Financial Services Insights: A Sea Change in Revenue Recognition

The recently announced principle-based standard on revenue recognition is expected to have a pervasive impact on investment advisors and the investment companies which they manage, including the investee enterprises in their portfolios. This new pronouncement will profoundly affect the recognition practices, personnel, processes and accounting systems, particularly of United States investment managers and portfolio companies, possibly requiring increased investment in reporting systems and/or altering cost structures associated with financial reporting. 

Application of the standard will require management to exercise significant judgment while considering a variety of criteria in a complex five-step recognition model.  The standard is effective for public registrants for annual reporting periods commencing after December 15, 2016; and for other entities a year thereafter (though private entities may elect to adopt the standard a year earlier than is required).  The adoption period is intended to allow sufficient time for issuers to grapple with the complexity of; prepare their personnel for; and adapt their accounting and operating systems to comply with the requirements of the new standard.

Implementation, Assistance and Next Steps

Many entities may feel that the effective dates are insufficient to adopt such a far-reaching standard as companies need to understand the guidance, determine an implementation strategy, and evaluate the impact.  In addition, complying with this standard will likely require modifications to companies’ IT systems, overhauls in their accounting systems and significant training throughout many levels of an organization.

In an effort to assist in the process, the FASB and the IASB announced that they are in the process of developing a joint transition resource group, and the AICPA has developed multiple industry-based task forces.  Additional details about these groups will be issued and communicated by ourselves in the coming weeks.

In the near term, feel free to contact your advisors to discuss the standard, evaluate its potential impact on significant revenue streams, and determine what should be communicated to the relevant stakeholders (i.e., audit committees, investors) as you develop your implementation strategy.