Question
I need help answering a class discussion question. We need to read a 3 page article and give our insight on what we read. The chapter that we are covering is on the revenue recognition. The answer does not have to be very long. Maybe a few paragraphs, no more than a half of a page.
The question is: Revenue Recognition – Planning for IFRS Convergence
After examining this session’s article, discuss the impact of these changes. How can a company best plan for the new revenue recognition rules?

The article is:
The experts say it’s time for CFOs and other finance professionals to engage in early-stage planning for how they will handle the changes necessary to comply with the new revenue recognition rules.

It might be tempting for financial statement preparers to push their analysis of the proposed converged revenue recognition standard to the back of their to-do lists. The standard has been under development since 2008, and full implementation probably is years away. And FASB and the International Accounting Standards Board (IASB) still have final decisions to make on issues such as the effective date.

“This has been a long journey,” Michael Wood, CPA, the chief accounting officer of defense and aerospace electronics company Raytheon, said during a panel discussion at the AICPA Conference on Current SEC and PCAOB Developments in December. “In some cases, it’s sort of like seasickness where you get it, and you first go through the phase where you’re afraid you’re going to die. And then you go through the phase where you’re afraid you’re not going to die. I think there is some weariness.”

The weariness over the standard-development process could abate soon, because the final standard is scheduled to be released by the middle of this year. All companies will face some adjustments as a result of the standard. Certain industries are likely to need major changes in their accounting systems.

Although the effective date is expected to be at least two years away, retrospective application would be required under the proposal. So companies may want to begin tracking the new set of numbers sooner, rather than later.

“It’s really not that far off, because at some point, optimally, you’d want to be able to calculate your results under both the existing standards and the new standard,” Wood said. “So the first thing you really need to figure out is how different am I between my existing standard and what the new standard is going to require.”

Dusty Stallings, a partner in PwC’s national professional services group, said now is the time for companies to begin to figure out how the standard will affect them. She advocates:

• Reviewing existing types of contracts and considering how they could be affected by the new standard. Businesses with 10- or 15-year contracts, for example, will need to be aware of any changes in how revenue will be recognized under the new model. “If you are going to have to change your [accounting software] system because you’re going to calculate revenue differently with this new standard than how you calculate it today, then that needs to go into your planning,” Stallings said.
• Studying the new model to understand the expected impact on the business, and what systems and other changes might be needed in the future. Software companies, for instance, may recognize revenue at a different point in time under the new standard. Different business processes and accounting systems may be necessary as a result.
• Creating a timeline for making necessary changes. Changes in business processes and accounting systems may require purchases of new hardware or software as well as expenditures of labor and training resources. Planning and budgeting for these expenditures could be helpful.

“The more companies understand what the change might mean to them and plan for it, the less challenging this is going to be for them when the time comes,” Stallings said.

Enhancing comparability
The FASB proposal, Revenue Recognition (Topic 605): Revenue From Contracts With Customers, states that revenue recognized should represent the amount a company expects to be entitled to receive in exchange for the transfer of promised goods or services.
A five-step process is proposed to identify that amount:

• Step 1: Identify the contract with a customer.
• Step 2: Identify the separate performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the separate performance obligations in the contract.
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The standard is being designed to facilitate global comparability as well as consistency in reporting between industries. It also will result in a significant decrease in the industry-specific guidance that U.S. companies are used to.

This could be a benefit for investors.

“You have this diverse set of literature in the U.S., which quite honestly, [is] 200-plus pieces of literature,” Mark LaMonte, a Moody’s managing director, said at the AICPA conference in December. “Many financial statement users don’t have accounting backgrounds or aren’t CPAs. And it’s very difficult for them to digest and understand that. So to the extent that this simplifies the guidance around revenue recognition, that’s very helpful.”

But the decrease in the number of rules for specific circumstances could create challenges for preparers. Some industries with the most significant challenges, according to Stallings, include:

• Telecommunications, whose practices of providing a free or discounted handset when signing a service contract may cause accounting difficulties under the new guidance.
• Software, which will see a different time frame in many cases for when revenue can be recognized and also may grapple with new licensing provisions.
• Entertainment and media, which also will be affected by the licensing guidance.
• Health care, whose complexity of interrelated contracts between patients, insurance companies, providers and, in some cases, facilities such as hospitals could create difficulties.
• Real estate, which will see some specific guidance stripped away.

Stallings said the objective of accounting for transactions similarly across borders, industries, and markets is a good one, even if it will cause some difficulties in the transition.

“Change always has some level of difficulty, and people are busy, and adding the difficulty of change on top of it just compounds,” Stallings said. “It’s absolutely understandable, but it’s hard to say this is a bad idea just because it adds a level of difficulty for a short period of time.”
To help preparers and auditors apply the new standard, the AICPA plans to develop a new Revenue Recognition Guide after the issuance of the final standard. The guide would help preparers and auditors think through the application of the new standard. It also would consistently update the existing guidance in AICPA Audit and Accounting Guides. The AICPA has decided to tackle 15 industries, 11 of which have existing AICPA Audit and Accounting Guides. The other four industries are software, aerospace and defense contractors, telecommunications, and hospitality.

The AICPA is forming industry task forces. Contact Kim Kushmerick (…org”>[email protected]) for additional information about the task forces.

Optimism isn’t universal

Despite widespread support for a single, converged standard, some others have not been quite as optimistic as Stallings. In a letter to FASB in March, the CFOs of telecommunications giants AT&T, Sprint Nextel, and Verizon wrote that the application of the proposal to their industry would diminish the usefulness of their financial statements to users, reduce comparability in the industry, and establish different accounting treatments for similar transactions.

“The proposed revenue standard, if adopted in its current form, would be adverse to the telecommunications industry and its users,” wrote AT&T’s John Stephens, Sprint Nextel’s Joseph Euteneuer, and Verizon’s Francis Shammo.

Regardless of the opinions on the developing standard, though, Wood said it is important, at a minimum, for companies that haven’t already done so to determine the changes that may occur in their revenue recognition practices.

He said potential effects on the business, such as how changes in revenue recognition practices impact go-to-market strategies, also should be considered. And he said global companies should be considering impacts to statutory filings.

“There will need to be time for management and financial statement users to understand differences as well as change agreements such as debt covenants, royalty, profit sharing, and other compensation arrangements to reflect the new accounting,” Wood said.

Even though Stallings said it is probably too early to jump in with large-scale transition projects, there is a lot to be done. And with the new standard due to be released by the middle of the year, the time for waiting may be over.
—Ken Tysiac ( [email protected]”>[email protected] ) is a JofA senior editor.
Tutorials for this Question
Available for
$15.00
Impact Of Changes In Revenue Recognition
Tutorial # 00063774
Posted On: 05/10/2015 11:38 AM
Posted By:
Best Tutors for school students, college students jia_andy
Expert tutors with experiences and qualities
Questions:4852
Tutorials:4854
Feedback Score:97% (1069 ratings)
Report this Tutorial as Inappropriate
Tutorial Preview
…Of…
Attachments

Impact_of_changes.docx (21.66 KB)
Preview: since xxxxxxxxx can xxxxx the accounting xxxxxxxxxx after the xxxxxxx This xxxxx xxxxxxx the xxxxxxxx to the xxxxxxxxx Consumers can xxxx the xxxxxxxxx xxxxxxxxxx and xxx view the xxx of their xxxxx within xxx xxxxxxxxxxxx Negative xxxxxxxxxxx requires time xx calculate revenue xx changes xx xxxxx gaps xx time Telecommunications xxx locate some xxxxxxxxxx problems xx xxxxx services xxxxx the changed xxxxxxxx Media and xxxxxxxxxxxxxx software xxxx xxxx be xxxxxxxx with the xxx directions Insurance…..
Purchase this Tutorial @ $15.00 *
* – Additional Paypal / Transaction Handling Fee (3.9% of Tutorial price + $0.30) applicable
Copyright © 2012-2017 HomeworkMinutes.com RSS Home Contact Us Terms of Use Academic Honesty Policy
Uploading copyrighted material is strictly prohibited. Refer to our DMCA Policy for more information.

This is an online marketplace for tutorials and homework help. All the content is provided by third parties and HomeworkMinutes.com is not liable for the same.