New accounting rules change how some companies sell goods, services

Some CFOs are adjusting business operations to comply with revenue-recognition guidelines

New accounting rules are prompting some corporate finance chiefs to change how they do business.

More than half of the S&P 500 companies disclosed some impact on their accounting policies since December, when new rules unified how companies account for revenues from sales and services. The change, which was in the works for more than a decade, replaces previously disparate, industryspecific rules and aligns U.S. standards closer to international guidelines.

For finance chiefs of some companies, including Red Hat Inc., Ciena Corp. and Mosaic Co., adopting the new revenue recognition standard from the Financial Accounting Standards Board means adjusting their business operations to be in line with the new accounting framework, which is more focused on contracts and when goods and services are delivered to customers.

Around 380 companies in the stock index have reported under the new rules as of June 8, and 294 companies in the index disclosed an impact on finan- cial statements from adopting the standard, according to Audit Analytics.

Finance teams spent months rewriting accounting processes and procedures and preparing new financial statements to comply with the new rules. Roughly one in five public companies surveyed by PricewaterhouseCoopers LLP said they spent or expected to spend $1 million ($1,301,000 Canadian) or more on this effort.

Software-service provider Red Hat previously would tailor the price for its subscription bundles for each customer. Now, the Raleigh, N.C., company will have uniform pricing and discounts for clients of its open-source software, said chief financial officer Eric Shander.

The new reporting rules require companies to more thoroughly account for the cost of sales, such as discounts and marketing efforts.

“We’re being much more prescriptive on where you’re placing the discount,” Shander said. “It will be more standardized.” The company closed 169 deals over $1 million during its fourth quarter, and 81 per cent of them included multiple technologies, he said.

Some companies expect the new rules to accelerate revenue, while others say the timing of when they can record revenue as earned will be delayed, even though their underlying business remains unchanged. Telecommunications networking-equipment maker Ciena expects to recognize some of its revenue sooner when it switches over to the new rules in November, said CFO Jim Moylan. The company’s fiscal year ends in October, giving it some extra time to make the transition.

“We are certainly talking about how we will restructure our contracts in a way to get access to that favourable accounting,” Moylan said.

In the past, Ciena would sell and install its internet-networking equipment, but only pass title and control to the customer when everything was deployed. Under the new accounting rules, the company plans to pass title to its customers sooner so it can record revenue on the equipment first, and later book the revenue on the service as it deploys that equipment, Moylan said.

“We want to make sure that we’re structuring our contracts so that change of title occurs perhaps earlier than it would have,” he said. Other companies doubled down on explaining the accounting changes to investors. Dunkin’ Brands Group Inc. held a special call with analysts and investors last October to discuss pending revenue accounting changes. CFO Kate Jaspon again walked stakeholders through the new math during the company’s analyst and investor day in February.

Dunkin’ now records its franchise fees over the term of the related licence, among other changes. Previously, Dunkin’ recognized franchise fees up front, either when a new restaurant was opened or when a renewal agreement became effective.

“Given the sweeping changes to revenue accounting rules, we felt it was important to educate our investment community on the impacts to our financial results early in the process and with great transparency,” Jaspon said in a statement. “In doing so, we were able to transition into 2018 with a focus on the fundamentals of our under- lying business, which have not changed, and limit any investor confusion from accounting rule changes.”

But other companies are opting to adjust operating practices, where possible, rather than disrupt the pattern of revenue investors have come to expect of the business. Fertilizer maker Mosaic changed some of its arrangements and systems to ensure that revenue could be recorded when control of its products — potash and phosphate — transferred to the customer.

“The policy changes did not affect our business economics,” said a Mosaic spokesman, adding that the company complied with the new accounting rules while also providing investors with consistent information. Most businesses say the tweaks are a way to keep the accounting outcome under the new rules consistent with that of the old rules, said Adam Brown, national assurance managing partner for accounting at BDO USA.

“If historically they’ve had revenue as you go, then that’s where they will consider some changes to preserve when revenue gets booked,” Brown said.