Every day our organization thinks about how we can better help finance teams achieve their goals and overcome challenges, including accounting change. Well, who better to help provide perspective than our own finance leaders? Today we’re turning over the blog to our CFO, Philip Wood and Group Finance Manager, Drew Whibley to share how they tackled two compliance initiatives - revenue recognition (IFRS 15 / ASC 606) and leasing (IFRS 16 / ASC 842) – and received written praise from the UK’s accounting regulator, the Financial Reporting Council.
Taking a proactive approach
Given the fact that we are in the business of accounting change, we knew the ramifications of ignoring what was coming and so need to be proactive. We know finance teams who didn’t start to worry about revenue recognition until the middle of last year (2018) and they were really challenged to meet the deadlines.
Luckily, we started to worry about revenue recognition and leasing a long time ago and it’s good we did because even with our relatively simple finance environment, it took the better part of a year or so to really nail down the underlying accounting principles and positions we were going to take and then refine them with our auditors.
An increasingly complex financial reporting environment
There is no doubt the reporting requirements are getting more complicated. I think this year our annual report contained almost 140 pages. That’s compared with probably about 90 pages in 2015 and if you go back even further to say, 2000, you’re talking about maybe a 20-page document. A lot of the complexity is coming from the introduction of these new standards.
Take the leasing standard for example. We have a simple lease portfolio and still we spent considerable time understanding everything that has happened over the lifetime of our leases. As you dig in you realize that you can have a lease that you initially took out say 15 years ago but then any time you have a price change or an update to the life of the lease, you effectively must create a new model that’s built off the back of that existing model. So, for every lease you’re creating many models to account for the changes over time.
For IFRS 15, in addition to the significant work of defining our accounting approach, we had to complete a granular contract by contract review. We ended up generating a roughly 5-page memo for each contract detailing things like length, customer profile, product and nuances within the contract that could impact the rev rec profile. When you think about some of our clients with millions of contracts – it's easy to see the significance of this change!
Early adoption to minimize disruption
Like any finance team, our primary goal was to minimize the disruption that these changes introduced. Ultimately, that’s why we decided to early adopt leasing – so that we could adopt both revenue recognition and leasing at the same time and limit the big changes to one year.
It’s also why we chose to use the full retrospective application. We felt that would better allow us to maintain transparency and explain the changes to our auditors and shareholders and reduce the volatility in our reporting.
There was this significant effort up front to really say, OK how do we interpret these principles and adopt these standards in a way that allows us to avoid disruption and change. Luckily, we have some of the brightest accounting change experts on our staff, so we were able to sit down with them and they guided us through the options, so we could make some decisions.
For both leasing and revenue recognition, one of the main surprises for us was the level of documentation that we were required to secure. For contracts that were 1-2 years old, this wasn’t that difficult but when our team looked back at contracts that were put in place 6 or 7 years ago, the information wasn’t as thorough, so it meant a lot of digging. Obviously, all the detail exists somewhere, but it took time and effort to locate and centralize it all.
The second surprise was the length of time it took to get our auditors comfortable with the principles and approach we wanted to take. They were waiting to see what the market would adopt as best practice and had to reach a level of comfort about the way in which we wanted to adopt the standards.
Best in class performance
Certainly, a high point for our team was being recognized by the Financial Reporting Council, an organization that monitors the reporting and audit materials produced by UK based companies. They commended us for the quality of our revenue recognition reporting and the way in which we disclose and talk about revenue recognition in our accounts.
The recognition was an acknowledgment of all the hard work that went into this effort. From our finance team, to our own accounting experts, to our product and development teams who had to understand and explain to us the historical and future product life cycles, so we could correctly account for ongoing enhancements. It was a true team effort.
Drew proudly shows off the FRC letter
Thank you to Philip and Drew for sharing their perspectives and for all their hard work!