5 Regulations on Retailers' Watchlists

Fast moves in Washington, combined with approaching deadlines of long-planned accounting changes are creating a rising tide of regulatory concerns in the retail industry. In fact, just over one-in-five retailers say regulations are their top concern in 2017.
 
Our 11th annual Retail Compass Survey of CFOs revealed five key areas of regulatory change and compliance top of mind in the c-suite.
 
1. Labor
  • Overtime
    • 45% of CFOs are taking action in response to the DOL’s (currently frozen) overtime rule.
    • Of those, 70% will increase salaries when exempt status is in question and 67% will convert salaried exempt employees to non-exempt hourly employees.
  • Minimum Wage
    • In response to a potential federal minimum wage hike, 70% of retailers say they plan to automate or simplify processes to boost efficiency.
    • Fewer retail CFOs will accelerate the closure of underperforming stores (39%), reduce headcount (34%), outsource non-core functions (30%) or cut employee hours (27%).
The retail industry is keeping close tabs on two labor movements that gained momentum during the Obama administration: increasing the minimum wage and expanding overtime pay. While a hike to the federal minimum wage seems unlikely during this congressional term, President Trump has offered mixed views on the issue. In the meantime, states and municipalities may continue passing their own minimum wage increases. Retailers will be also watching to see whether the DOL takes steps to reverse – or revise – the new overtime rules, once a new labor secretary is confirmed.
 
2. Tax Reform
  • In BDO’s 2017 Tax Outlook Survey, all 100 tax directors said they think tax reform is likely.
  • 61% of retail CFOs say a reduction in the corporate tax rate would have the greatest impact on their business.
While retail executives appear eager for reform that could lower their corporate tax rates or alter international taxation favorably, comprehensive tax reform could be a double-edged sword. A broad coalition, including the Retail Industry Leaders Association and more than 120 other trade groups, joined together to oppose the House’s border tax proposal, which would tax imported goods sold to U.S. consumers and leave some retailers in the red. As of early April, it’s unclear if the proposal will make the final bill or land on the cutting room floor, but retailers are watching closely.
 
3. Cybersecurity
  • 70% of retail CFOs expect cybersecurity regulations will increase in 2017.
  • 57% of retailers increased their cybersecurity spending in the past year.
  • 82% are currently EMV compliant.
In some ways, retailers are seasoned at cybersecurity compared to other industries, as they have contended with security challenges and breaches for more than a decade. But, as the threat landscape evolves and boards increase their focus on security practices, the work to safeguard data and the business is never done. Looking ahead, retailers expect they will have to answer not only to their customers and stakeholders on cybersecurity, but also to regulators. More standard cybersecurity guidance has been coming from states like New York, and the Trump administration has signaled that it will be a priority at the Federal level as well.
 
4. Lease Accounting
  • 54% of retail CFOs are concerned about lease accounting regulations.
In 2016, FASB announced the new lease accounting standard, which adds operating leases to the balance sheet. While public retailers have until 2019 and private retailers have until 2020 to implement the new standard, the time is now to begin the transition. In addition to educating stakeholders and investors about how key metrics will change, retailers will need to consider if they need to update or evolve their technology, training and reporting practices to meet new requirements.
 
5. Revenue Recognition
  • 64% of retail CFOs have carefully analyzed changes to revenue recognition.
  • 45% have developed a strategic implementation plan.
  • 36% have sought guidance for implementation.
  • 26% are waiting for competitors’ implementation actions.
Released jointly by the FASB and IASB in 2014, the deadline for compliance with the new ASC-606 revenue recognition standard is nearly here. Public retailers must apply the new standard to reporting periods beginning after December 15, 2017 and private retailers must do so the following year. However, less than half of retailers say they have developed an implementation plan, meaning many are behind in planning to address the new five-step model which may impact the timing of revenue recognition for gift cards, rebates, returns and other contracts with customers.
 
The regulation ruckus may be causing retailers concern this year, but careful, advanced planning for upcoming deadlines and potential scenarios will better position brands to ride the wave of change successfully.