With the January 1, 2018 deadline for complying with the Financial Accounting Standards Board (FASB) new revenue recognition standard rapidly approaching, 60 percent of public companies said they are facing challenges in implementing the standard by their internal deadline, according to a survey by KPMG. In the survey of 245 companies conducted by the audit, tax and advisory firm, companies reported challenges stemming from competing priorities, a lack of internal resources and struggles with interpreting the new standard, among other factors.
Detailed findings of the survey can be found at https://advisory.kpmg.us/deal-advisory/accounting-change-survey-revenue-recognition-leasing.html.
The KPMG survey found that private companies face a similar challenge in meeting the 2019 FASB deadline for private companies. In fact, 22 percent of private companies have yet to begin the process of adopting.
“Companies are pressed for time, forcing many to wait until after the effective date to automate their revenue recognition process through system changes,” said Steve Thompson, KPMG’s Advisory lead for Revenue Recognition. “Those still in the assessment phase are likely to find themselves saddled with a manual solution in the near term, leading to internal control challenges and added costs.”
The process has proven to be more complex, time-consuming and costly than anticipated – 57 percent of public companies cited the total expected implementation costs had increased from the prior year. According to executives, the top two unexpected costs were the increased need for outside advisors due to time and internal resource constraints (31 percent) and the time needed to complete a comprehensive assessment greater than anticipated (22 percent).
“While private companies have an additional year to complete their implementation, our survey showed these companies have a much greater awareness of how complex the implementation of the revenue recognition rules can be. Private companies will hopefully heed the lessons learned by public companies and prioritize their own efforts,” added Thompson.
Lease Accounting – The Challenges are Surprising Companies
In addition to new revenue recognition standards, FASB’s lease accounting changes go into effect January 2019 and will impact financial reporting for companies in all industries. While 52 percent of companies have started to assess the impacts of the new lease standards, most have not gone beyond establishing a program management team.
“Due to a focus on implementing the new revenue standards, the amount of time companies have to implement the new lease standard is compressed,” according to Marybeth Shamrock, KPMG’s Advisory lead for Leasing.
Executives most frequently cited identifying embedded leases (49 percent) and selecting and implementing an adequate leasing system (48 percent) as the most significant challenges associated with the implementation of the lease standards.
Nearly 50 percent of respondents also admitted little to no involvement of key executives, audit committees, external auditors, the M&A group, and the investor community in new lease implementation efforts.
“The January 2019 deadline is very real, and there is much work to be done in order for companies to comply,” adds Shamrock. “Now is the time to act, understanding the complexities at play here, to get your company on the path to adoption.”
KPMG recently surveyed more than 245 companies (76 percent public and 24 percent private), representing all major industries. Over 70 percent of respondents had revenue of $1 billion or more.