Private companies: Are you ready for the new revenue standard?
It is time for private companies to prepare for the new converged revenue recognition standard, which will go into effect in January 2019. With less than a year before these changes become permanent, private companies should take immediate action, if they haven’t done so already.
To enhance the urgency for private companies, their transition to the new guidance could take longer than it did for their public company counterparts, an issue further complicated for private companies with smaller teams. That’s all the more reason to get started on implementing the changes now.
As private companies begin to engage in the implementation process, they should keep the following three considerations in mind:
1. Time and effort: These new standards contain the most extensive accounting changes seen in years. Implementation will require time and effort from many functional areas of a company and often begins with a big-picture view of the new accounting standard. From there, companies will need to perform a deep dive into the various types of contracts they have with customers to identify how the accounting will change, if at all. Elements such as industry and the amount of diversity that exists across a company’s population of contracts can impact the amount of time required.
2. A coordinated affair: Companies should employ an implementation approach that is coordinated with departments outside of financial accounting, including tax, IT, sales, legal and HR. The new standard may present challenges and opportunities for other functions so it’s important to coordinate with them early on. For example, in human resources, many employee commission and bonus compensation structures are based upon a metric of revenue. A change in the timing of revenue recognition will likely impact these and similar arrangements. With regard to sales and marketing, many contracts have expanded to meet specific criteria outlined in a current revenue model. A new model would provide the opportunity to reevaluate the way goods and services are priced and bundled. These are just a few of the areas outside of accounting that could be affected. Each of the parties involved will need to understand the new standard in order to optimize the implementation for the company.
3. Management oversight: The new standard requires more management judgment due to more principles-based concepts, dictating the mindset and approach for those selected to perform the deep dive. “Hands-on” leaders who are up to date about the new standard and the business, and whose thinking is not cemented by experience with the existing revenue guidance, will be valuable. Checklists and industry practices that companies traditionally used no longer apply. Review of contractual agreements need to be performed by managers who are able to apply abstract concepts (the principles in the standard) to concrete facts (terms of the contract). This is not a one-size-fits-all exercise. Skilled, experienced professionals are needed to evaluate each contract individually.
Stay tuned for additional insights from me on how private companies can best prepare for the new revenue recognition standard, or for more information, click here.