Next month a new US accounting rule comes into effect that changes the way most US companies will report revenue, causing ‘anxiety’ among the investment community, according to panelists at a recent Pace University event.
The new revenue recognition standards come into effect next month for public companies and will require analysts to recalculate their financial models. Microsoft’s IR and accounting teams realized how disruptive the new standard would be to its analysts and decided to get a head start, transitioning to the new standard earlier this year.
While revenue recognition is an accounting change, ‘the IR department is absolutely critical for implementation,’ Patrick Finnegan, senior director at Fitch Ratings, said at the Pacesetters in Financial Reporting Conference last week, where Microsoft was presented with the Pacesetter of the Year 2017 award for its implementation of the new standard.
Microsoft’s team – Kristin Chester, senior manager of investor relations, and Stacy Harrington, senior director of corporate revenue assurance – shared highlights of how they worked together over the last 18 months to transition to the new standard while keeping their investors and analysts up to date.
Microsoft reports its year-end results in July and Q1 results in October.
August 2016: One year before implementation
Microsoft’s accounting team started work on the new revenue recognition standard in 2014. While there had been some conversations with the IR people internally, they became ‘best friends’ in August 2016, according to Harrington. ‘As accountants, we understood what the new standard was but needed to know how to communicate it to senior management and IR,’ she said at the Pacesetters event. ‘We made sure we were advised by IR on what it would need, including additional data.’
Microsoft started getting questions from its investors about the new standard about a year ago, according to Chester: ‘It was clear there was some anxiety about how we would go about implementing this new system and the type of information we would provide.’
May 2017: Three months before implementation
Microsoft typically hosts a briefing call with investors and analysts in May every other year. On this call, Chester explained that the company would file its year-end documents in July 2017 under the existing accounting standards and then proceed with the new standard from October.
The company produced a slideshow that clearly articulated what would change – and what wouldn’t – under the new accounting standards, and provided a month-by-month guide of what the next steps were. For Microsoft, the way revenue is reported changes for some business lines, but not for all of them, so Chester and Harrington wanted to give their analysts advance notice.
‘There was some concern that we would try to implement this during our quarterly earnings process,’ Chester explained. ‘We wanted to make it clear there would be a clean break between old and new, and that analysts would have several months to rebuild their models in between.’
July 2017: Financial year-end and one month before implementation
Microsoft reported its Q4 results and filed its 10K under the existing accounting rules. Guidance for 2018 was also provided under the existing accounting standard, so that it could be compared with 2017’s results. But the 10K further contained a chart called ‘Expected impacts to reported results’, which outlined what revenue would look like under the new standard. The Microsoft team included a note to analysts to tell them not to update their financial models until a further briefing in August.
August 2017: Start of new financial year and implementation date
On August 3 the Microsoft team hosted another conference call with investors and analysts to discuss in detail how the new standard would be implemented. As part of the materials, the team restated the company’s 2016 and 2017 financial statements based on the new accounting standard and translated the 2018 guidance into the new standard.
After the call, Chester spent a lot of time on follow-ups with analysts. ‘It wasn’t just a one-time call where they all walked away and rebuilt their model,’ she said. ‘We had proactive calls with our analysts and investors to answer immediate questions and then in the following weeks as they rebuilt their model. We provided comprehensive materials, but there was a lot of work behind the scenes.’
October 2017: First quarter under new standards
In October the company filed its 10Q and hosted its first earnings call under the new revenue recognition standards. ‘When we reported for Q1 there was very little noise around the new standard,’ Chester said. ‘We wanted the conversation to be about earnings by that point. People had already digested this change in August and September.’
