 20 companies quantified an impact on revenue guidance and 10 quantified an effect on expected earnings per share (EPS).

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Based on the preliminary sample, companies with negative impact were more likely to quantify the impact on EPS. That was the case for 6 of the 10 companies that did so, while 4 companies said the impact was expected to be immaterial.

For companies that did not early-adopt the standard, the 2017 earnings reports currently being released still reflect the old accounting. Still, we expect to see some quantitative or other dollar-impact disclosure, and perhaps some 2018 guidance that will incorporate the impact.

In subsequent earnings reports we will start to see the impact of ASC 606 in financial statements, as nearly 80% of the Russell 3000 companies with fiscal years ending on or around Dec. 31 should have adopted the new standard. For the other 20%, the adoption date depends on their fiscal year end.

The impact might not be as significant for companies, such as retailers, that sell products and receive revenue at one time. But for companies that sell recurring services like subscriptions or licenses, the rule may improve the results.

Here’s why. Under the previous law, if Activision Blizzard, for example, sold a 12-month software product license in June 2016, it could apply only six months of revenue to its books. It would not be able to count the next six months of revenue until 2017. But under ASC 606 it can count all the revenue at once, improving the 2018 results going forward.

The new standard likely will improve the first-quarter financial results of many life-sciences and technology companies that license their products.

For analysts trying to compare 2017 and 2018 revenue and expenses, going back and forth could be difficult. Even the historical comparison might not always be available. Part of that stems from the two methods companies may use to make the adjustment.

One such method is called “full retrospective,” restating all of a company’s revenue and expenses for the prior period. The advantage of this method is that analysts will be able to compare current revenue with past revenue to see the adjustment’s impact. This is especially helpful if the impact on financial statements is material.

Under the “modified” method, the company will adjust retained earnings in the current period and recognize revenue under ASC 606 going forward. This modified method is easier to implement, and most companies are likely to use this option.

From the perspective of investors, the modified method is a disadvantage because they won’t get the historical perspective. But no matter which method a company chooses, trying to get clarity on 2018 revenue and EPS growth won’t be easy.

Even the retrospective method won’t always help going forward, because we don’t know how it will affect 2018 outlooks, and we won’t understand how much revenue growth is due to the change in the accounting.

Many companies did not note the new revenue recognition rule in their 2018 guidance discussions, but even those that did were not consistent in how they disclosed it.

As an example, let’s look at two companies in the telecommunications industry that have already provided references to how they are reporting the impact of the rules.

Verizon Communications showed earnings-per-share guidance before the impact of the new revenue recognition standard. For 2018, Verizon expects the following:

Low single-digit percentage growth in adjusted EPS, which includes the dilutive impacts from a full year of depreciation and amortization costs from 2017 acquisitions, the Straight Path acquisition expected to close later in the first quarter, and the ongoing impact of last year’s data center divestitures. This is before the impact of tax reform and the revenue recognition standard.

Meanwhile, guidance provided by AT&T explains how the new standard affects EPS, but not by how much:

On a standalone basis, including the impact of tax reform and the new ASC 606 revenue recognition standard, we expect in 2018: Adjusted earnings per share in the $3.50 range.

Users of financial statements should keep in mind that the rule in some cases will affect both revenue and earnings per share, while in other cases there will be an offsetting impact – revenue and expenses will grow by about the same amount.

Olga Usvyatsky is vice president of research for Audit Analytics. Derryck Coleman is a research manager for the firm.

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