Public companies are already seeing the impact on their financials of the new revenue recognition rules that took effect at the beginning of this year. Ford Motor Co., an early adopter of the rules, added $35 million to its retained earnings over the course of 2017. While on the other hand, General Motors Co. has seen a $1 billion decrease in its equity after adopting the rules at the beginning of January.
Every company, whether public or private, will likely be affected by the implementation of the new rules, though to different degrees. For private companies, the rules take effect for annual reporting periods beginning after Dec. 15, 2018. The time to comply is coming soon. Fortunately, the experience of public companies during the implementation process may be relevant to private companies as they begin their journey.
Deloitte recently published a report titled Revenue recognition standard for private companies: No free passes, which highlighted some lessons private companies can learn from public companies as they go through the implementation process. Bloomberg Tax interviewed the authors of the report, Deloitte partners Eric Knachel and Mark Davis, about the report’s findings.
Bloomberg Tax: Based on the experiences of public companies, what is the most important thing private companies should do, in order to be ready for the end of the year?
Davis: The most important thing is to start now, don’t wait! Time is not on their [financial statement preparers’] side. The rules are very far reaching. It does take a long time to evaluate new processes. Some public companies assembled a group of people internally, some hired outside consultants. But either way, private companies should start early.
Knachel: Most public companies we talked to said that the implementation is a bigger effort than they anticipated. The new rules affect more than just accounting. They affect many facets of operations throughout the organizations. The IT systems that process transactions, the legal implication of contracts, and the HR contract that determines employees’ compensation will all be different. It takes longer than you think.
Some public companies we talked to conducted initial high level assessments based on the workload and time needed prior to implementation. Those [public companies] who didn’t have a plan had to do fire drills. But private companies usually don’t have the same level of resource as public companies. They can’t always afford fire drills.
Bloomberg Tax: What should private companies avoid doing?
Knachel: Avoid delaying! They don’t want to fall into the trap of thinking that it is just accounting. They might run into issues such as determining some legal terms in their contracts.
They also shouldn’t be thinking that they know everything about their organizations because they don’t have the same level of resource as public companies.
Bloomberg Tax: How can technology, such as Artificial Intelligence, play a role in implementing the new revenue rules?
Davis: A.I. provides significant opportunities for companies to reduce costs and efforts. For example, some companies have A.I. to go through contracts, huge populations of contracts, and pull out those contacts that they need to pay close attention to. So that they don’t need to read every single contract. It can significantly reduce companies’ effort.
Bloomberg Tax: What other advice do you have for private companies?
Knachel: First of all, don’t overlook disclosures. You need to show your work. Using a math class analogy, you need to not only show the results, but also show how you got the results, and what tools you have used.
Secondly, don’t fall into the trap by following peers and competitors. Private companies might be looking at similar public companies’ filings or they might be looking at those that are in the same industry as they are. But, they shouldn’t come to the conclusion that it is enough [to do] what their peers have done. They should make company-specific determinations.
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Xing Gao started at Bloomberg BNA as an Accounting Editor in September 2014. Xing is a CPA with a Master's degree in Accounting from George Washington University and a B.A. in International Economics and Trade from Beijing International Studies University, China. Follow Xing on Twitter at @gaoxing0103. View full biography.