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Reassessing Budgeting and Planning in the Wake of ASC 606

Reassessing Budgeting and Planning in the Wake of ASC 606

If you’ve missed any of the updates over the past few years, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announced what has been called one of the biggest changes to GAAP since Sarbanes-Oxley—the new revenue recognition rule (ASC 606/IFRS 15).

Set to replace over 200 specialized and/or industry- specific revenue recognition requirements under US GAAP, public companies will need to implement and report under the new standards starting at the end of this year, with private companies having an extra year to implement the new standard.

While we’ve talked about the impact of the update on accounting, legal, IT, HR, and more, and offered actionable tips in our whitepaper on the topic, there is another consideration that needs to be made regarding ASC 606 /IFRS 15: “How will this affect budgeting and planning?”

Changing Standards Change Budgeting and Planning

In an article written for Ventana Research, author Robert Kugel took a look at the changes that ASC 606 will have—not just on finance, but on the financial planning & analysis and budgeting.

“Thus far, software vendors, consultants and accounting professionals have focused most of their attention on how the new rules will affect the accounting organization and very little on the impact they will have on the financial planning and analysis (FP&A) function. […] However, in some cases, planning and budgeting will become more complex because of the divergence in the timing of accounting and “real” events. FP&A organizations in these corporations need to prepare now to cope with the new environment.”

Kugel goes on to highlight that for more complex contracts, compensation structures, or planning events, the new rules could have immense impact:

“The main challenge for FP&A groups in companies materially affected by the new rules is having the ability to plan corporate events (contract bookings and commission payments, for example) in parallel with accounting events, for example, forecasting when deals will close and when revenue from them will be recognized.

This would be a challenge if routinely there are sufficient differences in the size and scope of contracts (which is often the case in engineering and construction, for example) or if for any other reason it isn’t possible to create an abstracted model that achieves a consistently useful, sufficiently granular approximation of the differences between “real” and accounting events. Very likely, this will be more common than many people imagine. Those who think that their planning and budgeting won’t be affected should think again.”

Kugel notes that one of the first steps a company needs to take is to recognize its risk to the new rules, determining what will be necessary in planning and budgeting for “real” and accounting data in parallel. Read the entire article, Planning is Necessary for Revenue Recognition, for more.

Spreadsheets Won’t Cut It

Kugel makes one thing clear in his article, the use of spreadsheets in planning poses a huge risk to organizations under the new standard.

“Desktop spreadsheets are functional for individuals who create planning models and work with limited sets of data, but they are not well suited for recurring collaborative enterprise processes,” says Kugel, noting, “[…] companies that use a dedicated application more often have a process that works well or very well than those that use spreadsheets (60% vs. 47%).”

The more complex the planning process, the less effective an organization’s spreadsheet-laden processes are in managing the planning process. In a blog on the use of spreadsheets in managing ASC 606, Host Analytics agrees with Kugel, noting:

Experts recommend that companies currently using spreadsheets for budgeting and business planning would be better off switching to purpose-built planning applications to more easily address the challenges and complexity of the new guidelines. The same applies to companies currently using spreadsheets for financial reporting.  Moving to purpose-built applications will lead to efficiency in reporting with little margin for inaccuracy in shorter timeframes.”

We’ve covered the shortfalls of spreadsheets in Excel Hell Part 1: How the FP&A Process Starts Going South, and Excel Hell Part 2: Still Going South.

Learn more about the new standard’s impact on planning and budgeting in the Host Analytics articles Revenue Recognition Rules Could Impact Budgeting and Planning, and How EPM Software Can Help Companies Address the New Revenue Recognition Standards.

Taking the Next Step: Learn More about Host Analytics

Effective, cloud-based EPM software can do much more than help you prepare for the coming revenue recognition standard. In fact, it can help you capitalize on more opportunities in finance, reduce monthly and annual closing, budgeting, and planning times with rolling forecasts, and position your business for growth. Learn more about Host Analytics and its role in the financial transformation at your company by reading the following blogs from Brittenford’s own Tony Cantor:

Take your learning even further by reading our whitepapers Finance’s EPM Playbook and The Definitive Guide to Preparing for ASC 606/IFRS 15.

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