Study: Companies Dragging Feet on Revenue Recognition, Lease Standards

By:
Chris Gaetano
Published Date:
Jun 15, 2016
Deadline alarm clockThe new revenue recognition standards promises to create radical changes in how companies approach revenue, yet a recent KPMG study shows that 80 percent of firms still have not fully assessed how this will impact them. 

Formally approved in 2014, the revenue recognition standard will replace the myriad industry-specific revenue model currently in GAAP with a unitary methodology based around identifying and fulfilling performance obligations. These new rules represent a dramatic change from the way companies in the U.S. have historically recognized revenue, which will likely take a lot of time and resources to implement. 

Despite this, the KPMG report says that most companies are currently stuck in "assessment mode," where 71 percent of businesses are still looking at how the changes will impact them, with an additional 8 percent not having even started doing that. Only 7 percent have even begun the work of implementing the new standard in their accounting policy, and none have actually completed implementation. The majority admitted that they were behind schedule, at 63 percent. Reasons for the delay included having other priorities, human resource constraints, and financial restraints. The KPMG report said that, at the current rate things are going, many companies will not be ready when the standard finally comes into effect. 

"It is becoming increasingly evident that some companies will be forced to implement the standard using manual processes and controls without the ability to introduce system changes until sometime after the effective date. As reliance on manual processes increases, companies will be faced with heightened risk of errors, increased costs, and less efficient operations," said the report.

It also expressed concern that companies are ignoring the tax implications of the new standard. Of those still in the assessment phase, the report said 29 percent of companies involved tax professionals, and of those who are implementing the standard, only 26 percent of companies brought on tax professionals to help. This oversight, according to the report, will work to the detriment of affected companies. 

"C
hanges to the underlying financial accounting methods, processes, data, and information technology systems used to support such methods will require a careful evaluation of the impacts to tax accounting positions, policies, and calculations.Therefore, it is important to include tax professionals into the assessment and implementation discussions to help ensure that the tax compliance and reporting needs are identified and evaluated and that any necessary changes to tax, processes,
and systems are made in a timely fashion," said the report. 

On top of these issues, the KPMG report noted that companies are also expected to adapt to another massive accounting change around the same time frame, this one centered on leases. Under the new lease standard, companies will list all leased items on the balance sheet, represented as a liability totaling all payments for the lifetime of the lease balanced out with a "right to use" asset of equal amount. The report estimates that implementing this standard will require "thousands of hours of internal and external resources." 

Similar to the revenue recognition standard, progress has been slow for companies to assess the impact and implement the least standard. Only 49 percent have even started assessing the changes that will need to be made because of the standard. Of them, only 15 percent percent have completed a lease inventory and only 5 percent have performed an accounting assessment. Half haven't even established a program management team to tackle the issue. 

The KPMG report warned that companies may be underestimating the costs of implementing the lease standard as well. 70 percent think it will cost less than $500,000, which the report said may be unrealistic. 

"Given that most of our survey respondents have not yet started analyzing the leasing process or assessing IT system requirements, many companies may be setting unrealistic budget projections for their implementation efforts. Considering that the time needed to identify, read, interpret, abstract, and report one single lease can take four to ten hours, there will likely be a significant amount of financial investment above and beyond the IT systems selection and implementation component that many companies may not have considered," said the report. 

The report said that companies need to make implementing these standards a clear priority in order to minimize the chances of disruption. 

"
For revenue recognition, companies need to conclude their assessment activities as soon as possible, design required changes to processes and systems, and begin the implementation of those changes. For leasing, companies need to begin assessing the impact of this standard while also identifying and gathering their population of lease
agreements and working toward developing a thorough implementation plan," said the report. 

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