7 lessons from adopting rev rec
Public companies with a December 31 year-end have recently completed months-long (if not years-long) efforts on the adoption of ASC Topic 606, “Revenue from Contracts with Customers” (Topic 606). The adoption of Topic 606 has been one of the most time-consuming accounting projects taken on by most companies since Sarbanes-Oxley Act Section 404 over a decade ago. As Topic 606 effectively replaces all legacy GAAP rules around revenue recognition, it has far-reaching implications for all companies in all industry types.
Topic 606 is one of many planned changes in accounting literature that companies will be required to implement in the next few years. In the immediate horizon, Update 2018-01 – “Leases” (Topic 842) looms, which is applicable for most entities beginning in 2019. Similar to Topic 606, the provisions of Topic 842 are expected to have an impact on most companies from all industries. Accordingly, management should expect comparable obstacles in its adoption.
For private companies that have yet to implement Topic 606, and public companies eagerly awaiting the adoption of Topic 842, below are a few lessons learned from Topic 606 based on discussions with CFOs, controllers, independent auditors and consultants. The seven factors identified should help make for a smooth adoption process and avoid any surprises.
1. Planning. Like any important event, the adoption of a significant accounting guidance will require thorough planning. Management must read the literature to identify areas of its accounting operations that will be impacted by the adoption. Adequate understanding of the literature will be critical in planning for a roadmap of how adoption can be implemented. A CFO can hold meetings with their company’s controller and accounting team to brainstorm how Topic 606 would affect the company’s accounting operations. After identifying key areas that would be affected, the CFO can map a desired implementation plan for which the deadline for the completion of the work was prior to the adoption date.
2. Time. Quite an obvious and significant consideration, and yet somehow always underestimated, companies that adopt new accounting guidance must plan on a timeline with the expectation that there will be some hiccups along the way, whether they be internally or externally caused. Upon scrolling through the details of the other considerations outlined here, one will be able to see the far-reaching effects of an adoption similar to that of Topic 606. There are a variety of scenarios wherein management does not fully understand the time involved in evaluating a company’s contracts for the impact of Topic 606. One scenario is that a company hires a consulting firm late in the fourth quarter to assist in making the assessment. Because of this, the company might end up incurring significant consulting fees because of time miscalculation.
3. Knowledge and resources. Management should also gauge whether it has adequate technical accounting experts internally to sufficiently implement the adoption of any accounting guidance. Depending on the complexity of the company’s transactions (revenue contracts, in the case of Topic 606), the company may decide to hire third-party consultants to assist in the application. Luckily, there is no shortage of consulting firms out there who offer such services.
One thing to keep in mind prior to engaging a third-party firm to assist with any technical accounting matters is that management must perform its own due diligence on the competence, not just of the firm from which a consultant comes, but also the actual consultant assigned to the company’s account. Most firms have a tiered offering of consultants with varying degrees of expertise and experience. In addition, it may be a good idea for management to obtain proposals from several firms, as the pricing on such services can vary widely. Again, depending on the complexity of a company’s accounting operations affected by the guidance change, or the extent of assistance they will need, the range of fees can be significant (some upwards of $30,000).
4. Internal controls. The impact on the company’s internal control over financial reporting resulting from the adoption of a significant accounting standard is oftentimes overlooked, or at the very least becomes an aspect of adoption that does not get the assessment it deserves. Most whitepapers released by the national accounting firms include internal control considerations that most companies can use as a roadmap to internal control evaluation. The company’s internal audit function, if there is one, or the accounting group should look at the implementation of new accounting guidance as if it were a separate significant process. Having this perspective entails management separately evaluating the “What Could Go Wrongs” for the adoption and future ongoing accounting operations.
5. Disclosure. The disclosures required for Topic 606 were exhaustive, and company drafts of the disclosure were often not quite adequate, even when the underlying analyses were accurate and complete. The literature itself clearly specifies the disclosure requirements of the guidance, and most whitepapers on the subject also include a checklist-type section that provides detailed guidance on what should be included in the footnotes to the financial statements. The consideration for internal control impact should be made at the outset of the planning stages of the adoption process, with input from the company’s multi-departmental representative depending on the accounting operations.
6. Auditor input. There’s no use going through a full-blown analysis of the impact of an accounting change and then have the company’s independent auditors mention that during their review or audit, the adoption efforts require significant additional work. Independent auditors should be included in the planning stages of implementation to get their input and ensure that the company’s efforts overall are suitable to meet their requirements.
Note that as with Topic 606, adopting new guidance typically also entails significant management judgment, and so the sooner companies run these judgment-based assumptions with their independent auditors, the more time management has to respond or address auditor concerns. Auditor discussions on adoption implementation plans should actually occur before management puts such a plan together. Most reputable accounting firms would initiate such conversations with management and provide insight of key considerations typically a year before a significant accounting guidance change’s effective date. It is highly encouraged for management to have this ongoing conversation with its independent auditor to avoid surprises in the end.
7. Costs. The cost factor is often one of the biggest considerations in an adoption as significant as Topic 606. As noted above, if the company were to use external consultants to assist in the adoption efforts, comparative shopping should be performed. A factor that is often overlooked in cost analysis is the internal cost of the adoption. Such a significant change will require time from the company’s management — CFO, controller, accounting group, internal auditors, and quite possibly other personnel from non-accounting/finance departments including legal, sales, and operations. These personnel may have to incur significant hours that not only will affect their main responsibilities, but may also require monetary incentives.
The above list is clearly not comprehensive, and depending on the size of the company or the complexity of its accounting operations, the impact of any significant accounting guidance adoption will vary. The key to a successful — and relatively painless — adoption rests in management ensuring that the planning and coordination of the many moving pieces are monitored and updated to meet internal and external deadlines.