Accounting standard setters had been working on the new revenue recognition standard that took effect last year for more than a decade before the final rules were issued in 2014. There were multiple exposure drafts, so companies had ample opportunity to weigh in with any concerns.

Much the same was true for the new lease accounting standard that debuted this year.

But did the financial statements preparer community take full advantage of those opportunities to communicate with the Financial Accounting Standards Board (FASB) and its European counterpart, the International Accounting Standards Board (IASB)?

Not according to panelists at the recent 18th annual Financial Reporting Conference at Baruch College in New York.

The Future of Finance Has Arrived

The pace with which finance functions are employing automation and advanced technologies is quickening. Rapidly. A new survey of senior finance executives by Grant Thornton and CFO Research revealed that, for just about every key finance discipline, the use of advanced technologies has increased dramatically in the past 12 months.

Read More

“You don’t normally see many companies participating in the standard-setting early on,” said KPMG partner Prabhakar Kalavacherla, who was an IASB board member for five years, from early 2009 to late 2013.

“This may not be music to your ears,” he told the gathered accounting professionals, “but leaving it to your auditors is not the only solution. Many times when a standard is revised or amended, in my mind the primary reason is that the standard setters did not get enough information to incorporate in the standard.”

Added Kalavacherla, “I’m not trying to defend myself as [a former] standard setter. But I can tell you that the level of engagement [increased] after the [revenue recognition] standard became effective, with so many comments coming in when it was too late.”

Similar frustration was expressed by Scott Taub, managing director of Financial Reporting Advisors and a former deputy chief accountant and acting chief accountant for the Securities and Exchange Commission.

He said he talked to “a lot” of companies during implementation of the revenue recognition standard, ASC 606 (in the United States), who were surprised at some of the changes they now were forced to make to their accounting.

According to Taub, they said things like “nobody ever complained about our accounting in this area before, so why do we have to change?” and “why didn’t anybody tell us this was coming?”

The reason some of these companies were clueless, he said, was that they hadn’t even read the FASB exposure drafts.

Further, Taub said, some companies are hesitant to comment to standard setters — and for no good reason — even when they do have potentially relevant concerns about items in an exposure draft.

Representatives from one client company told him they didn’t feel they should comment, because they had input on only three of the two dozen-plus questions standard setters had posed in their revenue recognition proposal.

Taub said he urged them to write in and explain that they had real experience dealing with those issues. Finally they did, adding their voices to some others in their industry that had similar concerns.

“As it happened, FASB and IASB agreed with them,” Taub said. “The final standard took the approach this company wanted. I’m not sure FASB would have made that change if a few companies that initially had been reluctant to send a comment letter hadn’t finally gotten the nerve to do so.”

The lesson, he noted, since FASB vows to read every comment, is that “comments can have an effect and are important. Even if you’ve only got one thing to comment on, then comment. It’s not like you have to write a book in order to have your comments heard.”

Amie Thuener, the chief accountant at Google, offered a view that in particular standard setters don’t receive enough input on the cost-benefit equation of complying with new standards.

She said she’s more than once heard post-effective-date comments from FASB along the lines of “we didn’t know that was going to be hard for you, that you didn’t have access to this data.”

According to Mark LaMonte, a former managing director at Moody’s Investors Service, not only preparers but also financial statement users may drag their feet when it comes to commenting on proposed standards.

“The users are often very late to the game in terms of understanding the impact of new accounting standards,” said LaMonte. “FASB is certainly making efforts in terms of more user-focused outreach.”

Meanwhile, FASB chairman Russ Golden had told the conference earlier in the day that costs for complying with the revenue recognition standard turned out to be less than expected. Taub begged to differ.

“I’ve spent a lot of time in the last five years dealing with the new standard, and companies have put in a lot of work, time, resources, and cost,” he said. “It turned out to actually be more expensive to implement than I thought it would. Apparently, we [Taub and Golden] had wildly different expectations.”

Taub did say, though, that when it finally came time to “put the numbers in” the first financials prepared under the new revenue standard, things went smoothly on the whole. The other panelists agreed.

For his part, Taub indicated he was a big fan of the new standard. “It’s frankly a lot easier to answer questions on revenue recognition now,” he said. “Under old GAAP, I used to start my answers with, ‘Well, that’s not actually covered in the literature, but here’s how those of us in the secret society have figured out how to do this.’ Now, in all cases, we know what principles are supposed to apply.”

Finally, Kalavacherla said he’s involved in a research project with two university professors to determine how companies’ mean and median revenues have changed since implementing the new revenue standard.

“It’s early days so far,” he said, “but we’re doing some pretty rigorous analysis, and I’m surprised — there has not been that much impact on net income, and I definitely expected a much bigger change on the topline.”

KPMG likely will publish its research findings this fall, according to Kalavacherla.

, , , , , , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *