For the Investor:
What to Look for in Upcoming 10-Ks on Revenue Recognition
As we enter the season when most companies issue their annual reports, investors for the first time will be able to see just how companies are assessing the new revenue recognition standard.As we enter the season when most companies issue their annual reports, investors for the first time will be able to see just how companies are assessing the new revenue recognition standard. This is because companies are required to describe new accounting pronouncements that have been issued but not yet adopted.
The new standard already has been a major topic of discussion between the FASB and its stakeholders. In addition to our ongoing discussions with the Transition Resource Group, we’ve covered it extensively in prior versions of the FASB Outlook, published a Revenue Recognition-themed FASB in Focus, and produced a three-part video series.
But with the filing of upcoming 10-Ks with the Securities and Exchange Commission (SEC), investors are likely to see some more detailed disclosure regarding how companies believe the revenue recognition standard will impact their businesses. Unfortunately, this disclosure will not necessarily be found in the same place in all filings.
Some companies will include the disclosure in their financial statement footnotes only, possibly even toward the back.
Others will have the disclosure in the forward portion of their 10-K filings, along with other recent accounting pronouncements.
It’s possible that this initial discussion will be only a few sentences, but investors should seek it out and monitor the disclosure in future filings with the SEC. Companies may already be in a position to say that the new standard will materially affect their revenue recognition. Others might not be far enough in their process to come to a conclusion.
As they continue to assess the implications of the new guidance, companies likely will become more expansive in their disclosure.As they continue to assess the implications of the new guidance, companies likely will become more expansive in their disclosure. However, this year’s annual report represents an important starting point for investors and companies as they begin to engage in a dialogue about how the transition to the new financial “language” of revenue will occur.
For example, it will be necessary for investors and companies to come to an understanding of how much comparable information will be available when companies transition to the new standard.
Companies will have a choice in how they transition.Companies will have a choice in how they transition. They could report using a form of retrospective application of the new standard. In that case, the company would essentially restate prior year information so as to present some full trend analysis under the new standard as of the transition date.
On the other hand, the company could transition in a way that would not restate prior period income statements. In that case, the company would be required to disclose revenue information in the first year of adoption under both the new revenue guidance as well as the old revenue rules. That would provide trend information at the transition date using the prior revenue rules but not the new rules.
It is not too early for investors weigh in.Because companies currently are in the process of assessing the implications of the new standard and how they will go about adopting it, it is not too early for investors weigh in.
Investors can begin to ask company management about their current thinking on whether they plan to do retrospective transition or not. If there are no plans for a retrospective transition, investors perhaps could be satisfied if, when adopting the new standard, the company provides comparable trend information in an unaudited, non-GAAP format.
In any event, investors should at a minimum begin to monitor how companies describe the implications of the new revenue standard in upcoming SEC filings. They should also begin an ongoing dialogue about how companies will communicate about the new financial language of revenue.