SEC Conference – SAB 74 Implications

Preparers of public company financial statements should be very familiar with the requirements of SAB 74 to disclose of the known impacts of changes in accounting standards.  Typically this disclosure is covered by the quick and dirty “the change is not expected to be material” or the “the impact of the change is not yet known.”  While the SEC doesn’t like it, that answer works for many of the standard changes that only impact disclosures or only impact a small subset of public companies.

That logic won’t work with the revenue recognition and leasing standards set to be released in 2013.  First, in responses to the FASB, many industries have made it clear that even with the changes in the revised exposure drafts the new standards will significantly impact the timing and amount of revenue and expense recognition.  Second, companies are likely to have significant information on the impact of these standards well before they are actually implemented for several reasons including the length of time to implement the standards and the likelihood that many companies will implement dual accounting processes as a way to deal with the retrospective application requirement currently proposed in the standard.

It might be acceptable to say you don’t know when the standard is issued one year and effective the next, but these standards are likely to have an implementation phase of three years of more.  The SEC might allow you to get away with “I don’t know” the first year, but they are likely to ask serious questions if you keep it up in years two and three.  I could see the SEC asking if you don’t know, or at least have a solid estimate of the impacts in years two and three, how can you say you have the proper controls in place to produce financial statements once the standard is implemented.

And it gets even better; the SAB 74 disclosure is part of your audited financial statements (note this is not forward looking information, but information on what your current financial results would look like under the new standard).  That means any estimates you give are part of what will get audited.  Most importantly that means you have to have a properly controlled process in place to come up with the estimates that can be audited. An additional implication is that once the standard is in place the amounts included in your actual financial results better be close to what you disclosed previously.  If not, there are likely to be serious questions about your controls and processes on all of your financial results, not just your SAB 74 disclosures.

Bottom line, even if the FASB gives us until 2015 or 2016 to implement the new standards, because of SAB 74 you better be ready to start disclosing some solid numbers under the new standard by the time you release your 2014 (I think we will get a pass in 2013) financial statements.  So forget about those three year implementation plans and start thinking about how to track this information starting in one year on January 2014.

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