Now is the time to start preparing for revenue recognition
Preparing for and adapting to new accounting processes can be a real hassle and a pain. With each passing day, the pain can grow to be worse than the last day.
As you may know, the new revenue management guidelines — ASC 606, Revenue from Contracts with Customers — will go into effect starting in 2018 for public companies and 2019 for private companies. Your business clients may bury their heads in the sand and hope this goes away (or gets delayed), but that is not going to ease the pain. Make no mistake — the new guidelines are coming and the time to prepare is now.
ASC 606 will eliminate current transaction and industry-specific guidelines under U.S. GAAP rules and replace them with a principle-based approach for determining revenue recognition. According to the American Institute of CPAs, the new standard has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers.
Though these standards, set forth by the Financial Accounting Standards Board, do not take effect for at least one more year, any company that has current customer contracts extending into 2018 and beyond will feel the impact immediately. They must begin recasting their prior-period statements to adhere to these new guidelines in advance of the deadline so that they can properly provide comparative and future guidance to investors.
To gain insight into the level of preparedness that businesses have for the guidelines, Intacct recently surveyed financial professionals at businesses across a variety of industries. It should come as no surprise that 40 percent of finance professionals feel that preparing for and implementing the new accounting regulations will be a painful experience. These professionals even said they would prefer to sit in hours of traffic, stand in line at the DMV, or burn the roof of their mouth with scalding hot food rather than deal with the new standards.
Painful as it may be, your clients must face reality and properly prepare their organizations for the change. These new guidelines are being implemented to make financial results more transparent and comparable, and to harmonize U.S. standards with international standards. If they’re feeling the pain, they must push through so that their business can thrive under the new guidelines.
Ignoring the pain is the worst option. It will just make things worse down the road. In fact, the new standards will ultimately improve revenue recognition reporting. That’s why finance departments need to stop procrastinating and prepare now.
In the Intacct survey, 54 percent of finance professionals had not even begun assessing how they will address the changes from ASC 606, while 36 percent didn’t even plan on addressing it until the standards go into effect. This is the wrong approach and it will ultimately end with severe financial headaches, and potentially losing vast amounts of capital.
When Intacct broke down what the financial professionals found to be challenging in getting their businesses up to guideline-compliant standings, the survey revealed that there were three top pain points ailing most of the professionals:
- Accounting for variable consideration in customer contracts (59 percent);
- Dual reporting during the transition phase (51 percent); and,
- Accounting for costs to obtain/fulfill customer contracts (48 percent)
Many of the leading accounting software providers understand this issue and have either launched solutions to automatically manage revenue recognition and reporting under the new guidelines or have publicized their plans to do so. It is time for your clients to evaluate their current software to see if it can handle the transitions.
Don’t repeat history. Remember the transition to Sarbanes-Oxley? That was another painful change and those that did not react accordingly found themselves scrambling to deal with the massive burden that SOX placed on the finance and internal audit teams of businesses.
For now, the ASC 606 headache is likely manageable and there is time to address it. However, allow these pains to go unchecked for too long and the business is sure to feel the brunt of a much heavier financial migraine down the road. It is time for your clients to get their heads out of the sand and address the guidelines in front of them.