Organizations worldwide will soon need to start complying with new regulations for revenue accounting that have been approved by the Financial Accounting Standards Board and the International Accounting Standards Board. This will be a very big change for many companies, both public and private, and the recent vote to extend the deadline to meet these regulations indicates that many companies simply didn’t feel ready to make such a large change to their practices and procedures.
The burning question is, what are the best practices to help organizations become ready to meet the approved revenue accounting standards?
The timing and nature of the new revenue accounting standards have yielded a very interesting observation among the involved companies. Those companies taking an iterative project approach are making better progress than those taking the “Big Bang” approach. So, this has led me to the conclusion that this is not a “Big Bang” project. To be successful, organizations will need to work in iterations across accounting, technology and people.
LEARN THE NEW STANDARDS
The new revenue recognition standard will take effect on Dec. 15, 2017, for companies across all industries. The modification will change the process of revenue recognition. And the brand new five-step process for revenue recognition (see “5 Steps,” below) must be followed. So, organizations need to start preparing now for this standard — it will affect all industries, not just high technology, which currently already meets some aspects of the new regulations.
The technical accounting assessment has to be done in advance of implementing any systems. Customers have frequently asked me to provide software, but until accounting and parallel reporting requirements are finalized, no solution can be set in place. This technical accounting assessment will probably be broken down into smaller work segments and iterated with other IT systems and business process work streams.
Companies should start training their revenue recognition personnel now on the new standard. From my experience, it takes a GAAP-trained accountant about six to 12 months to really get comfortable with a new IFRS standard such as the new revenue accounting standard.
5 STEPS
The new five-step process for revenue recognition:
1. Identify the contract with a customer.
2. Identify the performance obligations (promises) in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation.
PULL TOGETHER
The nature of adopting this new standard is iterative and dynamic, as explained above. In order for companies to successfully navigate the activities and tasks necessary, excellent teamwork and collaboration is needed across IT, corporate finance, and the accounting advisor. Teams should be co-located as much as possible with regular checkpoints to coordinate and share information. Of course, individual teams will have to work on certain activities independently, but usually not for very long.
In terms of timing, the technical accounting assessment has to be completed up-front or in advance of implementing the system or any parts of the system solution.
I have had several customers ask for a software solution only to realize that their requirements weren’t mature enough for a successful software implementation. The new standard has to be understood and transformed into requirements before any IT system improvements can be made. This will probably occur in an iterative approach in small pieces since the new standard is fairly long — an accounting advisor can help accelerate this process.
Moving forward, organizations will be required to capture key data from all sales contracts related to revenue with a customer. Revenue recognition, however, can be extremely fluid, especially as contract terms get amended or new performance obligations are added.
BE FLEXIBLE
Remember that revenue recognition will also have impacts on parallel reporting and on the financial close. Be prepared to handle such situations in advance.
I have had some customers figure out the technical accounting assessments of the new standard, but then they didn’t have a clear parallel reporting strategy completed. Keep in mind that there is some dependency between the two — choices under the new standard may impact your parallel accounting strategy. But companies need to be aware of how these choices impact their parallel accounting strategy and consider various options as part of their overall planning. Include the parallel reporting considerations and potential impacts up front as soon as possible during your project.
Early preparation is not only recommended by experts, but crucial for successful compliance. You clients should start their process early to ensure that their accounting teams can hit the ground running by December 2017.
Pete Graham is director of finance solutions and mobility at SAP.
