Key revenue recognition considerations as the effective date nears
Mark your calendars! The effective date for the FASB and IASB’s new revenue recognition accounting standards (ASC 606 and IFRS 15) is approaching.
For companies that cannot effectively implement an automated revenue system by their required deadline (January 1 for most public filers) a “brute force” manual approach should be considered to reach compliance in time. This approach can be a combination of human-managed processes and enabling technology and tools, such as spreadsheets or a tactical database solution that supplement existing systems and processes to achieve near-term compliance. While there is an increased risk in a brute force approach because of its nature, some companies may find no other feasible solution in the short term.
As companies move forward on this path, a few key considerations should help with both the implementation and the ultimate transition to a more permanent solution.
Understand that a “brute force” solution comes with complexities
A brute force solution has many complex components, including navigating accounting, operational and data complexities as well as the management of resource constraints and competing simultaneous priorities. Capitalizing the costs to obtain a contract (i.e., commissions), calculating standalone selling prices and estimating variable consideration are complex areas affected by the new revenue recognition model, and these are critical accounting areas that companies need to get right. Furthermore, depending on the adoption method, it may take significant effort to quantify the impacts of the new standard to retrospective periods and calculate the opening balance sheet adjustments.
Challenges with data also add another layer of complexity. The new revenue recognition model touches many aspects of the quote-to-cash process, and involves gathering the required data across that process to meet the new standards’ requirements. Many companies are finding a significant amount of time spent on gathering data, qualifying data and establishing controls around the data source, as part of the implementation process. The gathering of data specifically is time-consuming, because in some cases, historical data may not be readily available due to changes in enterprise resource planning, historical operational processes, or mergers and acquisitions.
Consider “brute force” as an interim solution
Because of a manual approach’s higher level of risk and resource intensive process, it shouldn’t be considered a replacement for a sustainable long-term solution, but rather an interim approach or a necessary complement to it.
Companies should come up with a structure that will help them progress toward a more permanent automated solution even while implementing a partially manual approach. In other words, if you take on a brute force method, simultaneously think through a plan that addresses compliance in a more sustainable manner. The potential synergies between an interim manual solution and automated revenue management systems include identifying and prioritizing processing capabilities, transaction scoping and assessing existing data.
We are less than three months from 2018. While companies facing 2019 deadlines have more time to devise a reliable solution, the scale of change required can cause headaches for decision makers across industries.
As you consider how to implement a brute force solution in your own organization, take a moment to notice the people making this decision with you. Do you have your cybersecurity and risk experts in the room? Internal and external auditors? Perspectives from multiple parties are vital, and will support a smooth transition to a short-term solution, meaning more time and energy can be dedicated to strategizing a long-term answer to compliance.