"Get started now!" may seem like tired advice for adopting a new accounting rule — especially the recently issued revenue recognition standard1, which won't be effective until Jan. 1, 2017, for calendar-year public companies and 2018 for nonpublic firms. But these seemingly distant dates are no excuse for delay: Successful adoption of the standard may require that new processes be in place as early as next year. It is indeed time for audit committees to begin work on implementing this wide-ranging, extraordinarily significant accounting standard.

Audit committees should now be discussing with management its assessment of the impact of the standard — not just on financial statements, but also on company operations, policies and procedures. "There can be many implications for the new standard on various parts of the business," says Jeff French, national managing partner of Grant Thornton LLP's Consumer and Industrial Products practice. "Will it have an effect on debt covenants? On incentive compensation programs? Sales contracts? The audit committee will want to make sure the right people are being included in the implementation effort." Because of the standard's potentially broad, multifaceted impact, Grant Thornton recommends that a cross-functional team — composed of representatives from accounting, tax, IT, legal, sales, and compensation and benefits — be pulled together to adopt the new standard2.

In implementing the standard, here are some key items to consider:

Choices in selection of significant accounting policies and estimates

The new standard is more principles-based than the current rules, thus requiring more judgment calls by management. Many companies will need additional oversight of accounting judgment as management uses more estimates in revenue recognition. Audit committees should also monitor the issuance of additional interpretation guidance of the standard. "Right now, there are a lot of implementation questions, and we expect the implementation landscape is going to evolve," says Lynne Triplett, partner in Grant Thornton's Accounting Principles Consulting Group. "The joint IASB/FASB transition resource group will be meeting quarterly, and the 16 AICPA industry task forces will seek to address revenue recognition issues as well."

Importantly, management needs to decide soon whether to use the full retrospective method, which requires companies to restate two comparative years before the effective date3. "The audit committee needs to determine whether the method management wants is the best alternative for shareholders and other users of the financial statements — which may not be the same as the easiest method to implement," says Dorsey Baskin, managing partner in Grant Thornton's Assurance Services Development.

Appropriate communication of company's financial position to shareholders

Audit committees of public companies will want to make certain that all regulatory requirements for disclosing the impact of new accounting rules are met — including the firm's responsibilities to make interim disclosures before the standard becomes effective4. Private companies may decide to communicate directly with shareholders. In addition, companies need to be prepared to discuss with analysts before adoption how the rule will affect revenue and reported earnings per share.

Oversight of external auditor and audit

The audit committee should discuss with its auditors how they will be involved and how much help they can offer in adopting the new standard, given their requirement to maintain independence. In this light, audit committees should determine with management whether internal resources will be sufficient for adopting the new rule for financial reporting purposes or if external accounting services are required.

Review of internal control systems

Implementing the new standard may require new accounting processes, such as those to satisfy new disclosure rules. Companies must evaluate how they will track the information and design internal controls around the new processes. The additional controls will be introduced against the backdrop of company efforts to implement the new Committee of Sponsoring Organizations of the Treadway Commission 2013 Framework.

Oversight of internal audit

In transitioning to the new rule, companies can use internal audit to help their accounting departments determine transactions that need to be reviewed. Once the new systems and processes are in place, internal audit should work to see whether the processes and controls are functioning as needed, and how the transactions are being treated. Audit committees will want to assess whether sufficient resources are being allocated to internal audit for these activities.

Oversight of risk management

Additional exposures from the new rule should be identified and addressed. As with any significant new accounting standard, there is added risk of material misstatement and failure to make required disclosures. An example more specific to the rule is that — given the various opportunities to recognize income sooner under the standard — pay plans could be exploited to accelerate executive compensation.

In summary, the audit committee shouldn't wait until the period of adoption to take an interest in this new standard and understand its implications for the company, management's plans to handle its implementation, and the need for resources to get it done. Also, for public companies, the committee should expect robust discussions with the external auditor regarding the new standard, the allowed options and the accounting policy choices that management is considering and has made. Whether the company needs to begin tracking revenue in January 2015 under both the existing and new standards, or it has more time to prepare, the audit committee should know the plan.

Footnotes

1 More specifically, on May 28, 2014, the FASB and IASB issued converged guidance on accounting for revenue from contracts with customers. The FASB publication is ASU 2014-09 — Revenue from Contracts with Customers (Topic 606).

2 The AICPA has published a guide to adopting the new standard titled, "New Revenue Recognition Accounting Standard — Learning and Implementation Plan." See http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/2014-09_LIPlan.pdf for details.

3 The need to choose a method soon is discussed in "Revenue recognition: No time to wait," by Ken Tysiac, Journal of Accountancy, July 2014.

4 SEC Staff Accounting Bulletin (SAB) No. 74 (Topic 11: M). See http://www.sec.gov/interps/account/sabcodet11.htm#M for details.

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