The accounting world is bracing for change. What has been touted as one of the largest changes to GAAP since Sarbanes-Oxley, the impending ASC 606/IFRRS 15 Standards pose challenges that companies need to address as soon as possible.
Not just affecting accounting (see other departments affected here), not just affecting one industry (see industry commentary here), there are many decisions that have to be made before an organization moves to the new standard. Today, we explore the two methods of adoption—full vs. modified retrospective, as well as the pros and cons of each.
How to Choose an Adoption Method—Full Retrospective vs. Modified Retrospective
Surprisingly, many companies haven’t made the decision on which adoption model they intend to use. With the effective date of the standard bearing down for public companies (just under six months) and private companies (eighteen months), the most recent PwC study on Rev Rec adoption of the new standard found that over half of their respondents haven’t even chosen an adoption method.
While this study grouped public and private companies into one homogenous pool (as opposed to many other questions which split the two), it still points to the fact that many companies are unprepared for one of the earliest decisions they will have to make.
Notably, the idea of rewriting contracts and restating revenues looks to be one of the most prevalent challenges for organizations. Respondents to the PwC survey found that the following are or will be difficult/very difficult:
- Contract Reviews (current and ongoing): 78%
- Developing and Implementing New Accounting Policies: 76%
- Documentation of Conversion Process and Associated Auditability: 76%
The full retrospective method is much more thorough and therefore much more challenging. In this method, organizations are to apply the standard to new contracts as of 1/1/18 (public) and 1/1/19 (private), restating all contracts for periods presented (2016 and 2017 for public, 2017 and 2018 for private). PwC presents the pros and cons for each in their survey.
ASC 606: Full Retrospective Pros
- Comparability across periods
- Better data
- Improved stakeholder and shareholder relations
- More time to perform recast
ASC 606: Full Retrospective Cons
- High volume of data to recast
- Immense amount of time and effort needed to recast
- Historical data may be difficult to obtain
- More complicated reporting
The modified retrospective method includes a few practical expedients that make adoption easier, but poses higher risk in the year of adoption. This method requires the standard to be applied to contracts that are initiated after the effective date and contracts that have remaining obligations as of the effective date.
ASC 606: Modified Retrospective Pros
- Fewer data to recast
- No recasting of past revenue
- Easy for companies with contracts that aren’t material
- Less effort needed to get the job done
ASC 606: Modified Retrospective Cons
- More risk in year of adoption
- Must keep two sets of accounting records in the year of adoption
- May need certain historical data for other purposes
- Additional disclosure requirements
Learn More: ASC 606 Resources and Guide
One of the best pieces of advice we’ve heard is to see what other organizations within your industry are doing to prepare, as it is obvious that an SaaS company will have different needs than a real estate or life sciences company, and therefore different ways of recasting. For this, it’s important to watch for commentary from task groups within your own industry.
We’ve provided links to the task groups for ASC 606, as well as their commentary on the challenges in our blog AICPA Industry Task Forces Weighing In on Implementation Challenges.
Additionally, we’ve provided in-depth analysis in our whitepaper, The Definitive Guide to New Revenue Recognition Rules, which seeks to provide readers with more background, as well as offer best practices and advice to help readers prepare for the coming standard. Learn more by reading the preview below:
Looking for more? The following on-demand webinar series from our friends at Intacct seeks to address the rest of the concerns you may have when it comes to ASC 606/IFRS 15 adoption and implementation: