One of the open questions in adoption of the new Revenue Recognition Standard for public companies has been whether or not the SEC would require companies that adopt ASU 2014-09 retrospectively to apply it to all five years required in Form 10-K – Item 6 – Selected Financial Data.

Yesterday, September 11, 2014, at a Financial Accounting Standards Advisory Committee meeting the SEC Staff said they “would not object” if companies did not apply the standard to the fourth and fifth year back. As you know, S-K Item 301 for the five year summary requires clear disclosure when there are issues that affect comparability between years. In fact, S-K 301 says in Instruction 2:

Briefly describe, or cross-reference to a discussion thereof, factors such as accounting changes, business combinations or dispositions of business operations, that materially affect the comparability of the information reflected in selected financial data. Discussion of, or reference to, any material uncertainties should also be included where such matters might cause the data reflected herein not to be indicative of the registrant’s future financial condition or results of operations.

So, companies must address this lack of comparability, but at least we do not need to run parallel for revenue recognition for a five full years.

So, in a nutshell, the two choices in adopting the new standard are (adoption is required for years beginning after 12/15/2016 for public companies, one year later for non-public companies).

1. Full retrospective for all years presented, that is three years in a non-SRC or non-EGC 10-K. For this choice a company must “run parallel” for 2015 and 2016, and apply the new standard to 2017. (There are a few practical accommodations if you chose this option.)

2. Retrospective with a cumulative effect at the beginning of the year of adoption, 2017. However, if you use this method you must disclose the effect of the new standard on each line of the F/S affected. This means in essence you must run parallel for 2017 to provide comparative disclosures

So, now we know the choice with more clarity, and we can choose to double account for one or two years.

As always, welcome your comments and thoughts!