For most public companies, the new revenue recognition standard is projected to be implemented on January 1, 2018. Most companies will need to evaluate 2016 and 2017 financial information under the new rules, making it important for audit committees to understand how management is assessing the impact of the new revenue recognition standard.
Implementation of the new standard requires significant effort by companies, including analyzing contracts and designing new systems, processes, and controls. Given the importance of high quality application of the standard, I believe executive management, the audit committee, and the company’s external auditor should discuss implementation status and plans, as well as the allocation of sufficient resources with appropriate skill sets to execute the plan.
The Center for Audit Quality (CAQ) has developed a tool to help audit committee members be successful in their oversight responsibilities. This new tool, Preparing for the New Revenue Recognition Standard: A Tool for Audit Committees, answers important questions for boards to consider: How will revenue change? Is the company on track? How is the company preparing investors to understand the impact? Are appropriate disclosures being developed?
Affecting all companies (i.e., public, private, and nonprofit) that have contracts with customers, the new revenue recognition standard will impact various functional areas, from accounting and legal to information technology and human resources. The new CAQ tool covers four areas:
- Understanding the New Revenue Recognition Standard – What Is It? This section provides a brief overview of the core principles of the standard.
- Evaluating the Company’s Impact Assessment – How Will Revenue Recognition Change? This section assists audit committees in discussing with management the impact of the new standard due to various factors related to the company’s business.
- Evaluating the Implementation Project Plan – How Do We Need to Prepare? This section assists audit committees in their efforts to understand and evaluate management’s implementation project plan.
- Other Implementation Considerations – What Else Do We Need to Consider? This section assists audit committees with other considerations such as transition decisions and new disclosure requirements.