Two major aerospace and defense contractors say that despite the extensive work required to implement the FASB’s sweeping new revenue recognition standard, the end results in their financial statements appear to closely match the reporting under the existing standard that is being superseded.
Speaking on a FASB-sponsored webcast aimed at aerospace investors on May 11, 2017, General Electric Co. Global Technical Controller Russell Hodge and Raytheon Co. Chief Accounting Officer Michael Wood said the companies had to do a lot of work to comply with the new accounting requirements, but they did not anticipate a significant shift in reported revenues as a result.
“We had very little impact even though we had all that effort and had to go through the process,” Wood said.
Raytheon, which chose to adopt the new revenue standard a year ahead of the 2018 effective date for public companies, said its 2016 reported revenue was about $55 million lower than it would have been under old revenue recognition rules, but in the context of $24 billion in sales, the change was not significant to the company.
“Because the change was small, we really didn’t get a lot of interest from investors on the change because they sort of think about us the same,” Wood said. “Nonetheless, the amount of effort needed to do that is a lot.”
GE will adopt the standard in 2018, Hodge said, but the company so far does not expect big changes, either.
“It doesn’t fundamentally [change results] unless you’ve changed how you run your business, and it’s important for investors and analysts to understand this context,” Hodge said. “In general, you won’t see revenue created or revenue eliminated, you just may see it in different periods.”
GE and Raytheon’s experience aligns with a Moody’s Investors Service report released in April that said the new rules would not result in dramatically different revenue figures for most companies.
“For virtually all companies, the total amount of revenue recognized over the customer contract term will be the same,” the report said. Moody’s, however, the timing for recognizing specific revenues is likely to change. In some cases revenue recognition will be accelerated and in other cases it will be delayed. This could result in revenue swings from period to period depending on the company and industry. (See Moody’s Says Revenue Standard May Change Timing of Reported Revenue, Not the Amount Recorded in the April 25, 2017, edition of Accounting & Compliance Alert.)
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 by the U.S. and international accounting boards to come up with a single method for companies worldwide to calculate the top line in their income statements. It scraps about 180 pieces of business- and transaction-specific guidelines in U.S. GAAP and calls for a principles-based approach to recognizing revenue. The standards are mostly converged.
Public companies must comply with the standards in 2018, and companies are allowed to adopt the rules early.
In addition to calling for a new, single method to calculate revenue, the standard also requires new financial statement disclosures aimed at lending better insight into how companies come up with their revenue figures. The disclosures require breaking down revenue sources by product type and region. Compiling the information for the disclosures and setting up systems to capture the new data was a large undertaking for both GE and Raytheon, the executives said.
“We approached the disclosures relatively late in the process, and I would encourage folks to address that earlier in the process,” Wood said. “I would not underestimate the amount of effort with it.”
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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