The start of a new year often brings many changes, and in 2018 that will be especially true for many public (and even private) contract-based businesses across various industries. The announcement of the Financial Accounting Standards Board (FASB) ASC 606 standard has transformed the way organizations will analyze, evaluate, and recognize revenue. This is good news because the existing revenue recognition guidance lacks consistency across industries and between US GAAP and IFRS. It also does not adequately address certain types of arrangements. This new standard is aimed at reducing some of the inconsistencies and improving comparability.
The new standard could have a significant impact on the amount and timing of revenue recognition, which in turn could impact key performance measures; this could affect contract negotiations, business practices and activities, and even budgets. Several publications have noted that the Aerospace & Defense, Automotive, Communications, Engineering, Construction, Media & Entertainment, Pharmaceuticals, and Technology industries will be impacted the most.
Many members of the Finance Leadership team (typically including Accounting Directors, Controllers, and CFOs) of these organizations have been planning and preparing diligently to adjust their business practices to accommodate this change. And for those less prepared Finance leaders who haven’t — no worries — it’s not too late … but more on that later.
ASC 606/IFRS 15 accounting standards promise international alignment on how companies recognize revenue from contracts with customers. The guidelines are about the results of your end-to-end processes starting with sales and contracts, through pricing, quotes, orders/fulfilment, and ending with revenue recognition. The full name of the rule is ASC 606: Revenue from Contracts with Customers. In the US, this rule was issued by the Financial Accounting Standards Board (FASB). This organization maintains the U.S. standard for accounting, Generally Accepted Accounting Principles (GAAP).
Technology to the rescue!
All entities will likely have to consider changes to information technology system and business processes, as a result of the new decision points and increased disclosure requirements, among other aspects of the new revenue model. Many of the top SaaS ERP solutions have been expanding current features and functionality in response to the requirements of the 606 Standard. Some of the features include: Revenue Scenario Modeling, Detailed Contract Line Reporting, Revenue Allocation for multi-element arrangements, and the ability to extensively report on all aspects of Revenue. The new Revenue Recognition rules according to the 606 Standard require companies to present comparative financial statements using the new revenue standards, and these software enhancements could make this a seamless process.
Let’s break it down
Top things you need to do to prepare:
- Identify relevant contracts with customers.
- Identify performance obligations.
- Determine the transaction price within the contract(s).
Secondary processes to consider:
- How they will allocate transaction price to separate performance obligations.
- Recognizing revenue when an entity satisfies a performance obligation.
If you’re not prepared — it’s not too late!
With the proper disclosures, an entity can apply the new revenue standard retrospectively and choose to recognize the cumulative effect of applying the new standard to existing contracts in the opening balance of retained earnings. This can be done in an iterative process until all contracts from the prior standard are complete. We would suggest hiring an expert on ASC 606 to consult with your Finance Leadership on the best way to do this. The standard is effective for public entities for the first interim period within annual reporting periods, beginning after December 15, 2017 (nonpublic companies have an additional year).
Have a plan in place but need the technology and guidance to enable it? Contact us and we'll be happy to help you on that journey.