If regulatory posturing on revenue recognition is any indicator, companies can expect the Securities and Exchange Commission to begin scrutinizing disclosures about the pending new lease accounting requirements at this year end.

Financial Executives International studied comment letters issued by the SEC as companies prepared for the revenue recognition standard and found a handful that focused specifically on disclosures under Staff Accounting Bulletin No. 74, which requires companies to explain to investors what they can expect in future filings when a company adopts a new accounting requirement that is not yet effective.

Dating back to December 2016 year-end filings, the SEC began asking companies to make fairly detailed disclosures regarding the new revenue recognition standard taking effect Jan. 1, 2018. In each of the 18 comment letters the FEI identified, the SEC asked companies to provide more qualitative description of the potential impact of adopting the new requirements under Accounting Standards Codification 606.

The FEI analysis found other common themes among the SEC’s comment letter requests. Staff asked for more description of the expected effects of the new accounting policies, a comparison of the new policies to the existing policies, a description of the status of the implementation process, and a description of any significant implementation matters still to be addressed.

Finally, SEC staff asked for disclosure of the quantitative impact of adoption, if it could be determined. The SEC also took note when a company’s first-quarter disclosure did not advance the story line from the year-end disclosure, FEI says. 

With the effective date for the new revenue standard rapidly approaching, companies face another big accounting adoption effort in 2018 to prepare for the new lease accounting requirements taking effect in 2019. Wes Bricker, chief accountant at the SEC, said at a recent FEI conference he expected the leasing standard adoption “will also be a significant effort.”

Like the new revenue standard that soon takes effect, the new lease rules will have a significant effect on financial statements, bringing virtually all lease-related assets onto corporate balance sheets for the first time. Also like the revenue rule, the lease rules require companies to exercise some judgments where they haven’t under historic rules, making well-reasoned and well-documented accounting policies and internal controls a critical aspect of implementation.

Bricker encouraged companies to give themselves plenty of time to work through those issues. “Companies that wait to begin addressing the new leases standard until after they have implemented the new revenue standard may find that they have limited their time for implementation,” he said. “Insufficient time could impact, among other items, the ability of a company to make reasonable judgments and to complete its accounting analysis.”

Based on the SEC comment letter trends for revenue recognition, FEI is advising companies to pay particular attention to their SAB 74 disclosures, assuring some specific issues are addressed in the coming year. Those include a qualitative assessment of the potential impact of the standard, a description of the anticipated effects of the new accounting policies, a comparison of the current accounting policies to the new ones that will be applied under the new standard, a description of the implementation status, and an explanation of any significant implementation matters yet to be addressed.