The idea of the ‘perfect storm’ was first popularized by journalist Sebastian Junger in his book of the same name, set against the backdrop of the devastating Nor’easter of 1991. Though undeniably destructive, it was the origin of Junger’s storm that caught the public imagination: a chance combination of high-pressure systems, low-pressure systems, and tropical moisture, it showed that three unrelated phenomena coming together at just the right moment could spark a $200M disaster far greater than the sum of its parts.
It’s an apt metaphor for the challenges US businesses currently face, created – like that fateful Nor’easter – by a collision of three separate processes:
New – and Uncertain – Revenue Recognition Guidance. Released after many delays, FASB’s new ASC 606 standard was intended to streamline revenue recognition for businesses while eliminating the divide between US and international accounting rules.
In practice, the “one size fits all” philosophy underpinning ASC 606 has created almost as many questions as it answers, and disagreements between FASB and its international counterpart, the IASB, on timing and implementation have already opened a small yet noticeable rift between the formerly converged standards. Further complicating matters is the full scale of the guidance, which represents the largest accounting change since Sarbanes-Oxley back in 2002.
A Refocused SEC. Since 1934, the US Securities and Exchange Commission (SEC) has been responsible for protecting investors and market integrity by policing public companies. But after the 2008 financial crisis, much of the SEC’s attention was devoted to managing high-profile cases against major banks and mortgage lenders accused of contributing to the subprime mortgage bubble. That in turn left little bandwidth for day-to-day enforcement, particularly of smaller businesses.
With the most significant cases of the 2008 debacle closed and done with, all that is about to change – and in some cases, already has. The SEC has sent clear warning that it will turn its attention to the enforcement of sound financial practice. Already, activity is on the uptick, and SEC senior representatives make it clear that this trend will continue.
A New Perspective for SEC Enforcement. Worse, the SEC isn’t just more active, but is casting its net wider than ever. A new enforcement strategy unveiled in 2013 focuses on both major and minor infractions, and includes areas like internal controls, which were previously overlooked in SEC actions. This has been reflected in the Commission’s activities over the past 18 months, particularly in the software sector.
Battening the Hatches
Individually, any of these events would have a marked impact on US organizations. Combined, they expose companies to increased scrutiny – and liability – at a time of tremendous change in the accounting landscape.
These new challenges may be daunting. But unlike the Andrea Gail, the ill-fated fishing boat featured in Junger’s book, US companies aren’t necessarily doomed to sink. For once, there’s plenty of precedent: businesses already faced fundamental shifts in reporting and disclosures under Sarbanes-Oxley, laying the foundations for the more extensive requirements of ASC 606. Many of the major complexities added by ASC 606 - for example, the separation of performance obligations and the associated revenue allocation requirements – have also been present in the software sector since the inception of SOP 97-2 and ASC 605 back in the mid-‘90s.
But riding out this “storm” still requires companies to take a disciplined approach to systems, processes and people. Over the next few weeks, we’ll delve into each of the three factors behind the “perfect storm,” and what organizations can do to address them.
On June 25th, we're also teaming up with our friends at the Atlanta-based accountancy firm Habif, Arogeti & Wynne for a free webinar entitled ASC 606: Preparing for the New Revenue Standards. This one-hour event covers the ins and outs of the new guidance, and what businesses need to keep in mind when transitioning your systems to ASC 606 and IFRS 15.
And for those already preparing for ASC 606 or looking for ways to operationalize complex revenue recognition accounting, expert assistance is just a call or e-mail away. With years of experience in navigating changing accounting and compliance standards, our team is well-equipped to help you assess your processes and develop the implementation strategy you need to stay ahead of the weather.