The Securities & Exchange Commission (SEC) plans to look closely at disclosures next year to see how companies are adapting to new revenue recognition changes set to take effect next December. The changes are new rules that are part of wider changes being made to the generally accepted accounting principles, better known as GAAP.
The new rules will affect all public companies and will change revenue recognition from its current format. Revenue recognition refers to the conditions by which a company considers revenue measurable. The new rules attempt to improve the quality of financial reporting and comparability of different companies’ revenues. The SEC will look for increased disclosures from companies to ensure compliance with the new rules.
The new rules were set to take effect this month but were pushed back a year after a survey concluded that 75 percent of companies were still assessing how to comply, 8 percent had not started their initial assessment and only 17 percent had already begun implementing changes.
The SEC is encouraging companies to work with audit committees to improve compliance with non-GAAP reporting rules, which are sometimes implemented when a company believes traditional accounting methods will not provide an accurate picture of their financial condition.
Companies that use non-GAAP methods, which include adjusted earnings before interest, taxes, depreciation and amortization must explain why they are doing so and reconcile their numbers with comparable GAAP methods.
The SEC also stated that they will be sticking with GAAP for now, after considering a switch to the International Financial Reporting Standards, which still remain important for U.S. companies with global operations.
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Although companies have another year to implement these changes, it is never too early to start complying.
If you have compliance-related questions or have questions about how the rules might affect you or your company, contact an experienced Los Angeles securities fraud attorney today for a consultation to discuss your rights and options.