6 Tips for Adopting the New Revenue Recognition Standard
It is hard to believe three years have passed since the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 codifying ASC 606, Revenue from Contracts with Customers, yet here we are with a Jan. 1, 2018 effective date looming for calendar year-end public companies.
There have been thousands of online posts providing insight, guidance, and views on actions necessary for companies to adopt the new revenue recognition standard. MorganFranklin Consulting’s own advice at the outset urged companies to not delay in assessing the impacts of the new standard and to “think opportunity.”
Let’s face it though, time is running out. Many companies today are not as far along as they should be (or want to be), and it is time to get down to business.
Since its issuance in May 2014, our firm has been helping companies adopt the new standard, and we learned we were right when we said “one size does not fit all.”
Based on our experiences with numerous companies in a variety of industries over the last three years, here are a few practical tips and insights to consider as you work through your adoption, whether you are performing it internally or leveraging outside help:
1. The new standard is principles-based! There may be one, five-step model for all companies to follow, but there is considerable accounting judgment to be applied as we move away from a rules-based model. For instance, estimating the variable consideration at the outset of an arrangement or assessing whether options in a contract should be accounted for as a material right are not straightforward decisions.
These judgments may be challenging to calculate and even more challenging to audit, so be sure to create proper documentation to provide evidence of how the principles of the new standard are applied to your fact pattern.
2. Inventory and document critical technical accounting positions – take a view. We have seen hundreds of accounting position papers with a lot of highlighting and questions in the margin. Work with your finance team, contract owners, and advisors to formalize accounting positions as soon as possible. Critical stakeholders need to be educated on the impact of the new standard, including the board of directors, executive leadership, and your external auditors. Don’t leave them in limbo.
3. Understand the implications of choosing a transition method. Both transition methods (full retrospective and modified retrospective) have benefits and challenges, and you will not know which method is best until you get started on assessing the impact of the new standard. There is no right answer to which method to choose. With no precedent regarding how to transition to a new model, it is imperative to think through both the logistics of this new standard and the needs of your stakeholders.
4. Engage your external auditors. You are not the only ones with a lot to do. Your external auditors must audit your technical accounting positions, ascertain the completeness and accuracy of the beginning retained earnings adjustment, understand processes to properly apply the new standard post-adoption, and evaluate the company’s internal controls as part of the adoption effort, as well as changes in information systems and new business processes. This leads us to our next point of emphasis.
5. Be organized, own the process (it is not too late), and be audit ready. Ensure all steps of the adoption process are documented – from technical accounting positions to process changes and internal control considerations. The more organized a company and well-documented your adoption process, the smoother the audit process.
Even if you feel the new standard will not impact your business, you still must go through the process of proving this to management and your auditors.
6. Don’t underestimate the value of project management. Companies have underestimated the amount of time and resources necessary to adopt the new standard. If you think your company is behind, you are probably right. Engage a project manager to align resources, work streams, and organizational objectives. This will allow management flexibility to respond and adapt to unforeseen challenges.
Barbara Ard and Amy Hover are managing directors at MorganFranklin Consulting. Barbara specializes in advising fast-growing private and public companies on accounting and transaction services matters. Amy has deep experience leading complex, global projects at some of...