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Public Companies Favor Riskier Path on Revamped Revenue Recognition Rules

Traders Magazine Online News, November 16, 2018

John D'Antona Jr.

The overwhelming majority of U.S.-based public companies are choosing the less onerous – but riskier – of two possible methods for complying with the transformative new accounting rules for recognizing revenue from customer contracts, known as ASC 606. This according to a new report from business and regulatory compliance analytics company, Intelligize. The report, Impact of Revenue Recognition Standards on Public Companies, uses public company filings, SEC comment letters and other data from the Intelligize research platform to examine how both companies and the SEC have handled the adoption of the new revenue recognition standards on public companies.

“These rules have been in development for 12 years, but, given that this is the first complete overhaul of these standards in a decade, they are still bringing a lot of uncertainty with them,” said Rob Peters, the report’s lead author and a senior director at Intelligize, whose research platform provides news, regulatory insights, and powerful analytical tools for accounting, compliance and transactional professionals. “Our findings suggest that for most public companies, the advantages of taking a more cautious approach did not outweigh the burdens they imposed.” 

The new revenue recognition rules, which went into effect for public companies on January 1, 2018, cut across all industries and have been called the regulatory change with the most profound impact on corporate finance since the Sarbanes-Oxley legislation at the start of the century. Intelligize’s report found that 87 percent of S&P 500 companies have opted to use the “modified retrospective transition” method for complying with the new rules, rather than the “full retrospective transition” method, which requires companies to restate revenues back to fiscal year 2016.

The modified retrospective method does not require companies to recast past revenue and is widely thought to require less effort. By offering less historical context, however, this method increases the risk that the market will misinterpret reductions in revenue numbers caused by the accounting change. The aversion among S&P 500 companies to the rigors of the “full retrospective” method is consistent with another finding from the report: fewer than 32 of nearly 4,000 public companies chose to become early adopters of the new accounting standard.

“The huge disparity in S&P 500 standard adopters electing to use the modified transition method, while nearly half (46.9 percent) of early adopters chose the full retrospective method, may be attributed to several factors,” Peters said. “These may include the time cushion afforded early adopters compared to their later adopting peers, and/or the relative size of the S&P 500 standard adopter companies, which makes using the full retrospective method more challenging.” 

Intelligize’s report also found that to date, the SEC has been true to its initial word in working with companies facing the challenging transition to the new revenue recognition standard. In May 2018, Kyle Moffatt, chief accountant for the SEC’s division of corporation finance, noted that “We aren’t planning to beat up on companies in this first year.” 

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