Many businesses are still getting ready for the new revenue recognition and leasing standards, and in some cases that involves changing their technology and processes.
The revenue recognition standard takes effect for public companies starting in December, while the leasing standard takes effect next December, but many companies are still not ready for either standard.
“As we approach the effective date for calendar year-end companies, we continue to see companies at many different stages along their implementation path,” said John McGaw, Americas accounting change leader at Ernst & Young, during an interview at Financial Executives International’s Current Financial Reporting Issues conference in New York on Monday. “Part of that is understandable because companies are impacted differently by the standard. Also, we’ve seen companies that, depending on other initiatives or activities they may have going on inside their organization, may have responded to the new revenue recognition standard at different paces. I think it’s fair to say that even as we get closer, we still see companies at varying stages of readiness.”
He anticipates companies will be ready by the time they have to file their financial statements early next year in accordance with the new revenue recognition standard. “In the first quarter they will,” McGaw predicted. “There is a history of changes in accounting, and companies find a way to produce high-quality financial statements that are reflective of the changes in rules.”
However, he believes many companies will be using spreadsheets and manual processes to bridge the gap until they can automate the changes required more completely.
“What we might find is that certain organizations that weren’t able to put in perhaps as much of the revenue automation that might benefit them in the future, if they didn’t have time to get that in place now, they may have had to do some more of the manual workarounds, what you may hear referred to as the spreadsheet-based approach,” said McGaw. “While that will allow them to achieve high-quality financial results that can be audited, they may look for opportunities in the future to take a step back and see if there is a better way to automate this process. Is there a better way to use technology and some of the innovations that we’re seeing around robotics or artificial intelligence or machine learning that people are looking for ways to bake into the process? However, companies that became involved earlier in the process found ways to drive other business benefits from the adoption of the new standard. If the revenue automation or enhanced processing technology can drive more efficient, faster, well controlled external financial statements, they’re also seeing ways to drive management reporting and better business insights from the process.”
Companies seem to be further ahead on the revenue recognition standard than on the lease accounting standard, for which the effective date is still more than a year away. However, the leasing standard is likely to require a more automated approach, particularly for businesses with a large number of leases, such as retail chains.
“I think there’s a few that have tried to do both at the same time, but when you think about revenue recognition, although we say it does require a lot of cross-functional implications, my experience is that they’ve left it most of the time to the finance function,” said Eloise Wagner, Americas accounting change leader for revenue recognition at EY. “Typically revenue transactions are recorded in the system, whereas with leases you have a lot that are just sort of left outside of lease administration. From the get go, on rev rec, companies have chosen or not to go with some sort of automated way to go forward. For leases, I don’t know that there’s as much of a choice. You need that IT solution right off. At least, that’s how we’ve worked with our clients and seen in the market. They do need more of the technology. You’re dealing much more not just with the finance function. From the beginning you are dealing more with understanding not just the way you have to account for the way these leases, but also the lease administration portion of it, which I think has much more benefit for leases. It has transformed more of the organization. But I think a lot of companies are trying to get over the hump of rev rec and then will come back and deal with leases afterwards.”
McGaw agrees with that assessment and sees companies taking advantage of new technology to deal with the standards. “I think that’s true because of where we are on the timeline, with revenue being effective a year earlier, that people would be a little bit further behind,” he said. “There are some good lessons being learned around how to involve the rest of the organization in terms of achieving compliance and driving additional business benefit. The other thing we’ve seen that people are learning with the standard is the various software platforms, whether it’s the larger ERPs, or whether it’s more of the boutique or point solutions, that the software community is creating many more options for companies under the new standards than they had under old accounting, which creates a great benefit for people. What people are also learning is that because the standards are new, therefore the software or at least the enhancements to the software are new. There is a journey around which is the right software for us and for our environment. In leases for example, what’s the nature of our lease portfolio and what do we need the software to do, and at the same time how does it tie into a larger IT systems strategy that the organization has? Part of it is about solving for the immediate need of leases, and part of it is about how it ties into a larger strategy and platform.”
Some companies are taking the opportunity to use the new standards for transforming the finance function. “The message we try to communicate is that this is change,” said McGaw. “It’s a new standard that accountants and their business colleagues are interpreting. The sooner you get started, the greater an opportunity you have to go at your pace, involve people in your organization, involve your auditor, and involve advisors that you may have on a timeline that works for you. If you wait till later in the game, you’re more compressed and some of your options may be limited.”
Companies may use the opportunity to change their enterprise resource planning systems, although both McGaw and Wagner haven’t seen that happening as much with the revenue recognition standard. “On the rev rec piece, I think it’s not as much because most revenue transactions you hope were recorded already,” said Wagner. “They had a way to capture those. There has definitely been improvement or enhancement, but I think that companies that have it embedded in their ERP systems will continue to do so. Companies that have rev rec in their Excel spreadsheet either had the choice to move into something that’s more long-term automated or keep it in an Excel spreadsheet. It’s all a question of timing and how ready are you versus the effective date.”
While some companies are temporarily using manual workarounds and Excel spreadsheets for the rev rec standard, the leasing standard may require buying some new software. “When you think about leases, companies that are dealing with a meaningful number of leases have to have some sort of a system to track from a demonstration and an accounting perspective, to provide information to management to make decisions, but also to be able to support the transition of putting all these leases on the balance sheet and then be able to meet the disclosure requirements and have an audit trail,” said Wagner.
ERP vendors are upgrading their systems to support the new standards. “With both of the standards, we’re seeing the software companies make a greater investment in the solutions that they’re making available,” said McGaw.
Companies can also benefit from leveraging advanced technologies as they adjust to the new standards. “The organization that brings finance and the CIO organization together and talks about what’s the long-term journey and strategy and platform and how does that tie into the business requirements that these two standards bring along, they do have the chance for enhanced automation, which generally people will find to be more effective and efficient, with better control and better business insights,” said McGaw. “At the conference today, people were talking about what does the future look like, and how do we bring greater technology into the financial reporting space. I think these solutions and these systems tend to lend themselves better to an even broader application of technology, and broader use of robotics or machine learning. Both of these standards deal with a high volume of repetitive transactions and often those high-volume, repetitive transactions lend themselves well. Now, that doesn’t remove the role of professionals and human beings in this process because both of the standards still require a high degree of judgment. But if you can use technology and automation to handle the processing of the transactions and the management of the data, then the finance and the business team’s time is best focused on what the accounting and the business issues are, versus managing all the data, which is often a challenge for people. We can use technology to free up humans to spend their time on analyzing the information versus processing information?”
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