September 28, 2017

Revenue Recognition: Is Anybody Ready?

I was always one of those people who crammed a semester’s worth of studying into the night before the final exam. This Bloomberg accounting blog suggests that a lot of companies are going to find themselves in the same boat when it comes to implementation of FASB’s new revenue recognition standard:

The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.

“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.”

Despite the 2018 implementation date, the blog notes that Starbucks, Oracle & Apple have all recently announced that they won’t be implementing the new standard until 2019. MarketWatch’s Francine McKenna & her colleagues have been closely following the impact of the new standard. She notes that some companies can defer to 2019 because of the timing of their fiscal years. However, Francine points out that Apple’s an interesting example of the challenges that companies face – as this article notes, Apple originally planned to early adopt the new standard, but then delayed implementation one year to the latest possible date.

It turns out that there are some companies that stuck their necks out & early adopted the new revenue recognition standard. This recent blog from Steve Quinlivan reviews one recent early adopter’s fairly probing comment letter from the Staff, & has some tips for comments that companies that haven’t adopted should keep in mind for their 3rd quarter 10-Qs. Also see this Deloitte memo that analyzes revenue recognition disclosures in the 2nd quarter for a bunch of companies…

ESG: Building a “Sustainability Competent” Board

Boards are increasingly called upon to address a variety sustainability issues – including climate change, human rights & other environmental and social concerns that not long ago seemed pretty far afield from the business of running a public company. This Ceres report makes the business case for developing boards that are “sustainability competent,” and offers insight about how to accomplish this objective.

Here’s an excerpt from the executive summary addressing the business case for sustainability competence:

Where sustainability is material to a company, boards have a fiduciary responsibility to act. A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions. To discharge this responsibility, directors need to be able to understand and evaluate material risks facing the business. When a social or environmental force poses material risks, directors now need to consider those risks in decision-making in order to adequately discharge their fiduciary responsibility.

Investors are increasingly focusing on board sustainability competence. Investors are making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, they are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy. Consequently, investors are putting pressure on boards to show themselves as “competent” in environmental and social issues.

Your mileage may vary when it comes to legal arguments about what the fiduciary duty of care requires here, but there’s no doubt that sustainability is becoming a top priority for many investors.

The report calls for companies to take a variety of steps to build a sustainability competent board. These include integrating sustainability into the nominating process, educating directors on sustainability risks, & deepening engagement with experts and stakeholders on relevant sustainability topics.

When it comes to sustainability, most of the action among investors has come from institutions. This recent publication from the US SIF Foundation aims to change that – it provides a guide for retail investors to getting started in socially responsible investing.

IPOs:  Are SPACs the Answer for Unicorns?

We’ve previously blogged about various aspects of the Unicorn phenomenon – $1 billion dollar tech companies that are reluctant to take the IPO plunge. How can these companies be coaxed into the public marketplace? This NYT DealBook article says somebody’s building an app – uh, I mean a SPAC – for that.  Here’s an excerpt:

Last week, Chamath Palihapitiya, a brash entrepreneur who was an early Facebook employee, launched a public company known as a special purpose acquisition company, or a “blank check” company, with $600 million put up by investors. The intent is to merge with one of Silicon Valley’s unicorns, taking it public through a back door of sorts.

The idea is to remove “the process of going public that is true brain damage,” Mr. Palihapitiya said.

Unicorns may have the cash to defer going public, but it does create problems for them when it comes to retaining talent – at some point, employees realize that they can’t eat private company stock.  By gobbling up Unicorns into a SPAC, the idea is that the entity will enable their management to avoid all of the headaches and distractions of the IPO process, and become public in a blink through a reverse merger.

Reverse mergers as a vehicle for going public don’t have the greatest track record – but most of the companies that have gone down that path weren’t in a position to attract the kind of attention from market participants that a hot tech property might.  So, who knows?  It might just be crazy enough to work.

John Jenkins