The first financial reports requiring organizations to use the new revenue recognition standard are just over a year away. While this may sound like a fair amount of time to change the way your company recognizes revenue, there is a reason the standard was already delayed a year. It’s not a ‘flip-a-switch” change to become compliant. It’s a labor-intensive process that requires an organizational approach and has been considered one of the most difficult changes that an organization faces.
ASC 606/IFRS 15: A Complicated Transition
- Contract Reviews (current and ongoing): 78%
- Developing and Implementing New Accounting Policies: 76%
- Documentation of Conversion Process and Associated Auditability: 76%
- Quantification of Adjustments: 72%
- Project Management: 71%
- Revisions to Systems and Associated Controls: 68%
- Identification of Accounting Differences Across the Organization: 64%
Five Departments Who Need to Change for Compliance
While this is a standard set by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the new rules affect more than just accounting. CFO contributor Eric Knachel, Senior Consultation Partner at Deloitte & Touche LLP, recently highlighted the five departments/areas which need to make changes before 2018 (2019 for private companies) to become compliant:
The new standard specifically focuses on how companies recognize revenue associated with customer contracts, so obviously, accounting will be the most heavily impacted by the standard. To achieve its goal, the new standard relies much more heavily on estimates and judgments. This in turn requires additional data gathering and reporting, including extensive disclosures — not only about the data used, but also about the judgments that were applied when producing the estimates.
Compliance with the new revenue recognition standard will almost certainly require data that is not currently being collected, aggregated, or reported. As many systems were not designed to capture the data (performance obligations, contract start and end dates, etc.) needed as part of the new standard, IT has to be a major player in the move to the new standard, updating or implementing new systems to track necessary components.
Learn more about the first accounting software/ERP built for ASC 606/IFRS 15 compliance here.
The new revenue recognition standard assumes that customer contracts will contain certain elements — including specific provisions for termination, pricing, and enforcement — that might be handled differently (or might not be present at all) in a company’s existing contracts. Therefore, an organization’s legal department needs to review all current contracts and templates to see which changes need to be made (if any) regarding performance obligations and application of the new standard.
Additionally, if the purchasing organization needs to make their own review of any new contract, this could be a laborious, time consuming process.
Human Resources and Training
Implementation of the new standard is a major undertaking that will likely require significant resources and staff. In addition, it will likely require extensive training, not only for the accountants who need to apply the new standard but for anyone involved in negotiating and reviewing customer contracts. That includes sales people, sales managers, the legal department, investor relations, and executive leadership.
The new standard changes the way that contracts are recognized, fulfilled, and accounted for. In this, the new standard will also change the way that many are compensated. This can have a big impact on executive bonuses, sales commissions, and any form of compensation linked to revenue-related metrics, including broad metrics such as profitability and EBITDA.
Knachel finds there are two changes that could be made:
- Redesign the detailed terms of the program to try and replicate the payouts that would have occurred under the old revenue recognition standard, or
- Maintain separate records that recognize revenue the old way for compensation purposes.
Compliance is not as easy as flipping a switch. There are many steps that need to be taken, and many resolutions that need to be made. Luckily, there is help. Wipfli/Brittenford has announced a new 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.
See a preview below and download here: