Chief accountant says lessons learned from revenue standard’s implementation can be used again

SEC Chief Accountant Wesley Bricker said companies should take the lessons they learn from implementing the FASB’s revenue accounting standard and apply them when preparing for the standards for lease contracts and credit losses.

“If management has accumulated some lessons learned in implementing revenue, they should be identifying those now, so that they can be incorporated into implementation planning for the other major standards,” Bricker said during the Global Board Leader’s Summit hosted by the National Association of Corporate Directors (NACD) on Oct. 2, 2017, in National Harbor, Maryland.

The effective date for the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), is 2018, and Bricker said he expected management to have made good progress on the implementation given that the effective date is less than three months away. In 2019, companies will have to begin complying with ASU No. 2016-02, Leases (Topic 842). In 2020, ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, will go into effect.

Bricker also said boards’ audit committees also have an important role to play in ensuring that the lease contracts and credit loss standards are implemented efficiently. Most important, he said audit committees must have a thorough understanding of where a company stands with implementing the revenue standard.

To that end, he urged audit committees to have separate discussions about implementing Topic 606 with management and the external audit team because the auditor also has insight and perspective about how the company is doing compared to other companies in areas like accounting policies, complex judgments, and internal control processes.

“If you have two different conversations with management and the external auditor, that should be a serious flag,” Bricker said. “Not that there is a financial reporting issue today, but you could have a financial reporting issue in the future.”

In Bricker’s view, the audit committee’s discussions about the planning and quality of the revenue standard’s implementation process will let the committee’s members judge management’s preparation for other standards. The three standards are expected to make substantial changes to financial reporting.

ASU No. 2014-09 is expected to usher in major changes for reporting revenue because it is erasing about 180 pieces of industry-specific revenue guidance in U.S. GAAP and providing a principles-based, five-step process by which businesses must calculate the top line in their income statements. It also requires new disclosures, such as qualitative and quantitative information about revenue recognized from contracts with customers and significant judgments and changes in judgments.

ASU No. 2016-02 requires companies to recognize their lease obligations on their balance sheets.

ASU No. 2016-13 calls on banks to set aside reserves when they originate loans to cover losses on loans that will default through what the FASB calls the “Current Expected Credit Loss” (CECL) model. The standard is replacing the “incurred loss” model that requires banks to mark down loans after borrowers have fallen behind on payments.

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