In less than a year, new revenue recognition standards, ASC 606, will go into effect for public companies. As corporate controller at Workday, I’m focused on our transition to these new standards and like other organizations, we’ve spent considerable time determining the best strategy for adopting these changes.
While the process can be daunting, here are some insights and lessons I’ve learned along the way:
1. If you haven’t already, get started now.
There’s a lot to consider in preparing for these changes. Before determining which adoption method to select – full or modified retrospective – organizations will need to first review all contracts to determine which ones will be affected and the implications to revenue. Technology will play a big role in helping to identify, assess, and report on contracts, and organizations will need to determine whether technology investments need to be made in order to comply with these changes. For example, finance systems that unify contract and transaction data in one place can make it easy to assess contracts, without having to extra data from multiple or bolt-on systems for assessment.
In addition to reviewing contracts, finance professionals will also need to determine broader implications across the organization and make sure any stakeholders who might be impacted are aware. It’s also important to look at what additional reporting may be needed to comply with disclosures. While this is more of an end-game task, finance will want to be able to “press go” on those reports when needed.
And finally, consider how any contract changes could impact the auditing process.
Start thinking about it now. There’s no time like the present to get started to avoid any last minute surprises closer to the deadline.
2. Have a consistent, systematic way for identifying contracts that will change.
This will make it much easier to evaluate contracts and determine impact to revenue. The capabilities of your finance system are a big factor in the ability to do this is, as they can help or hinder the process of reviewing contracts. For example, having the ability to do side by side comparisons of how revenue is recognized in the original contract and how it will be recognized under the new guidance is a huge help. You will need a systematic way to identify impacted contracts and to ensure you have the correct reports to support the additional disclosures.
3. Identify what technology and tools will support these standards and future changes.
As I’ve shared, your technology system plays a big role in your ability to transition to the new guidelines. Part of each company’s assessment process is determining if existing systems can support the preparation and execution of these changes. The key is having a technology foundation that is flexible and configurable so that your system can adapt both today, and to future standards and requirements. Use this as an opportunity to reevaluate your finance system and explore how technology can best serve your business priorities and demands.
4. Talk to auditors early on about the potential impact of the new rules.
The new standards can impact both historical and future periods and transactions, potentially affecting a company’s financial statements. It’s important that finance organizations work closely with their auditing firms to evaluate their approach and stay close throughout the entire process, so there are no surprises when closing the books and issuing financial statements. While this may significantly increase the amount of work for companies, technology can really help with this process.
Our finance system has built-in workflows, called the business process framework, which enable us to see how a contract moves through the organization for approvals, making it easy to verify every step, change, and approval during this conversion to the new standard. Having everything documented in one system makes the auditing process easier for everyone.
This will be a big and busy year for finance professionals as we prepare for these revenue recognition changes. Most importantly: Don’t procrastinate, and if needed, reach out to outside resources for help.