Moody’s says revenue standard may change timing of reported revenue, not the amount recorded

The revenue accounting standards that take effect in 2018 are considered some of the biggest changes to financial reporting in IFRS and U.S. GAAP in recent memory.

But the standards are not expected to result in drastically different revenue figures for many companies, according to a Moody’s Investors Service report released on April 20, 2017.

“For virtually all companies the total amount of revenue recognized over the customer contract term will be the same,” the report states.

What is likely to change, however, is the timing of when companies recognize revenue. In some cases the reported revenue will be accelerated. In other cases, it will slow down. This could result in revenue swings from period to period depending on the company and industry, and investors and analysts need to be prepared, said Kevyn Dillow, vice president and senior accounting analyst at Moody’s.

“With current accounting, a lot of the standards allow for some smoothing of revenue recognition, which maybe makes analysts’ jobs easier because when you have more volatility in the revenue line, it makes our job a little harder in understanding the cause of the trend,” Dillow said.

The FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, in May 2014 alongside the IASB’s IFRS 15, Revenue From Contracts With Customers. The standards are the result of a dozen years of work between the accounting boards to come up with a single method for companies worldwide to calculate the top line in their income statements. ASU No. 2014-09 scraps about 180 pieces of business- and transaction-specific guidelines in U.S. GAAP and calls for a principles-based approach to recognizing revenue. It is mostly converged with IFRS 15.

Public companies must comply with the new guidance in 2018. It is expected to create major accounting changes in the software, telecommunications, and the aerospace industries, but in some other markets, such as retailing, where transactions with customers are considered relatively straightforward, the change is not supposed to be as dramatic.

Rolls-Royce Holdings plc warned investors and analysts in November 2016 that the new standard will result in lower revenue figures when it is first implemented. The company sells airplane engines at a loss, but it expects to profit in the future when its servicing arm repairs the engines or its parts department sells new pieces. The services, however, may not be used until the engine has been in the customer’s possession for several years. The revenue standards allow revenue to be recognized, however, only when the customer takes control of the good or service being offered, thus prohibiting companies from recognizing sales on services that have not been performed.

Overall, the company said in its investor presentation that profits and revenues per engine would be unchanged over the long term, but in the short term, from period-by-period reported revenues will drop.

“They have very few models of engines, and a lot of them are at a similar place in their life cycle,” Dillow said. “They go through periods of time where they’re selling brand new engines and then move to period of time where they’re doing servicing of parts.”

Moody’s does not expect the new standards to affect companies’ credit ratings because a change in reporting does not change underlying financial conditions. The disclosures required in the standard, however, could reveal information that may affect how analysts rate companies’ financial health and their ability to service debt.

Overall, the new rules will be a boon for investors and analysts, Moody’s said, especially with the new disclosure requirements. The footnote disclosures may offer better insight into estimates companies make to calculate revenue as well as break down revenues by product type and region in some cases.

“To get that information into the audited financial statement is long overdue,” Dillow said.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

Additional analysis of the revenue standard can be found on Checkpoint in the Accounting and Auditing Update Service and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): Special Report: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements.

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