Private companies falling behind on new accounting standards

This article originally appeared on April 23, 2018 and is authored by Michael Cohn of Accounting Today.

Most private companies haven’t made significant progress preparing to adopt the new revenue recognition and lease accounting standards, according to a new survey.

The report, by the consulting firm MorganFranklin, polled nearly 70 finance and accounting leaders at emerging and middle-market U.S. companies, and found that 63 percent of participants haven’t made significant progress in implementing the new revenue recognition standard. Only 9 percent have completed adoption of the rev rec standard, while 19 percent said they have made significant progress. Calendar year-end public companies were required to adopt the revenue recognition standard by the beginning of this year, and private companies are supposed to implement it for reporting periods after Dec. 15, 2018.

They have a little more time on the lease accounting standard. While public companies are required to adopt the leasing standard by the beginning of 2019, private companies have until 2020. Only 9 percent of the survey respondents indicated they are well on their way to adopting the leasing standard, while 6 percent said they have adopted it already. But 68 percent of the respondents said they have not made significant progress implementing the leasing standard.

“In general, companies are right now starting to engage around the new revenue recognition standard and the new lease standard,” said Shawn Degnan, managing director and commercial market leader of MorganFranklin. “They’re through most of their calendar year ends. They’re getting through their audits. They’re having their closing meetings with the auditors and the updated board meetings, and it’s kind of top of mind. While it has been a topic of discussion maybe to a degree at board meetings, it is now becoming front and center.”

Public companies have begun to file disclosures with their quarterly financial statements about their progress on the standards, and they are starting to come under more pressure from corporate boards. Private businesses too are beginning to feel the pressure.

“We are getting a number of calls from private companies, especially private equity-backed companies, that are looking for some assistance,” said Degnan. “They’re trying to engage somebody to help them with this, especially around revenue recognition.”

He compared the effort to adopt the revenue recognition standard to the Sarbanes-Oxley Act of 2002, and sees opportunities for accounting and consulting firms to help companies adjust.

“The difference with the adoption of the new standard is that there’s a high degree of technical expertise involved in this, understanding the literature and applying it to the set of facts and circumstances,” said Degnan. “That’s where companies may not have either the capacity or the ability to really do that internally. Therefore they’re looking either higher up or outside for experts. A lot of the consulting firms and accounting firms, with the inclusion of ourselves, have now been doing this for years with public filers, so we’ve got experience that we’re able to push down to the private companies.”

The lease accounting standard also requires extra work by companies. “Leasing is another one of those standards where it’s going to be a tremendous level of effort accumulating the documentation needed,” said Degnan. “The standard itself is not overly complex, but leases are one of those areas where I think companies struggle with understanding how many leases they have and where those leases reside. Only until you understand that, you can really understand the challenges associated with the adoption. What we have focused on with leases is, let’s get the tools and technology in place to input your leases and account for them in an automated manner, and let’s put the processes in place to enable you to handle this stuff going forward.”

Software is playing a role in helping companies adjust to the new standards. In the MorganFranklin survey, 39 percent of the participants reported that QuickBooks was the most utilized accounting system, while 30 percent cited NetSuite.

“Technology was a consistent theme throughout the survey,” said Degnan. “Take the metrics and reporting at the board level. Boards are getting used to having an increased level of granularity in the level of reporting that they’re seeing, and they know that technology is out there, and that this information exists. FP&A functions within organizations are now looking to further automate. There are some very good enterprise performance management tools out there that can help companies get data in a timely and accurate manner. Using that information, they can then address the requests of the board, and actually be proactive with the metrics that they’re putting forth and the tracking and reporting. Companies are really starting to anticipate some of these things coming from their board and putting the processes in place to address them.”

A 70 percent majority of the survey respondents indicated that major decisions go through finance, and it plays an active role in influencing company strategy.

“The other key takeaway that we had within the survey was really the desire of finance and accounting professionals to be a better partner to the business,” said Degnan. “It’s kind of a pull and a push. There is a desire to have the business pull them into more of the sales and operational functions within the organization, but in order to feel that pull, they’ve got to instill that sense of confidence in those functions. Finance and accounting teams are trying to automate and improve processes, and really start understanding the business, providing information and data in a way that they are now getting a seat at the table from a broader perspective than they normally would and get that partner of the business status.”

For more information about how MorganFranklin can assist with lease accounting, visit our Technical Accounting and Financial Reporting page.


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