Revenue Recognition: How It Will Impact Three Key Sectors

• Date: 01 March 2015
• DOI: http://doi.org/10.1002/jcaf.22037
• Published date: 01 March 2015

31

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22037

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Jack T. Ciesielski

and Thomas R. Weirich

Accounting Standards Update 2014–9, “Revenue

from Contracts with Customers,” becomes effec-

tive for calendar-year companies at the beginning

of 2017. It will completely change the way firms

process their recognition of revenue. Today, the

underlying premise for recognizing revenue is that

it takes place when the risks and rewards have

transferred to the owner. Tomorrow, the premise

underlying recognition will be that it occurs when

a change in control over a transferred asset is

complete. But even costs will change—the stan-

dard may require the recognition of costs in areas

where prior rules were silent or didn’t even exist.

© 2015 Wiley Periodicals, Inc.

R evenue Recognition: How It Will Impact

Three Key Sectors

In 2017, the rules

change on rec-

ognizing revenue

for U.S. companies.

Will those changes

speed up reporting of

revenue—or slow it

down? When it comes

to assessing the effects

of the changes and the

veracity of the guid-

ance managers provide

about revenues, inves-

tors and analysts will be

at the mercy of those

guidance providers.

While it may be

hard to predict the

future, applying logic and facts

to a puzzle can make it look like

you have predicted the future.

However, in this article the new

revenue recognition standard’s

requirements are applied to facts

about present-day revenue recog-

nition practices for firms in three

sectors: technology, telecom-

munications, and health care, so

as to predict the change’s effects.

Those three sectors are perhaps

the most interesting because the

new standard will likely drive a

wider wedge between earnings

and cash flows, and pro forma

earnings reports are common

in those sectors. Yet pro forma

reporting neglects the real differ-

ences between earnings and cash

flows, creating a bigger inves-

tor blind spot. The following

accounting issues for these three

sectors may have implications

for financial executives at other

entities as well.

IN THE YEAR 2017

First, a quick review of

salient facts: current revenue

recognition standards will go

by the wayside beginning in

calendar year 2017. That’s when

Accounting Stan-

dards Update (ASU)

2014–9, “Revenue

from Contracts with

Customers,” goes

into effect. Whatever

methods companies

have been using for

recognizing rev-

enue will change,

too. Even costs will

change—the stan-

dard may require the

recognition of costs

in areas where prior

rules were silent or

didn’t even exist.

The new stan-

dard will affect all industries

and have varying impacts. For

instance, financial institutions

generate most of their earn-

ings from financial instruments

and may therefore seem little

affected by the new standard.

However, they also engage in

activities that generate fees, and

they also sell excess real estate

from foreclosures, and those

areas will be affected by the

new standard. Other industries

will bear much more direct

impacts.

These five steps will be at the

heart of all the changes: