Accounting Standards Update 2014-09,“Revenue from Contracts with Customers (Topic 606),” will go live in just a little more than three months. Publicly-traded firms have had years to prepare for it, and years to discuss its effects with owners of the firm. The means for that discussion is in the Management’s Discussion & Analysis of SEC financial statement filings - both annual and quarterly.
So far - and it’s quite far, by this point - firms have sparsely disclosed details of the new revenue recognition standard’s effects. Investors want to know if it will materially impact revenues and in turn, profitability when it goes into effect. A study of the second quarter 10-Qs for 391 S&P 500 firms shows that only a smattering of them disclosed whether the pending application would result in a material impact on the financial statements; about 38% of them expected no material impact. Most surprisingly, with the effective date so close at hand, about 60% of the firms were mum on the issue of whether it would have a significant impact on them. Many firms disclosed informative facts about different ways the standard might affect them, without going into “material effects” territory - but about 28% didn’t discuss them.
If the standard lives up to its advance billing as a major accounting event, then firms are being delinquent in informing investors. If they’re incorporating those effects in their 2018 earnings guidance, they shouldn’t be shy about putting it into print. If firms are disclosing very little because ASU 2014-09 won’t affect them significantly, then the standard is over-hyped and over-feared. The year 2018 will show which premise is correct.